The small, Mediterranean island of Malta, might typically be known as a sun and beach, package holiday destination, or even for its use as a location in Hollywood blockbusters.
But way from the beaches and the bars, a digital revolution is underway.
Over a decade ago, Malta was one of the first jurisdictions to regulate the burgeoning iGaming industry, and since then, it has grown to become one of the largest and most respected online gambling regulators in the world.
Since then, it has had its finger well and truly on the pulse of developments in the digital world, and one such area of particular interest is that of blockchain, ICOs and cryptocurrencies.
Home to a large number of software development companies, digital-legal specialists, and financial services experts with solid digital knowledge, it is becoming a prime location for startups and businesses functioning within the crypto-sector.
In this article, we will take an in-depth on the current legal environment regarding ICOs and cryptocurrencies as well as what is in the pipeline for the future:
- What is malta’s stand on cryptocurrency?
- Malta and proposed ICO regulations
- Malta’s ICO regulations compared to the rest of the world
- What are the legal issues with ICOs?
- What’s the next step for Malta and ICO regulation?
What Is Malta’s Stand On Cryptocurrency?
A cryptocurrency or a virtual currency is a form of digital currency that uses encryption methods for both security and acquiring, or mining the coins.
These techniques are also applied to the verification of transactions, and these coins are increasingly being used for paying for goods and services. They are decentralised, private and secure.
At the moment, in Malta, the cryptocurrency market is mostly unregulated although some clarifications have been gained from the regulatory authorities.
These confirmations have so far, just reiterated the fact that the bitcoin business and related industries are unregulated at the moment.
Presently, Bitcoin and other cryptocurrencies are not considered as regulated instruments under MiFID and any company that handles cryptocurrencies are not required to undergo any form of licensing process with the MFSA (Mata Financial Services Agency).
The only exception to this rule is if the coin can be considered as an investment instrument under the Investment Services Act, and if they did, they would trigger the obligations of the act.
The government has also taken steps to warn investors about the possible risks associated with crowdfunding and ICOs, as well as securities fraud.
Because transactions involving cryptocurrencies cannot be reversed, as well as the fact that they are anonymous, means that there are opportunities for fraudsters to strike.
Many other countries have taken a somewhat cynical approach to cryptocurrencies and related technologies with much discussion around how they should be classified and regulated.
Some jurisdictions have outright banned them, others have regulated in a way which makes it increasingly hard to work with them, but Malta as of yet has not put any obstacles in its way.
Malta and Proposed ICO Regulations
Due to the explosion of the popularity and hype surrounding cryptocurrencies and ICOs, the Maltese government has taken several steps to regulate these new industries as well as to propose a framework that will not only protect investors, but that will support the evolution and development of the sector.
Between the 23rd of October and the 17th of November 2017, the Maltese government in collaboration with the MFSA launched a period of public consultation that involved the input of 53 different local and international stakeholders.
During this time, the MFSA aimed to gather information and feedback on the ICO and cryptocurrency industry as well as some of its propositions for regulations.
Then, the MFSA published a feedback statement which proposed a range of regulations for collective investment schemes that are investing in virtual currencies. These regulations are designed to safeguard the interests of investors as well as the integrity of the financial market in the concept of virtual currencies.
The MFSA also added a clarification that both direct and indirect investment into digital currencies would require full compliance with the regulations come into effect.
Then in February, the Government published its plans to table three bills that would seek to provide comprehensive regulation for ICOs, virtual currencies and blockchain technology.
Malta Digital Innovation Authority Bill
The paper states that new authority will be created, known as the Malta Digital Innovation Authority (MDIA) which will oversee the certification of blockchain platforms and cryptocurrencies, as well as the functioning of ICOs.
This new authority will act as a regulator and a watchdog over ICOs and will also function as a consultative body that will be tasked with promoting government policy and protecting the reputation of the jurisdiction.
This board will be entirely responsible for the registration and certification of Technology Service Providers regarding the TAS Bill, and it will function as the National Competent Authority.
The MDIA will also appoint inspectors and impose administrative penalties as well as single public statements amongst other powers that it will be given.
Regulation of Initial Coin Offerings Bill
The second bill will pertain to virtual currencies, and in particular, it will provide stringent guidance and regulation for Initial Coin Offerings and other services related to VCs.
The bill will also impact brokers, exchanges, wallet providers, investment advisors, market makers, and asset managers, that deal with cryptocurrency.
Certain ICOs can fall within the scope of investment services regulations, and therefore the MFSA will roll out a proposed Financial Instruments Test which will ascertain whether the ICO or cryptocurrency could be considered as a financial instrument that would fall under the investment services regulations or whether it will fall under the scope of the VC Bill.
The Financial Instruments Test will be made applicable to persons or companies that are offering ICOs conducted in Malta to determine whether it should fall under the scope of the MiFID.
This test will also apply to individuals that provide services or activities regarding non-classified VCs, and the analysis will provide a much-needed degree of legal certainty and clarification regarding the particular asset.
The bill will create the first legal framework of its type, in any global jurisdiction that will govern ICOs while providing a regulatory framework which applies to service providers.
ICOs that relate to VCs yet do not qualify as a financial instrument will then be set transparency requirements and a standardised list of information which must be provided in the whitepaper.
Those individuals that provide such services will be required to abide by licensing requirements as well as applicable ongoing obligations. The MFSA will also have the right to investigate and if necessary, suspend and ICO or the trading of a VC on any exchange or platform.
Technology Service Providers Bill
The other bill in the holy trinity of regulation will be the TAS Bill.
It will seek to regulate Technology Service Providers, and it will also certify and verify Technology Arrangements as long as they feature an administrator that has been registered with the MIDA.
Malta’s ICO Regulations vs The Rest of The World
Malta is set to become the first jurisdiction in the world to legislate in support of ICOs. This is how the rest of the world is dealing with them:
The Financial Crimes Enforcement Network (FinCEN) announced at the beginning of March that they would apply their regulations to those who conduct ICOs within US borders, or from US borders.
The Securities and Exchange Commission have also been issuing subpoenas and requests for information to a range of tech companies and advisors involved in the market in a bid to gather more information on the sector.
In February the Malaysian government announced that all cryptocurrency exchanges must verify all of the identities of traders so they can be in full compliance with AML legislation due to be enforced.
The Supreme Court decided that banks must allow the trading of cryptocurrencies and that accounts associated with the industry must not be restricted.
The government also declared that cryptocurrencies will e taxed as property and individuals will not have to pay VAT although businesses will. In January, the Tax Authority issued a statement stating it was considering taxing profits from ICOs.
In February, the central bank prohibited financial institutions from investing in or trading with cryptocurrencies.
It also outlawed exchanges and creating cryptocurrency based platforms. Banks are also now not allowed to facilitate credit card transactions to buy cryptocurrencies.
The Russian Ministry of Communication launched new licensing rules for ICOs including a $1.7m capital, licensed bank accounts and a license for the development, production, and issuance of cryptocurrency tokens.
The UK territory announced in February that it would be looking to create a legal framework for companies that wish to utilise ICOs.
The country has said that it will cut off internet access for citizens that trade in cryptocurrencies or permit ICO investments.
The Securities and Futures Commission released a warning statement detailing possible risks of dealing with crypto exchanges and ICOs.
The UAE Securities and Commodities Authority issued a warning in February against investing in ICOs, adding that legal protection is not available as the agency does not regulate them.
The Swiss Crypto Valley Association releases its new code of conduct for the issuing and running of ICOs.
What Are The Legal Issues With ICOs?
The legal issues around ICOs are extensive and are too complicated to go into any particular detail here.
In this section, we will touch on a few of the issues that present themselves.
The Token Nature
Firstly, you need to consider whether your ICO and token are regarded as a security or any other scheme that would fall under the provisions of any jurisdictional-specific regulations.
Until you have ascertained this, you should not proceed, or else you risk being at odds with local laws, and subject to fines and prosecution.
AML and KYC Procedures
Secondly, regardless of the legal status of the ICO or token, you also need to decide how you will tackle AML and counter-terrorism financing concerns through stringent due diligence and KYC procedures.
Each jurisdiction has different requirements regarding this, and you need to consider them seriously and in depth.
ICO’s Terms and Conditions
You also need to consider to what the terms and conditions of your ICO will be, and also how they will satisfy the above requirements as well.
Regardless of what jurisdiction you will be operating in, your terms and conditions need to be comprehensive and transparent to avoid you getting into hot water at a later date.
What’s The Next Step For Malta and ICO Regulation?
Regarding the next step for Malta and its ICO regulation, we must wait to see the outcome once the three bills are tabled in parliament.
The house will discuss them, and then voted on during several readings, and then, subject to any changes; they will enter into force at a time shortly.
These regulations are set to mark the beginning of a proper ICO and cryptocurrency boom on the island, and many believe that this industry could soon surpass the success of the islands iGaming industry.
There is little doubt that these types of technology are going to have as much impact on our lives as the internet did, and that in years to come they will have entirely and revolutionised the way in which we conduct business, handle finances, and function in our day to day lives.
It is an exciting time for those on the front line, and anyone involved in technology and how the Maltese government handles the creation of this legal framework will have wide-reaching repercussions.
It is hoped that Malta will set the gold standard for regulation of ICOs and cryptocurrencies and that other jurisdictions will look to their example to follow suit.
One thing is for sure, and that is that the future of Malta ICO and crypto regulations are looking very promising for that small, unassuming Mediterranean island.
Read more about Malta’s Blockchain Summit coming in November 2018.