As they say, the only constant is change. Malta decided to lead such change brought about by the adoption of new technologies like Blockchain and Artificial Intelligence (AI). In 2018 Malta was the first jurisdiction in the world to enact a fully-fledged regulatory framework specifically targeted at regulating DLT based innovative technology arrangements.
Amongst the laws enacted there is the Virtual Financial Assets Act (VFA Act), which covers the area related to financial services offered through a DLT based solution. The VFA Act provides amongst other things, clarity through the “Financial Instrument Test” in determining whether a DLT token is a utility token (not regulated), a financial instrument (STO) and if none of these then it would be automatically considered as being a Virtual Financial Asset (VFA). Tokens determined to be as financial instruments (STOs) would be regulated under the traditional financial regulation (MiFID). The Malta Financial Services Authority (MFSA), launched a consultation document named “Security Token Offering – MFSA Capital Markets Strategy”. In this consultation document, MFSA outlines its attempt to define STOs making a distinction between “Traditional STOs” and “Other STOs”, with its focus so far limited to just “Traditional STOs”[1].
On the other hand, tokens determined as being VFAs would be regulated by the new VFA Act. The VFA Act also includes service licences for services offered in relation to Virtual Financial Assets, including the licensing of crypto exchanges.
The VFA Act also provides for a new role. This is the VFA agent. The VFA agent is the sole registered interlocutor between the Issuer or Service Licence applicant and the MFSA. The VFA Agent has the primary role of acting as the first line of defence for the jurisdiction thus making sure that it filters properly Issuers and Service Licence applicants wishing to do business through Malta. EMCS is a licensed VFA Agent through its subsidiary company called Finovative Ltd.
MFSA has also issued 3 chapters on detailed rules[2] with regards VFA Agents, Issuers and VFA Service Licence holders. MFSA has also issued Guidance notes[3] with regards to the execution of the Financial Instrument test and its expectations with regards to cyber security.
The lead taken by Malta in setting up this regulatory framework has been important as now other European jurisdictions are following up on it and setting up very similar regulatory frameworks. ESMA is also moving in the same direction calling for an EU wide regulation of Digital assets whilst indicating that some of these Digital assets can potentially be financial instruments to be regulated by MiFID. Moreover, all this hard work by Malta has paid dividends as it has attracted important players to the jurisdiction like Binance, OKex and ZB.com. Malta is also moving ahead on the STO front, with the Malta Stock Exchange involved in setting up an STO listing space on its MiFID regulated market.[4] Recently Apple co-founder Steve Wozniak has formed a Malta-based blockchain enterprise targeting more efficient use of energy, through his investing and co-founding of the EFFORCE project.[5]
Beyond the regulatory framework for DLT based solutions, in January 2019, MFSA launched its ‘Vision 2021’, which is primarily based on a Fintech Strategy. This Fintech Strategy aims to establish Malta as an international FinTech hub which supports and enables financial services providers to infuse technology in product and service offerings to drive innovation. The MFSA aims to establish the foundations to enable FinTech start-ups and scale-ups, technology firms and established financial services providers to develop viable FinTech solutions which drive innovation and enhance access to financial products, increase competition, deliver better customer experiences, and ultimately, contribute to the long-term success of the Maltese financial services sector.
The MFSA FinTech Strategy[6] has been published for industry consultation through a Consultation Document and a Feedback Statement[7] was then also published.
The MFSA FinTech Strategy is based on six pillars. These being:
- Regulations
- Ecosystem
- Architecture
- International Links
- Knowledge
- Security
Recently the first consultation document[8] with regards the first Pillar regarding Regulations has been published. This document outlines the objectives, legal framework and structure of the Regulatory Sandbox.
Malta is also at the forefront of exploring Artificial Intelligence (AI) as a new economic niche. The aim is to develop a National AI Strategy and put Malta amongst the top 10 nations with a national strategy for Artificial Intelligence. To achieve this an AI Taskforce has been set up, who then published an AI High-level policy document[9] for consultation in March 2019.
In a financial services market which presents a dynamic and ever-changing environment, Malta’s proactiveness in offering innovative proposals ensures it’s the first port of call for the creative investor.
[1] https://www.mfsa.com.mt/wp-content/uploads/2019/07/20190719_Security-Token-Offering-Consultation-Document.pdf
[2] https://www.mfsa.com.mt/fintech/virtual-financial-assets/rules/
[3] https://www.mfsa.com.mt/fintech/virtual-financial-assets/guidance/
[4] https://www.borzamalta.com.mt/article-mse-binance-mou
[5] https://www.coindesk.com/steve-wozniak-has-joined-an-energy-focused-blockchain-startup-in-malta
[6] https://www.mfsa.com.mt/wp-content/uploads/2019/05/MFSA-Fintech-Strategy.pdf
[7] https://www.mfsa.com.mt/wp-content/uploads/2019/05/20190515_FS_FeedbackStatement.pdf
[8] https://www.mfsa.com.mt/wp-content/uploads/2019/07/20190704_MFSA-FinTech-Strategy-Pillar-11.pdf
[9] https://malta.ai/wp-content/uploads/2019/04/Draft_Policy_document_-_online_version.pdf