First fully comprehensive DLT legislative framework
Malta has been praised for its commitment towards building and supporting the cryptocurrency industry, and has in fact established itself as a major fintech hub. Due to its forward-looking approach in relation to cryptocurrencies and DLTs, Malta has managed to engage global pioneers in the crypto exchanges sector. Some of these exchanges have opted to relocate to the island, while others initiated operations in Malta. More than 670 investment funds, with an expanding network of 80 fund managers, 26 fund administrators and variety of prominent industry service providers have found their home in Malta.
Regulating Virtual Financial Asset (VFA)
The government of Malta has adopted a prudent approach in regulating the area with measures in place for operators to meet the compliance level required in an EU member state. In 2018, Malta gave force of law to a legal framework applicable to Virtual Financial Assets (VFA) , providing a regulated regime for the provision of services to virtual currencies, those who operate them as well as the technology on which they are built, making Malta the first jurisdiction to regulate this area comprehensively. The legislative regime comprises a series of three laws; the Malta Digital Innovation Authority Act (MDIA Act) that established the Malta Digital Innovation Authority (MDIA); the Innovative Technology Arrangements and Services Act (ITAS Act) providing for registration of technology service providers and the certification of technology arrangements; and the Virtual Financial Assets Act (VFAA) which regulates initial coin offerings (ICOs), VFA service providers and VFA agents.
The Requirements Set Out by the VFAA
The VFAA provides that persons intent on providing VFA services in or from Malta require a licence by the Malta Financial Services Authority (MFSA) which needs to be obtained before providing such services. The VFA Act sets out the requirements which shall be met by persons applying for a VFA Services Licence, including physical presence in Malta. Designated persons, directors, senior management, qualifying shareholders and ultimate beneficial owners have to undertake a fit and proper test. A licensed VFA Agent must be appointed by the applicant whose role is to file the application with the MFSA and act as liaison between the applicant and the MFSA. The applicant must undertake, through the VFA Agent, a Financial Instrument Test (FIT) to ensure that the DLT asset in relation to which the applicant will be providing the VFA Service falls within the meaning of a virtual financial instrument as per the VFAA. The board of administrators/directors must be effectively directed by at least two individuals. The applicant needs also to appoint a compliance officer, a money laundering reporting officer as well as a risk manager.
Types of VFA Services
The second schedule of the Virtual Financial Assets Act lists the types of VFA Services which may be provided, once the DLT asset has been classified as a Virtual Financial Asset. The wide range of services include:
1. Reception & Transmission of Orders: receiving a purchase or sale order from a client and processing the order to a counterparty for execution;
2. Execution of Orders on behalf of other persons: Arranging to purchase or sell one or more VFAs on behalf of clients;
3. Dealing on own account: investing one or more VFAs for direct market gain rather than trading a VFA on behalf of clients;
4. Portfolio management: managing VFA asset/s on behalf of clients;
5. Custodian or Nominee Services: Holding under custody, or acting as nominee holder of one or more VFAs on behalf of others;
6. Investment Advice: providing advice to clients with respect to VFA transactions;
7. Placing of virtual financial assets: Marketing of recently issued VFAs or ones which have already been issued but have not yet been admitted to trading on a DLT exchange;
8. Operating as a VFA Exchange
The services listed under the Act have been grouped under four separate classes of licence that start from class 1 that permits the service provider to receive and transmit orders, to provide investment advice and to carry out the placing of virtual financial assets that carry a minimum share capital requirement of either €50,000 or €25,000 + Professional Indemnity insurance. Each subsequent class permits more activities until class 4, that enables the service provider to offer all the eight services mentioned, and can also act as a VFA exchange, having a minimum share capital requirement of €730,000. Having said that, the VFAA also contemplates certain exemptions from licensing that may apply in specific circumstances.
Acting as a global trailblazer within the industry, Malta is proving itself to be the jurisdiction of choice for Fintech companies wishing to establish a regulated presence in the cryptocurrency industry.
About Chetcuti Cauchi Advocates
Chetcuti Cauchi Advocates is an international advisory firm, with offices in Malta, Cyprus, London, Zurich and Hong Kong, guiding high net worth international families and their businesses on subjects as diverse as corporate, tax, financial services, fintech, residency & citizenship, property, ownership of luxury assets.
Senior Manager Corporate and Fintech
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Email: asksma@cclex.com