Malta was among the first authorities to see opportunity during the advent of the online gaming industry, becoming one of original regulators of the industry in its infancy. Online gambling as an industry has gone from strength to strength in the years that followed, with Malta establishing itself as one of the eminent regulators of the industry globally. Perhaps in part due to the success seen with gambling regulation, Malta has kept a keen eye trained on the latest developments within the digital sphere, looking for the next lucrative venture to succeed with. The rise of the cryptographic sector has been one such development that has stirred the interest of Maltese jurisdiction. Today, cryptocurrency, blockchain development and Initial Coin Offerings (ICOs) are all of chief interest.
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Below, we breakdown the current-day legal implications surrounding cryptocurrency and ICOs, while also looking ahead to see what lies in store for the sector as cryptocurrency regulations in Malta move forward.
In short, cryptocurrencies are virtualised forms of currency. This digital currency also utilises forms of encryption. While great focus has been placed on the anonymity that cryptocurrencies provide, it’s worth stressing that encryption is also highly relevant to overall security and is utilised in the acquisition and mining of crypto tokens. Encryption techniques are also relevant when it comes to verifying transactions. As cryptocurrencies fall into more common usage, they’re increasingly used for more everyday purposes, such as paying for services or purchasing goods. All transactions made with cryptocurrency benefit from the decentralised infrastructure the blockchain provides, while also allowing for high levels of security and privacy for those using them.
Cryptocurrency regulations in Malta are largely unrestricted today. However, as usage of cryptocurrency becomes more widespread, regulatory authorities have started to show more of an interest, with certain clarifications defined. That being said, there’s still nothing like rigid enforcement, which only underlines the reality that the crypto-sector remains a largely unregulated realm.
The Markets in Financial Instruments Directive (MiFID) does not define cryptocurrencies like Bitcoin and Ethereum as regulated instruments. That means that any entity that handles such virtual currencies has no obligation when it comes to licensing with the Malta Financial Services Agency (MFSA). There are very few exceptions to this rule, however. One such exception, as defined under the Investment Services Act, is if cryptocurrency is being utilised as an investment instrument. In these instances, regulatory obligations laid out in the act can be enforced. There has also been some efforts by state government to intervene in cryptocurrency activity, but only loosely. For example, governments have made effort to inform potential investors about risk factors associated with cryptocurrencies, particularly when it comes to crowdfunding activities and security fraud concerns. This latter point is particularly relevant due to the irreversible nature of cryptocurrency transactions, meaning anyone losing out to fraudsters have no fallback to compensate their losses.
Elsewhere in the world, there’s been a more suspicious and cynical discussion surrounding cryptocurrencies and its relevant technologies. One common argument in crypto discussions is that cryptocurrencies need to be classified and tightly regulated. In certain territories, cryptocurrencies have been outlawed outright. In other instances, regulation has been introduced which makes it more difficult for cryptocurrencies to be utilised. In Malta however, no such hurdles have been laid out.
Proposed Plans for ICO Regulation
Taking note of the boom in cryptocurrency and ICOs, Malta has made tracks in regards to introducing regulation to build a better framework for protecting investors. Additionally, these proposals are there to serve the industries capitalising on cryptocurrency, which is intended to promote innovation and development within the sector.
In October and November of 2017, the government of Malta combined forces with the MFSA in a public consultation period, inviting the input of more than 50 stakeholders operating both locally and internationally. The aim of this consultation period was to gather useful insights and feedback on the cryptographic industry as a whole, as well as work on preliminary plans for regulations that might need to be introduced.
Once this consultation phase was over, the MFSA released a statement which outlined a selection of regulation proposals with a focus on collective investment schemes that utilise virtual currencies in their activities. These prospective regulations were designed to protect the interests of investors, while also serving the overall integrity of the virtual currency financial market. This statement from the MFSA also hammered home the point that direct and indirect investment of cryptocurrencies would need to adhere to compliance regulations. By February of 2018, the Maltese government had published a more formal plan outlining three bills that would ensure exhaustive regulation for cryptocurrencies, blockchain technologies and initial coin offerings.
Understanding the Malta Digital Innovation Authority Bill
This detailed paper made it clear that a new authority would need to be created to meet the task at hand. The authority, named the Malta Digital Innovation Authority (MDIA) is intended to maintain oversight when it comes to certifying blockchain platforms and individual cryptocurrencies. It is also intended to oversee the general operation and functionality of ICOs. The MDIA will serve as both a regulatory body and watchdog, while also providing comprehensive consultation to support new government policy intended to protect the interests and integrity of Maltese jurisdiction. The MDIA is wholly accountable for the certification and registration of Technology Service Providers in regards tot he TAS Bill. It will also serve as the National Competent Authority. As outlined in their proposals, the MDIA is required to appoint dedicated inspectors to monitor the cryptographic sector, as well as define and impose penalties in the event of a breach of regulation.
The second of the three bills drafted placed a keen focus on outlining stringent guidance and regulatory rules for Initial Coin Offerings, as well as supplementary services in the orbit of virtual currencies. The Regulation of Initial Coin Offerings Bill has implications for many entities involved in crypto interests. Brokers, exchanges, investment consultants, asset managers and wallet providers are all impacted. In instances when ICOs fall under the scrutiny of investment services regulations, the Financial Instruments Test can instead be deployed by the MFSA. This will decide whether a cryptocurrency or ICO needs to be reassessed and labelled a financial instrument. If it does, investment services regulations, rather than virtual currency bill regulations, apply. This test not only applies to organisations conducting ICOs within Malta, but is also applicable to individuals and organisations offering services or conducting activities that relate to virtual currencies. Once conducted, the Financial Instruments Test findings will ensure legal certainties are clearly defined. This will be the first legal framework of its kind created anywhere in the world, providing essential insights and guidance in regards to regulation.
For ICOs that aren’t found to be financial instruments, other measures will be taken to provide a degree of regulation instead. For example, transparency requirements will need to be adhered to. In short, this requires those behind a virtual currency or ICO to ensure a comprehensive list of required information is included outright in their white paper releases. Licensing requirements will need to be adhered to and continuing obligations fulfilled. Should an ICO or trading activity be found to be in breach of any regulatory requirements, the MFSA will have the right to pursue rigorous investigation and enforce suspension of trading.
What’s Defined in the Technology Service Providers Bill?
The last bill in this regulatory shake-up is the Technology Service Providers Bill (TAS Bill). This last bill is intended to help regulate those defined as Technology Service Providers, while also serving to verify and certify any Technology Arrangements should they have an administrator that’s registered with the MIDA.
Comparing Malta’s ICO Regulations to Other Countries
Should everything go as planned, Malta will become the very first jurisdiction anywhere in the world to successfully pass legislation in support of initial coin offerings. Elsewhere in the world, jurisdictions have taken different approaches.
In the United States of America, the Financial Crimes Enforcement Network (FinCEN) has made it clear they will be applying regulations to any ICO conducted within the US. What’s more, the Securities and Exchange Commission have been targeting technology companies and consultants with interests in the market, with requests for information and the issuing of subpoenas now a common occurrence as it strives to gain deeper insights into what’s going on within the sector.
Meanwhile in Russia, new licensing regulation for ICOs have been introduced by the Russian Ministry of Communication. These new rules mean that any bank accounts, development activities and issuance phases require licensing. In Europe, the likes of Gibraltar are following Malta’s lead, announcing in February 2018 the intention to draft a legal framework relating to ICOs. More progress has been seen in Switzerland, with the Swiss Crypto Valley Association releasing a revised code of conduct that relates to the issuing and operation of ICOs. Countries like China have taken a much more defiant stance in the face of cryptocurrency, however. The Chinese government has a strict ban on cryptocurrency activity and investment in ICO, with anyone found to be engaging in either facing a total restriction of internet access.
ICO Legal Implications
The legal implications involved in ICOs are extensive and complex, but there are a few key issues that are commonly encountered. Firstly, understanding the nature of a cryptocurrency is crucial. An ICO or token can be regarded differently in different territories, with state-specific regulations making things complicated. Until you’re completely confident on the nature of the ICO or cryptocurrency, don’t make any moves into dealing with it or you run the risk of falling foul of local regulation.
AML and KYC Procedures are also a priority concern, regardless of individual legal status of any given token or ICO. Different jurisdictions have varying levels of regulation in regards to this, so make sure you’ve researched local specifics exhaustively.
Anyone looking to launch an ICO will need to produce terms and conditions as a backbone to their campaign, but extra attention needs to be given to the process of outlining them to ensure they meet strict requirements. No matter where in the world your ICO is operating, terms and conditions always need to be as comprehensive as possible, while also maintaining a level of transparency to help stave off trouble down the line.
The Future of ICO Regulation in Malta
The next steps in ICO regulation in Malta ultimately depend on the success of the three proposed bills outlined above when they reach parliament. After the bills have been discussed and votes have been held after they’ve read, changes could be proposed and carried out before the final versions come into effect.
Once these regulations have been passed by government, a new era in cryptocurrency and ICOs will be able to begin in Malta. Many insiders and industry experts are in fact predicting that a crypto boom is coming, with growth potential that could surpass the success of the online gambling industry on the island. It’s easy to agree with the optimism of these forecasts. Blockchain technology and cryptocurrencies will almost certainly impact our everyday lives significantly in the years to come, perhaps even ushering in the same degree of change as the internet has over the past couple of decades. With such far-reaching applications, it’s crucial that the cryptographic sector is fit for purpose and that the interests of everyone are protected. The emergence of cryptocurrency regulations in Malta is a promising sign that people can look forward to the future with an optimistic outlook.