Malta introduced new regulations governing Virtual Financial Assets
The Virtual Financial Assets Act (The VFA Act), was set out to regulate the field of Initial Virtual Financial Asset Offerings and Virtual Financial Assets and to make provision for matters ancillary or incidental thereto or connected therewith.
Under the definitions of the Act, a cryptocurrency may be classed as a Virtual Financial Asset (VFA) and the Act provides a comprehensive set of rules that will both protect consumers and support the growth of the industry and its stakeholders. The Act outlines stringent requirements for those that are launching cryptocurrencies, as well as other service providers including brokerages, portfolio managers, custodian and nominee service providers, eWallet providers, investment advisors, and perhaps most crucially, cryptocurrency exchanges.
The VFA Act defines initial virtual financial asset offerings or as they are more commonly known, 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'. This definition underscores the central role of initial VFA offerings as a means of raising capital by selling virtual financial assets to investors.
The necessary license requirements and conditions which must be adhered to by individuals or entities who issue VFAs or who provide certain specified activities in relation to VFAs were also clearly defined.
The Act delineates the necessary regulatory framework for ICOs and VFAs and makes provisions for matters which are ancillary or incidental thereto. In addition, it 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, which must be made with a registered whitepaper to be delivered to the Malta Financial Services Authority as the competent authority. The Act also provides clear guidelines on what information such whitepaper should include, how collected funds may be used, and how due diligence on the individuals behind the fund-seeking entity is to be carried out. It also clearly clarifies that businesses will be liable to pay damages to anyone that loses money due to false statements contained in the whitepaper.
Initial VFA Offerings are defined as DLT-enabled methods for raising funds whereby an issuer, who must be a legal person duly formed in Malta, issues or proposes to issue a VFA in or from within Malta, and offers it to the general public in exchange for funds.
Both the VFAA and the Innovative Technology Arrangements and Services Act (ITAS Act) define a DLT as a digital or electronic database or ledger in which information is recorded, consensually shared, and synchronised across a network of multiple nodes and:
- is distributed, decentralised, shared and replicated
- may be public or private, permissioned or permissionless or a hybrid therein
- is immutable and protected with cryptography, and
- is auditable.
The Act also includes specific information and requirements which must be included in a whitepaper prior to the issue of an ICO, along with the manner in which advertisements relating to either an initial VFA offering or an admission of a VFA to trading on a VFA exchange shall be carried out.
Advertisements are referred to as being any form or medium of marketing activities disseminated to the public by means of any type of media which promotes the purchase of a VFA or the procurement of a VFA service including initial VFA offerings. The Act also includes applicable principles which must be applied by issuers of VFA in or from within Malta.
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
- 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 tasked with specific reporting and monitoring obligations.
License requirements apply in relation to the provision by any person of a VFA service in or from within Malta.
The Act provides us with a list of such services, which include the rendering of services related to virtual financial assets, as follows:
- Reception and transmission of orders to buy, sell or subscribe for virtual financial assets and the transmission of that order to a third party for execution;
- Execution of orders on behalf of other persons;
- Dealing on own account;
- Portfolio management;
- Custodian or nominee services;
- Investment advice;
- Placing of virtual financial assets;
- The operation of a VFA exchange;
- Transfer of virtual financial assets.
Any entity that offers a VFA or is classified as a VFA service provider is required under the new rules to apply for a license from the MFSA through the guidance of a registered VFA agent.
The MFSA has also developed a financial instrument test that will determine whether a product or service would fall under financial services legislation, or whether it is covered by the scope of the VFA Act. Despite not yet being made official, the MFSA has reiterated the fact that any issuers in Malta must carry out a legal assessment and notify the Authority accordingly should any authorisation be required.
Upon acquisition of a VFA license, these operators will be allowed to facilitate the exchange of virtual financial assets such as tokens or coins, or provide services supporting the VFA sector. In this respect, Grant Thornton will be applying for this licence as soon as it is made available.
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 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 by 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.
The VFA Act creates a regulatory environment that will provide much sought after legal certainty and lucidity in both the local and international crypto community. The Act establishes a robust compliance and enforcement regime in Malta and lays down the necessary foundations to strengthen investor protection and curb market abuse and further enhances and solidifies Malta's budding reputation as a premier blockchain jurisdiction.
How can Grant Thornton help?
In order to apply for a VFA License, one must do so via an agent that has been approved by the MFSA. Grant Thornton qualifies for such role, and we would not only be able to apply for the license on your behalf, but we also operate a multi-disciplinary Fintech and Blockchain Advisory Team composed of specialists in different areas to assist in all other related matters.
From tax advisory to choosing an appropriate company structure, legal advice for blockchain start-ups to the launch of DLT platforms, or even ancillary services for ICOs, Grant Thornton is able to guide you from start to finish.
As a member firm of Grant Thornton International we offer clients a flexible, responsive service with the breadth and depth of skills to appeal to a variety of markets and with the experience, knowledge and expertise to undertake specialised, sector-specific work.
Our clients can access the knowledge and experience of more than 42,000 people in over 130 countries and consistently receive a distinctive, high quality and boutique service wherever they choose to do business.
Whether you are planning on setting up a cryptocurrency exchange, or considering relocating your payment platform to Malta, we are here to offer legal, financial, and corporate services related advice that will make your transition or setup process as smooth as possible.