The Malta Financial Services Authority (MFSA) issued a discussion paper on Initial Coin Offerings (ICOs), Virtual Currencies (VCs) and their Related Service Providers in November 2017. The aim is to regulate the industry, thereby bringing regulatory certainty to a young and dynamic part of the current fintech revolution that is sweeping financial markets all over the world.

Which law will apply?

A Maltese Virtual Financial Assets Act (VFAA) is currently being prepared. It aims to ensure effective investor protection, financial market integrity and financial stability whilst supporting innovation and new technologies in the financial services area.

The Maltese Government has also unveiled a consultation document on the establishment of the Malta Digital Innovation Authority and are working on a regulatory framework for the certification of DLT platforms, Technology Arrangements (eg smart contracts) and Technology Service Providers, ICOs, VCs and VC Exchanges and related service providers.

The introduction of a Financial Instrument Test will determine whether a Distributed Ledger Technology (DLT) Asset (which includes virtual tokens, financial assets and financial instruments intrinsically dependent on, or utilising, distributed ledger technology) will be regulated under existing EU/National Financial Services legislation or the VFAA (or is otherwise exempt).

European Securities and Market Authority (ESMA) policy statement

The new Maltese regulations will follow the general principles established by the ESMA policy statement issued in November 2017. Firms involved in ICOs and/or other VC activities should carefully consider whether their activities constitute regulated activities in terms of EU or National legislation (eg regulated Investment Services activities).

Where coins or tokens qualify as financial instruments it is likely that companies involved in ICOs conduct regulated investment activities. Consequently, a Financial Instrument Test will lie at the heart of the new regulations. Certain VCs and activities pertaining to them (which are not regulated investment activities) would be licensable under the new VFAA.

Financial Instrument Test

The test will be a mandatory requirement under the new VFAA, applicable to potential users of ICOs and to potential VFAA licence holders. Non-licensable persons will also need to conduct the test to establish the applicable regulatory framework.

The type of assets that will be included in the test are Virtual Tokens, Transferable Securities, Money Market instruments, units in Collective Investment Schemes, Financial Derivative instruments and Emissions Allowances.

Issuers of ICOs

In circumstances where the Financial Instrument Test indicates that a VC issued through an ICO qualifies as a financial instrument, the issuer must comply with the relevant EU/National legislative framework, including the Prospectus Directive, MIFID, AIFMD, etc.

If the VC clears the Financial Instrument Test, the VFAA becomes applicable. A high level of regulatory principles on transparency and merit-based regulation are expected to apply.

Collective Investment Schemes

Funds investing in VCs will be subject to new rules applicable to Professional Investment Funds (PIFs), Alternative Investment Funds (AIFs) and Notified Alternative Investment Funds (NAIFs). It is not envisaged that UCITS will be allowed to invest in VCs.

Crypto Currency Exchanges

Commercial trading in VCs are mostly done via unregulated platforms often called exchanges. It will be important to establish whether an asset traded on any one exchange constitutes a financial instrument. If the VCs traded on the exchange do not qualify as financial instruments, the VFAA will provide a framework for the regulation of the issuer and the exchange platform.

Existing licenced financial institutions and service providers

It is expected that the VFAA will demand segregation between traditional assets and DLT assets if licensed financial institutions and service providers want to provide VCs, ICOs, etc.

Anti-Money Laundering (AML) Provisions

Persons carrying out activities and/or services in relation to or involving VCs qualifying as financial instruments fall under the definition of subject persons for the purposes of current AML rules. It is anticipated that persons licensed under the VFAA will also be considered subject purposes for the purpose of current AML rules.

For more information regarding DLT in Malta, do not hesitate to contact Louise Vella or Thomas Jacobsen on