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 disruptive technologies.
The ambition is for Malta and Blockchain Technology is to become the 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.
Here’s what you have to know about the relationship between Malta and DLTs:
- Why Is Malta Focusing on DLTs, ICOs and VCs?
- The Relationship Between DLTs and Blockchain Technology.
- Why Do We Need Distributed Ledger Technologies?
- Blockchain Technology and Cryptocurrency.
- ICOs Explained.
- Cryptocurrency and ICOs – Why So Many Controversies?
- The Need For Regulatory Framework.
- Malta’s Proposed Regulatory Framework:
– The MDIA Bill
– TAS Bill
– VCs Bill
- Malta Blockchain Summit 2018
- What Does It All Mean For Malta And DLT Worldwide?
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.
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 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 offering certainty.
For Malta, to consolidate its present position and develop further its potential in becoming an attractive alternative to the world’s main 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 into particular industries.
Distributed Ledger Technologies
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.
A distributed ledger oversees and maintains transaction and ‘smart contracts’ in a decentralised database. All the information stored on the ledger is saved indefinitely using an incorruptible cryptographic code, known as a digital signature.
The system is designed to protect property in the virtual space such as cryptocurrencies, intellectual property and digital media.
Once the technology is adopted by mainstream users, making online purchases will be quicker, more comfortable and more affordable.
DLT will reduce the costs of various fees and enable buyers and sellers to create and execute transactions directly.
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 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.
Going back to the origins of the blockchain, one will realise that the idea of decentralised, openly available, network originated from blockchain.
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.
The uses of DLTs are almost infinite.
They range from financial services to voting and healthcare.
Distributed ledger technology will revolutionise the way governments, institutions and corporations interact with the general public.
DLT is making waves because the technology promises to change the flawed landscape of the financial system and the way the world economy is organised.
The principle behind the technology is to establish a system that cannot be corrupted thus eliminate criminal activity online.
The new paradigms will significantly solve standard issues that typically surface in disputes over contractual obligations.
For example, traders that do not fulfil their promise will develop a negative reputation. DLT promotes fair trade and acts as a deterrent against defecting on payments.
Furthermore, public ledgers cannot be altered or falsified. Reputation for companies and consumers is an essential aspect of online consumerism.
Modern consumers rely on peer-to-peer recommendations, yet contentious issues are surrounding the liability of recommendations and star ratings on consumer review websites.
The capacity for DLT to bring stability to the financial infrastructure is arguably its greatest asset.
In the current system, markets are manipulated out of self-interest which inherently debases commodities and fiat currencies at the expense of unsuspecting investors.
Public ledgers record every transaction. Therefore, underhand tactics can be traced to specific firms or rogue traders.
DLT will help investigators pinpoint culprits thus preventing financial institutions from capitalising on loopholes at the expense of the general public.
Sub-prime mortgages that caused the housing market to collapse and trigger the 2008 banking crisis is an excellent example of how the finance industry manipulate markets.
The crash ultimately stunted pension schemes and other savings accounts while banks – the perpetrators of the crash – were bailed out.
Distributed ledger technology, therefore, has the potential to become one of the most innovative inventions in history.
Because the technology makes businesses and people accountable for action and non-action, we can expect to create a society that is honest and co-operative.
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 paper 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 feature 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 sort of 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.
Combining blockchain technology (and other DLT) with cryptocurrency resulted in creating… A new business model.
The new-future industry standard – an ICO.
ICO stands for the Initial Coin Offering, and it’s a newly emerged concept of crowdfunding projects in the cryptocurrency and blockchain-based industries.
A company can release their cryptocurrency (usually in a limited amount) and sells to the audience who wants to invest in a particular project.
The cryptocurrency is released in the form of tokens, which later can be exchanged for other crypto-coins of fiat money.
As a result, the company acquires the capital to fund the project, and it can invest in further product development.
In return, whoever has decided to invest, get the crypto tokens’ share, and they become the complete owners of these tokens.
ICOs are often used to fund the development of new cryptocurrencies or projects that will work with the blockchain technology as a backbone.
Though, it doesn’t mean ICOs cannot be used for anything else – the owner of a project can exchange gathered tokens for fiat money and invest in something tangible.
ICOs’ tokens can be either purchased directly from the crowdfunding platform or from an exchange. Most tokens are available for sale on exchanges and can be traded just like Bitcoin or any other virtual currency
One of the most accurate definitions of ICO was written by The Economist:
“ICO “coins” are essentially digital coupons, tokens issued on an indelible distributed ledger, or blockchain, of the kind that underpins Bitcoin, a crypto-currency. That means they can easily be traded, although unlike shares they do not confer ownership rights. […] Investors hope that successful projects will cause tokens’ value to rise.”
There’s one crucial thing to understand about the appeal of ICOs.
They are investments made with a hope of a quick financial return.
It’s also critical to understand that even though the investors have the full ownership of the purchased tokens, and can trade them, they don’t have ownership of the project or a product.
This is precisely what makes ICOs different to IPOs.
ICO vs IPO
During an Initial Public Offering (IPO), a company releases shares that can be purchased by the members of the public.
The shares are not only an investment, but also signify an ownership in the respective company. Meaning, the shareholders are also the decision makers within that company.
ICOs, on the other hand, don’t give you ownership.
Most of the time, they’re just tokens – units of cryptocurrency – that can be traded and exchanged for other cryptocurrencies. Sometimes, they also give a voting power – the more one owns, the more power one has on the network.
Another crucial difference is the decentralised nature of ICOs. Because they’re not regulated by the government, there’s no need for legislation and compliance. A crowdfunding for a project can start anytime and anyone can participate in it.
IPO, however, involves a large amount of paperwork to be prepared in advance and it has to comply with the local regulations. In a way, it’s a more traditional and conservative environment for a company to raise funds.
Hence, ICOs are more popular in a startup environment and within companies which are delving into new, experimental, areas and wouldn’t be able to bypass the legislation.
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 huge advantage over traditional methods of funding.
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.
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 VCs.
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 will be featured with a warning that one must be prepared to lose an entire investment, we can keep on wishing that they will ever reach a mainstream adoption.
Source: Jason Borg
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 Creation of a new Digital Innovation Authority
- The voluntary registration of Technology Service Providers
- Certification of DLT Platforms and related smart contracts
- Process of approving an ICO developed by the MFSA (Malta Financial Services Authority)
- Regulation of service providers of VCs, such as brokers, exchanges, wallet providers, asset managers, investment advisors and market makers
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.”
There are three pieces of legislation that have been proposed by the Government:
- The MDIA Bill (Malta Digital Innovation Authority)
- TAS Bill (The Technology Arrangements)
- VC Bill (The Virtual Currencies 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 kind of property
- Suing and being sued
- Entering into all transactions that involve lending or borrowing money
The responsibilities of the MDIA:
- Promoting Malta as a centre of excellence for technological information (in particular DLTs).
- Fostering and maintaining the progress and use of DLT.
- Promoting education and ethical standards for DLT.
- Protecting Malta’s reputation on the international level in implementing the best practices for DLT.
- Protecting users and consumers of DLT.
- Assisting data protection authorities in safeguarding data.
- Enforcing ethical and legitimate criteria in the design and use of DLT (with the help of The National Technology Ethics Committee).
- 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.
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 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:
- 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.
- 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.
- 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’.
- 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.
Naturally, Malta is slowly becoming the world’s hub for multiple blockchain conferences.
We’ve seen the trend towards the end of 2017 when various clubs brought to the island world-class speakers.
However, this year Malta will host the two-day Blockchain Summit in November.
The Summit is going to have a lot of industry-involved speakers who are going to share their experiences, thoughts and ideas on the changes with everyone.
Some of the speakers will include Ian Gaudi, founder of GTG Advocates is going to be one of the speakers at the event. GTG Advocates is a full-service commercial firm based in Malta. It sets their main focuses on Data protection, Corporate Law, Telecoms Shipping & Maritime and of course Blockchain.
Joining as well will be Jonathan Galea who is the managing director at Blockchain Advisory Ltd, Carla Maree Vella the founder of VERFID, James Catania the CEO of Intelliblock and a lot more you can be excited about.
The summit will take place between 1-2 of November at The InterContinental Arena Conference Centre which has a perfect central location in the prime area of St. George´s Bay and offers enough capacity and flexibility to welcome a huge amount of people.
The prices of the tickets will increase as the date gets closer. They offer Early Bird passes for €49, On Time passes for €99 and Last Minute for €149. Check the website for more information on the price dates.
Every ticket includes the same 2-day pass for all the main events, it gives you access to all the conferences and relaxes zones, as well as the ICO, startup pitch.
Last but not least everyone is provided with a lunch for every day of the conference.
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 one significant advantage – it already has experience in working in a fast-paced and challenging industry, iGaming.
The online gaming sector is perhaps one that will largely 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.
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.
The government seems to have a solid foundation and an outline of the proposed framework, but many details still have to be discussed.
One aspect that is still missing is a case study of how the new system would actually 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 in the near future.
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 definitely 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 simply continue the way things are done now.
Without a doubt, Malta and Blockchain Technology relationship will keep on evolving throughout 2018, eventually becoming the world’s first blockchain regulated state, with a solid foundation to start from.
The next few months should bring a more precise structure regarding the DLT regulatory framework, and what everyone is waiting for, the first ever virtual currencies policy.
The National Blockchain Taskforce has been set up to support the Government with putting the legislation together.