Malta’s Cryptocurrency and Blockchain Regulations

Malta has a deep interest in the rapidly growing sector of digital technologies, Distributed Ledger Technologies in particular.

During the last few months, the Government of Malta has been working with private parties, across various sectors both locally and internationally, to identify the changes in their legislative and administrative framework that are required to accommodate blockchain and cryptocurrency.

Malta’s cryptocurrency and blockchain regulations will establish the country as world’s first blockchain-regulated state with clearly established regulatory frameworks for DLTs, ICOs and virtual currencies.

As a result, Malta will have an opportunity to attract international businesses that seek regulation to establish their blockchain-based companies as well as those that will utilise virtual currencies.

Why Is Malta Focusing on DLTs, ICOs and VCs?

Throughout the years, Malta has managed to distinguish itself across a range of industries, ranging from tourism to a well-established financial, corporate and fiduciary services. An island that has been known for its breathtaking landscapes and sandy beaches has turned into a hub of growing knowledge-based sectors.

The booming iGaming industry helped Malta to attract talent from all over the world, resulting the same in a rapid technological and economical growth of the island. Hence, during the past few years, the Maltese economy continued its expansion path.

Not only the economic growth is well above the Euro-Area average, but the employment figures have continuously kept growing.

All these factors increased Malta’s demand for skilled labour in industries such as financial services and online gaming. The attractive lifestyle, work-life balance and warm weather drew the attention of highly educated and skilled workforce.

Positioned as an international hub of business, Malta’s success also lies in the presence of a robust regulatory support infrastructure that offers a full range of services, while providing certainty.

For Malta, to consolidate its present position and develop further its potential in becoming an attractive alternative to the world’s leading international financial centres, its legislative framework and regulatory bodies need to continue.

The proliferation of new and emerging technologies will (and already have) a serious impact on the majority of industries. Malta has a unique opportunity of utilising its already advanced position in these sectors and continue leading in this area. The only way it can be done is by being proactive, open to business, attracting entrepreneurs and investors from all over the world.

By doing so, Malta can transform into an international hub for digital technology innovation.

So it happened that the current upgrade in technology lies within the Distributed Ledger Technology (DLT), which is closely related to Virtual Currencies as well as Initial Coin Offerings.

All of the above can have a massive impact on the financial industry as well as iGaming. The only way Malta will maintain its leadership position in these sectors if it starts applying new technologies to particular industries.

Is Cryptocurrency Legal In Malta?

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 the Maltese government as of yet has not put any obstacles in its way.

Read more in Malta Cryptocurrency and ICO Regulations.

Local Banks Restrictions

Since November 2017, one of the biggest local banks, BOV has banned any transactions related to cryptocurrency. Including SEPA transfers made to cryptocurrency exchanges.

Following the BOV steps, another local bank – BNF – has also introduced similar restrictions.

So far, none of the banks commented on the ban, but it doesn’t seem like there are any plans of changing it. Although this seems contradictory to what the government is currently trying to achieve, the financial industry remains separate from the government entity.

In the meantime, Maltese residents have switched to international banks, such as Revolut, to be able to invest in cryptocurrency.

The Parliamentary Secretary for the Digital Economy Silvio Schembri commented:

“I understand that nowadays we are operating within an environment that is not regulated [referring to Blockchain and cryptocurrencies]. I can understand the reluctance of banks not to open up accounts in this type of industry. I strongly believe that once these laws will be enacted, this will answer a lot of questions especially when it comes to Anti Money-Laundering and KYC issues. I can understand today’s situation, without these Bills we have these questions unanswered, but I think these bills will answer those questions.”

– Silvio Schembri

Read more on How To Buy Bitcoin From Malta.

The Need For Cryptocurrency and Blockchain Regulations

Blockchain-based platforms, as well as ICOs, could become a suitable alternative means of finance for the industry if they are properly regulated.

The correct regulation of both ICOs and VCs will guarantee investor protection, market integrity and financial soundness.

There is no way of regulating ICOs without looking at Virtual currencies.

Therefore, the need for a regime that will cover brokers, exchanges, wallet providers and any other aspects of the market that are dealing with VCs. While the cryptocurrency community is undoubtedly against any form of regulation, the industry has already gone too far for it to be ignored.

If we are considering VCs and DLTs as the future of multiple industries, we also have to provide a high degree of investor protection and transparency. Currently, the unregulated market serves as an excellent platform for scams, Ponzi schemes and dark market.

The regulation will not change the decentralised nature of cryptocurrency, but it will merely increase the security levels, which are much needed.

Until cryptocurrency and ICO investments are featured with a warning that one must be prepared to lose an entire investment, we can keep on wishing that they will ever reach mainstream adoption.

How Is Malta Going to Regulate Cryptocurrency and Blockchain?

The regulation will be split between three separate entities, and each one of them will look at a different aspect of blockchain or cryptocurrency.

The first draft of Malta Regulatory Framework was released on 30th November 2017 to gather feedback from individuals on the proposed regulations.

The framework involved:

• The MDIA Bill – the creation of a new Malta Digital Innovation Authority
• The TAS Bill – registration of Technology Service Providers and certification of DLT Platforms and related smart contracts
• The VC Bill – the regulation of service providers of VCs, such as brokers, exchanges, wallet providers, asset managers, investment advisors and market makers
• The process of approving an ICO developed by the MFSA (Malta Financial Services Authority)

As described by the Parliamentary Secretary for Financial Services, Digital Economy and Innovation within the Office of the Prime Minister – Silvio Schembri:

“The proposed framework will offer legal certanity in a space that is currently unregulated and touches upon a number of issues including types of authorisations, legal personality, and the applicability of law on smart contracts.”

– Silvio Schembri

The MDIA Bill

The MDIA Bill will allow the establishment of the Malta Digital Innovation Authority, composed of a Chairman and a maximum of eight other members chosen by the Minister responsible for Digital Economy.

The primary responsibility of the MDIA is to be the “competent authority” for Technology Service Providers, and it will be responsible for any certifications.

In Layman’s terms, MDIA will be the body that carries the responsibility of anything that is happening or will happen regarding DLTs, ICOs and VCs.

The MDIA will also act independently, without seeking instructions from anybody, including the Minister responsible for Digital Economy or the OPM.

The Authority will be a separate legal entity that will be capable of:

• Entering into contracts
• Acquiring, holding and disposing of any property
• Suing and being sued
• Entering into all transactions that involve lending or borrowing money

The responsibilities of the MDIA:

1. Promoting Malta as a centre of excellence for technological information (in particular DLTs).
2. Fostering and maintaining the progress and use of DLT.
3. Promoting education and ethical standards for DLT.
4. Protecting Malta’s reputation on the international level in implementing the best practices for DLT.
5. Protecting users and consumers of DLT.
6. Assisting data protection authorities in safeguarding data.
7. Enforcing ethical and legitimate criteria in the design and use of DLT (with the help of The National Technology Ethics Committee).
8. Promoting transparency and auditability in the use of DLT.
   Promoting legal certainty.

Any person can request the MDIA to certify a Technology Arrangement. The authority will then review its compliance with law, integrity and security.

TAS Bill

The TAS Bill will set the framework for the registration of Technology Service Providers and the certification of Technology Arrangements.

In the beginning, the TAS bill will capture only DLT Platforms and smart contracts.

In the future, TAS might be extended to platforms and arrangements related to artificial intelligence.

One of the significant benefits of DLT is the possibility of integrating smart contracts, which are self-executing without the need of the third party involvement.

The current legislative framework doesn’t consider having contracts in a ‘smart’ format, and therefore it doesn’t offer proper regulation of smart contracts.

With the help of TAS, the contract cannot be not validated just because of its ‘smart’ format.

To paint a real-life scenario; if someone decides to open a company using DLT, or an ICO, currently the individual doesn’t have to seek any regulatory framework.

With the new legislation, that individual would have to submit a TAS bill to the MDIA for approval and would have to comply with the developed legislation.

The VCs Bill

The Government of Malta has also encouraged a framework regulating especially virtual currencies and ICOs.

This framework aims at ensuring investor protection, market integrity and financial soundness.

The VCs bill focuses on particular:

1. An issuer of Virtual Currency/ICO should cover all information that needs to be communicated to an investor in the whitepaper. Additionally, if the issuer plans to trade the virtual currency on exchanges, they would have to submit additional transparency requirements.
2. Anyone providing services based on virtual currencies has acquired the licensing requirements which should reflect the principles outlined in the existing EU financial services legislation.
3. MFSA will have a power to issue directives, to adopt and publish rules, to require information, to suspend and ICO or to trade VC on an exchange, and to introduce the ‘Financial Instruments Test’.
4. It’s important to note that while the other two bills seem to have a solid foundation already established, the VCs bill leaves plenty of room for improvement.

The current proposal only considers Bitcoin and altcoins, compromising the same the vast spectrum of VCs.

After establishing the final version of the proposal, there will be a six-month adjustment period to enable everyone to fully comply with the proposed VC Bill.

When Are The Regulations Going To Be Introduced?

As of yet, no official date has been confirmed when the regulations will come to life.

In April 2018, the Cabinet approved the DLT and cryptocurrency bill which is now waiting to be presented in front of the Parliment. Afterwards, a debate will be ensued between both sides of the House before it is passed into law.

It’s expected that once the proposed regulations pass through the Parliment and the House, separate entities will start working on introducing them into an ecosystem.

In the meantime, two of the biggest cryptocurrency exchanges by the trade volume, Binance and OKEx, announced they would be moving their operations to Malta. This is a clear sign that the proposed regulations will likely go through in favour of cryptocurrency and blockchain-based platforms.

Why So Many Controversies?

The legal state of ICOs and virtual currencies is very blurry worldwide.

Ideally, the coin or token is not sold as a financial asset but as a digital good. Hence, we have heard so much about crowdfunding or crowd sale – they relate to raising funds.

In most jurisdictions, the funding with ICO is not regulated, making the process easy and paperless. This gives an ICO a massive advantage over traditional methods of financing.

While most ICOs happen in a grey area, it’s not going to last forever. Crowdfunding still involves an investment of fiat money into the project, and at some point, the cryptocurrency can be withdrawn as a fiat.

Due to the lack of regulation, an ICO can be launched by anyone at any time, involving collecting money in the form of cryptocurrency that was exchanged from fiat currency. Unregulated cryptocurrency exchanges also collect vast amounts of fiat currency, and their taxation remains a question mark.

The most prominent concerns around virtual currencies and ICOs are anonymity and the taxation of earned funds. One has to invest a certain amount of fiat currency first to get hold of cryptocurrency, but virtual currency can be withdrawn as fiat as well.

Hence the problem of how funds have been acquired, withdrawn and how much profit has been made on them.

In the future, both virtual currencies and ICOs will most likely have to face the same or similar regulation to the traditional means of funding.

The Future Of Blockchain Companies in Malta

It is pretty clear that Malta’s ambition is being at the forefront of blockchain jurisdiction worldwide. Without a doubt, the current government has been working efficiently in putting together a team of experts, doing a public call for feedback and proposing a regulatory framework.

Rightly so, as countries such as Gibraltar are also working on creating a blockchain and cryptocurrency-friendly jurisdiction.

Malta, however, has many significant advantages – it already has experience in working in a fast-paced and challenging industry, iGaming. Over the last few decades, the country has also established itself as one of the most reliable regulatory entities worldwide, and it seems like Blockchain and Cryptocurrency regulations will repeat that success.

The online gaming sector is perhaps one that will primarily benefit from blockchain technology and cryptocurrency regulations. It’s also a one that keeps abreast with the latest technology and faces an enormous amount of competition. It only seems logical that the first step for Malta to keep the online gaming sector moving forward is to stay ahead of the game and provide regulation that would work for both parties.

Thanks to the booming iGaming industry, Malta has attracted plenty of international talent to the island which now can be utilised for the growing blockchain sector.

This doesn’t mean that iGaming is the only to benefit. Public sectors such as healthcare or land registry will see an unrecognisable change one Distributed Ledger Technologies come to live.

Only recently, Malta took the first place in the Morgan Stanley’s study on the countries with the largest cryptocurrency volume trade. The research also concluded that nations with a defined plan for cryptocurrency and blockchain regulations are the first ones to attract blockchain-based companies.

Undoubtedly, Malta will keep growing in the blockchain sector, and more blockchain companies will consider the island for their headquarters.

However, one aspect that is still missing is a case study of how the new system would work in real life. It would also be interesting to see predicted statistics on how the new legislation will impact the cryptocurrency and DLT industries all over the world.

How many businesses are expected to move their operations to Malta? Will the current workforce be capable of dealing with the new technology? These are all the questions that remain to be answered, hopefully shortly.

Once the public gets to see the bigger picture, it will be much easier to translate the government’s vision into the real-life scenario.

The cryptocurrency community will try to oppose these changes and will find their way around the legislation. The concern here is whether we will see a clear divide between those who are ready to give their anonymity but receive more security in exchange, and those that will only continue the way things are done now.

More about DLT, Blockchain and Cryptocurrency

Distributed Ledger Technology

Source: Michael Casey, MIT

Distributed ledgers are public databases that go far beyond static-ledgers we currently use in the business world. The technology’s greatest asset is to create a decentralised system that eliminates the need for a central power such as the bank, government or other intermediaries typically involved in multiple processes to validate or authenticate various transactions.

Subsequently, records stored in a ledger will be validated and authenticated by a network of participants.

Each network has some “nodes” (computers) which communicate with one another until a consensus confirms a transaction can be authorised.

All this information is recorded in a public ledger.

While remaining secure and private, any suspicious activity is identified by every node on the network.

Once a consensus is reached, a record that is distributed on the ledger is timestamped with a cryptographic signature that cannot be changed or corrupted.

The architecture, therefore, paves the way to develop a new system of records that eliminates fraud, money laundering and other criminal activity that is being conducted through digital channels. Because distributed ledgers form the basis of the blockchain, it can be quite easy to consider them both as the same technology.

However, this is not the case.

Blockchain technology is just one part of DLT, and although they work together, they are separate technologies.

In a nutshell, DLT is made up of the decentralised network facilitating and verifying transactions.

Everyone in the network can see this shared transaction ledger, but there is no single point of failure, which records or digital assets can be hacked or corrupted.

DLT has applications across every kind of digital record and transaction, and we are already beginning to see significant industries leaning into the shift.

For more detailed information, visit our guide to Distributed Ledger Technology.

Blockchain Technology

Blockchain technology is a particular type of distributed ledger that is most commonly used for the exchange of digital currencies such as Bitcoin and Ethereum.

However, the technology can support much more than just cryptocurrency – it can be used in healthcare, land registry or voting.

Picture a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine this network is designed to update this spreadsheet regularly.

And you have a basic understanding of blockchain.

The blockchain is a growing database with millions of records, otherwise known as blocks. With a blockchain, many people can enter information into records, and a community of users how the record is amended and updated.

The blockchain database, just like Google Docs, isn’t stored in one location. Rather, it functions more like a cloud, which anyone can access and verify it.

Although blockchain technology relies on information from earlier transactions or entries, it is not essential for all ledgers to require recorded information nor proof of work.

The technology is versatile and has the potential to transform numerous industries, for more detailed information, visit our guide to What Is Blockchain Technology.

Blockchain Technology and Cryptocurrency

Blockchain technology is often wrongly associated with just cryptocurrency (especially Bitcoin), forgetting that blockchain can be used for any of the 700+ cryptocurrencies.

And as proved above, for much more than just money.

Bitcoin first appeared in a paper created by a person (or a group of people for all we know) under the pseudonym Satoshi Nakamoto. The document detailed the innovative P2P payment system, that can be all set up digitally, happen online and without an intermediary.

Not long after that, it became evident that it’s not the currency — Bitcoin — that was so innovative but the technology behind it. Yes, the currency itself and the idea were fresh to the market, but it was the blockchain technology that allowed it to happen.

A cryptocurrency is a digital or virtual currency that uses cryptography for security.

A cryptocurrency is difficult to counterfeit because of this security feature. A defining characteristic of a cryptocurrency and arguably its most endearing allure is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.

Virtual currencies are not secured by people or by trust, but by math. It is more probable that an asteroid falls on your house than that a cryptocurrency address is compromised.

If you look at money on your bank account and the transactions you make on an everyday basis, you will see that it all comes down to the entry in a database. Money is all about a verified entry in some database, whether it’s an account, balance or transaction.

Before you make any changes to the database, certain conditions have to be met – usually, you have to own the money to be able to transfer it etc. The same theory applies for cryptocurrency as well – it’s all about limited entries to the database, that nobody can change unless there are specific conditions met.

Although blockchain is commonly associated with Bitcoin, over time, it found more applications. Bitcoin is merely just the first blockchain technology offspring, but it cannot replace it.

Conclusion

So, what’s next?

There’s no doubt Malta is going pass all three DLT and cryptocurrency bills in the next few months. The regulatory framework will include:

1. The new authority – Malta Digital Innovation Authority – that will act as the regulator for any blockchain or cryptocurrency-based platform, similar to MFSA and the banking sector.
2. The new framework for blockchain-based platforms, outlining how smart contracts should work within the current legislation.
3. The process of regulating ICOs and Virtual Currencies.

Covering these three aspects is what makes Malta stand out – the majority of countries which are working on the regulations are only looking into regulating cryptocurrencies and ICOs, without considering the bigger picture.

Malta will attract not only ICOs and cryptocurrency-based companies but also blockchain-based companies and smart contracts – something the majority hasn’t even looked at.

While no precise dates have been announced yet, it’s pretty clear the bills will pass by the end of the first half of 2018.

Two big conferences have already been scheduled for October and November – Malta Blockchain Summit and Delta Summit – and we can expect both of them to be the official launch of the new blockchain era in the Maltese economy.

The next few months should bring a more precise structure for Malta’s Blockchain and Cryptocurrency regulation.

If you want to find out more about the future policies, meet the people who are responsible for creating them, as well as the first blockchain companies establishing in Malta, book your ticket at Malta Blockchain Summit!