Malta regulations governing Virtual Financial Assets (VFA’s) including ICO’s, wallet providers and exchanges

 Malta embraced the blockchain revolution and seeks for further growth and thrive as a first mover to introduce legislation for the blockchain technologies. Malta’s government is proud to create the environment for disruptive technologies, DLT and Cypto Space building reputation as a first regulated blockchain jurisdiction!

The Virtual Financial Assets Act, 2018 (The VFA Act), sets out to regulate the field of Initial Virtual Financial Asset Offerings and Virtual Financial Assets and related services. The VFA Act creates a regulatory environment that will provide legal certainty the local and international crypto space and involved community. The Act establishes a robust compliance and legal regime in Malta thus lays down the necessary legal base to strengthen investor protection and adhere to market abuse.

Definitions and classifications

Under the definitions of the Act, a cryptocurrency may be classified as a Virtual Financial Asset (VFA). The Act provides a comprehensive set of rules that will bring certainty, protect consumers and support the growth of the industry and its stakeholders. The Act specifies requirements for those that are launching cryptocurrencies, portfolio managers, investment advisers custodians, service providers, brokerages, eWallet providers, and cryptocurrency exchanges among others.
The VFA Act defines initial virtual financial asset offerings or as they are more commonly called, Initial Coin Offerings (ICOs) as a method of raising funds whereby an issuer is issuing virtual financial assets and is offering them in exchange for funds’.

General Information 

The license requirements and conditions which must be adhered to by individuals or entities who issue VFAs or who provide specified activities in relation to VFAs are clearly defined in the Act.
The Act delineates the necessary regulatory framework for ICOs and VFAs and makes provisions for related matters. The framework regulates the type of VFAs which may be issued through an Initial VFA offering and admission to trading on a Distributed Ledger Technology (DLT) exchange. There is an obligation to deliver a registered whitepaper to the Malta Financial Services Authority – the competent authority.

Whitepaper requirements

The Act also provides guidelines on what information and requirements the whitepaper should be included.
The issuers must establish how collected funds may be used and it also clarifies that businesses will be liable to pay damages to anyone that loses money due to false statements contained in the whitepaper.
The Act also includes specific information and requirements in relation to advertisements relating to either an initial VFA offering or an admission of a VFA to trading on a VFA exchange.

The Act defines a VFA as ‘any form of digital medium recordation that is used as a digital medium of exchange, unit of account or store of value and that is not: an electronic money, a financial instrument, or a virtual token.

Virtual tokens, or ‘utility tokens’, are DLT assets which have no utility, value or application outside of the DLT platform on which they were issued and may only be redeemed for funds on the platform directly by the issuer of the DLT asset.

The issuer of an ICO is required to appoint a VFA Agent, who must be approved by the MFSA as the competent authority and will be obliged to carry out specific reporting and monitoring obligations.

License requirements

Any entity that offers a VFA or is classified as a VFA service provider is required to apply for a license from the MFSA through the guidance of a registered VFA agent.
The MFSA has also developed and published a financial instrument test which determinate whether a product or service would fall under financial services legislation, or whether it is covered by the scope of the VFA Act.

ICOs which relate to VCs that do not qualify as financial instruments – Under the VFA rules, ICOs issuing virtual currencies that do not qualify as financial instruments are still be subject to minimum transparency requirements and other obligations of the relevant parties involved. Certain parameters of the legislation applicable to initial public offerings shall still be adhered to issuers of ICOs, even if the VC does not qualify as a financial instrument. These principles include the necessary information that must be communicated to the investors in the Whitepaper and additional transparency requirements when the issuer intends to trade the VC on an exchange.

Extensive role of the VFA Agent

A Malta VFA Agent shall upon commencing discussions with clients on the purpose of their Initial Coin Offerings, need to perform a Financial Instruments Test, shall also ensure that the client has a robust and significant business plan and shall also guide the client on the requirements, information and disclosures which are required to be included in the White Paper before such are submitted to the MFSA for approval.
The purpose of having in place VFA Agents gives the Authority higher level of market protection Thus a Malta VFA Agent shall be acting as a gatekeeper responsible for the protection of the public interest by ensuring that obligations are meet and an entity has right operational setup and is able to deliver the proposed business plan as tabled within the application documentation to the competent authority.
”A Malta VFA Agent shall be acting as a gatekeeper responsible for the protection of the public interest”
The VFA Agent shall be also main point of liaison and contact, between Authority and a customer. The Agent shall be required to keep all records of necessary documentation as well and carry out compliance checks, reports and monitoring among other responsibilities.
The Agent itself shall be subject to Chapter 373 to the Laws of Malta and the relevant subsidiary legislation.

Summary on VFA Agent

In conclusion, it is important to note that the ‘nature’ of the VFA Agent is restricted to a limited group of professionals and the role of the VFA Agent is to act as a goal keeper for the MFSA-competent authority. Agent must meet certain criteria and essentially be competent, qualified and diligent and in the and authorized to Act as such Agent. Moreover, the MFSA has the power to issue directives on an ad hoc basis ensuring Agents are subject to regulatory powers.

Services by the VFA Agent :

  • Carrying out and endorsing the Financial Instrument Test
  • Reviewing and assistance with drafting the Whitepaper
  • Responsibilities and obligations to ensure compliance with the provisions of the VFA Act and of any rules or regulations issued or to be issued. Including review of agreements in place with sector specific functionaries which agreements which must satisfy all legal requirements
  • Ongoing liaison, guidance, necessary advisory services to provide customer with certainty that company complies with the VFA Act regulations
  • Maintaining records which shall serve as an evidence how the issuer has complied with the VFA Act
  • Conduct applicable checks and compliance carried out in order to prove that the issuer is fit and proper, both prior to the issue of the ICO and other stadiums, this would include carrying out annual compliance checks and due diligence applicable
  • Provide Assistance with preparation of application and submission of an application and white paper to the Authorities
  • Liaison with the respective authorities on all matter relating to the provided services and registration of the whitepaper
  • Annual review and submission of the compliance certificate to the competent authority on behalf of the administrators of the issuer (a customer’s entity)
  • Acting and liaise with the respective authorities on behalf of customer/issuer
  • Endorsement of Financial Instrument Test

As the classification is complex at the initial stage, the VFA shall perform a Financial Instrument Test as required by the competent authority. Mentioned test serves to analyse each category of financial instrument under MiFID within a DLT context.
The Financial Instrument Test shall establish the underlying nature of the coin or token to be issued, within the following categories is a virtual financial asset, a virtual token, electronic money or financial instrument. The test is crucial to determine which laws, rules and regulations will apply for the issue and the classification of such assets.

Malta is introducing a standardized ‘formula’ which will determine whether the Virtual Financial Asset:
~ could potentially be classified a ‘security’ governed local and EU Regulations pertaining to Investment Services
~ may be a ‘hybrid’ and therefore has the element of an ‘investment’ or ‘money’; or
~ is neither of the above.
Once the VFA Agent establishes what the ICO will be, the Agent’s firm will need to deal with the applicable law which will govern the issuance of such token.

Income tax, duty on documents and VAT

The Maltese Commissioner for Revenue has issued guidelines, on the interpretation of income tax, duty on documents and VAT in connection with activities involving distributed ledger technology assets. These guidelines further add certainty and stability to the interested parties in Malta. Tax related incentives help offset the cost of operating Crypto Business and keep Malta attractive.

Regulatory framework for the blockchain sector includes :

Main Legislation
The Virtual Financial Assets Act, 2018 (The VFA Act)

Regulations
Virtual Financial Assets Regulations, 2018

Rules
Rules Chapter 1 of the Virtual Financial Assets Rulebook 

Chapter 2 of the Virtual Financial Assets Rulebook 
Glossary of Terms 

Guidance
Frequently Asked Questions on the Virtual Financial Assets Framework
Financial Instrument Test 
Circulars

Consultations and Feedback 

The Maltese government has pitched the country as ‘Blockchain Island’ and strives to provide industry players who have or intend to relocate to Malta with legal certainty for purposes of making use of Malta’s regulatory framework. Thus we encourage you to bring disruptive technologies to Malta. 

Read more about:  Frequently Asked Questions with regards to Crypto Regulation Malta

 

Disclaimer
This document does not purport to give legal, financial or tax advice. 

 

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