Due to the explosion of the popularity and hype surrounding cryptocurrencies and ICOs, Malta is also the first country in the world to introduce a clear regulatory framework around ICOs, tokens and cryptocurrencies. The Maltese government has taken several steps to regulate these new industries as well as to propose a framework that will not only protect investors, but that will support the evolution and development of the sector.
Plans are in place for the Malta Financial Services Authority (MFSA) to act as a regulator to overview ICOs in Malta, thus ensuring the elimination of Fraudulent ICOs.
Foreigners launching their ICOs in Malta can also benefit from personal tax rates of 5%, with 0% on certain token sale models. What's more, Malta boasts a highly educated, tech savvy workforce with English spoken as a native language and who are used to working in multinational company environments due to the large online gaming and finance sectors on the island. Malta is also a full EU and Eurozone country.
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.
Financial Instrument Test in connection with ICOs
Malta is moving closer to introducing a test that would clearly define when assets derived from initial coin offerings (ICOs) are securities. Managed by the MFSA, the Financial Instrument Test will be a mandatory requirement which would be applicable, both within the context of ICOs conducted in or from Malta, as well as in the intermediation of DLT assets by persons undertaking certain activities in relation to DLT assets.
Thanks to a twelve-criterion checklist, the test will determine how a DLT asset should be classified and regulated in terms of local and EU legislation. The test would essentially be based on the following criteria:
- Whether the DLT asset falls within the definition of a virtual token;
- In the case where the DLT asset is not classified as a virtual token; whether it qualifies as a financial instrument in terms of MiFID and in terms of the Malta Investment Services Act;
- In the case where the DLT asset does not meet both the tests in (i) and (ii), whether the DLT asset will qualify as a Virtual Financial Asset in terms of the proposed Virtual Financial Assets Act (VFAA).
Furthermore, Malta provides a clear definition of virtual tokens as a DLT asset that 'has no utility, value or application outside of the DLT platform on which it was issued and that cannot be exchanged for funds on such platform or with the issuer of such DLT asset'.
In brief, this means that after carrying out the proposed Financial Instrument Test, if a token is classified as a virtual financial asset, the new proposed laws would apply and the operator would not require a license under MiFID. Virtual tokens (as defined) are out of scope of the aforesaid regulatory space.
The introduction of the proposed VFAA, together with the proposed Financial Instrument Test will provide legal certainty to the industry, instilling market stability and protection to investors.
The carrying out of activities as listed in the VFA act in or from Malta is a licensable activity. Such services include the rendering of such services related to virtual financial assets as:
- 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
The concept of 'fit and proper' is a fundamental regulatory test adopted by the MFSA requiring senior staff and potential and existing licensees (both at licensing stage and on an on-going basis thereafter) to demonstrate solvency, competence and integrity in all their dealings.
The application process is likely to involve:
- The Preparatory Stage – information gathering and compiling of application (timing depends on completeness of the documentation submitted) (4 to 6 weeks);
- The Licensing Stage (12 to 26 weeks);
- The Post-Licensing/Commencement of Business Stage.
A regulatory fee (likely to vary according to the licence category) is payable when the draft licence application is submitted (the application fee). An annual fee is payable on the day the licence is issued and on each subsequent anniversary thereafter.
ICO legal implications
Whilst Malta's ICO regulation is practicable and rational, founders should be aware that certain pitfalls remain in executing their ICO, and while there is truth in the belief that issuing utility tokens is less burdensome than a security token, the advantages and additional investment that these attract from institutional investors outweigh the cost and time investment required.
A clear and well defined white paper, which is compliant with Malta's VFA act, as well as a watertight token sale agreement is essential, and should cover:
- Token pricing and ICO timeframet;
- Minimum/target/maximum raises;
- Token model and utility;
- Clarification on any voting, profit share or dividend rights attributed to the token;
- Project budget, allocations, timeframes etc;
- Development roadmap with clear milestones;
- Contingencies for missed targets, low raises etc;
- Fund security (escrow, multi-sig wallets, etc).
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