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The Virtual Financial Act (VFA) In Malta

The VFAA

Malta, popularly dunned as ‘The Blockchain Island’ is quickly making itself stand out in the global blockchain and cryptocurrency community. They are doing this by drafting and passing draft bills aimed at embracing and regulating cryptocurrencies, ICOs, and blockchain technology along with service providers and intermediaries that operate within those sectors.

The VFA which is split into 3 bills, namely:

  1. The Malta Digital Innovation Authority Bill
  2. The Technology Arrangements and Services Bill, and
  3. The Virtual Financial Assets Bill

Aims at providing legal security to investors and operators, while also ensuring continued growth and development of Maltese cryptocurrency sector and DLT. The VFA is set to turn Malta into a digital innovation hub through training, provision of incentive, investment and the development of a legal framework that supports cryptocurrency and blockchain technology.

The Act classifies cryptocurrency as a Virtual Financial Asset (VFA), and therefore, it establishes an all-inclusive set of rules which will serve the dual purpose of protecting the consumers as well as supporting the stakeholders’ and industry’s growth. It outlines stringent requirements for people interested in introducing or launching new cryptocurrencies as well as other service providers who include portfolio manager, brokerages, custodian service providers, cryptocurrency exchange firms, investment advisors, and eWallet providers.

MFSA (Malta Financial Services Authority) has come up with a financial instrument test which aims at establishing whether a certain product or service is covered under the scope provided for in the VFA Act or whether it is under financial services legislation. MFSA has emphasised on the requirement for issuers in Malta to first undergo a legal assessment and notify the Authorities accordingly before being issued with any authorisation.

Summary of the VFA Malta Act

Despite its breadth, this act can be grouped into the following parts:-

The preliminary

This is a section that provides definitions on common terms that relate to assets, administration, and Distributed Ledger Technology (DLT). A few of the definitions include electronic money, virtual tokens, and financial instrument.

Electronic money refers to magnetically and electronically stored monetary value issued after receiving funds and which is accepted by a legal or natural person other than a financial institution.

Virtual tokens are a type of digital medium that has no value, utility or application out of the DLT platform from which it is issued. Virtual tokens can only be redeemed in exchange for money on such a platform and directly by the issuer of the DLT asset. Electronic money is not a part of virtual tokens.

Financial instruments include such things as certificates of deposit, shares and bonds, treasury bills, derivative instruments used for the transfer of credit risk, and so on.
As there are not yet standardized definitions in regard to concepts, technologies and the processes involved in cryptocurrency and blockchain technology, we can only expect more definitions or modifications on the current ones as technology continues to evolve and after technology experts continue reviewing the Act in detail.

Initial VFA offerings

which is the section that provides the Act’s prerequisite for registering virtual financial assets when trading on DLT exchange platforms. This prerequisite includes the drafting and recording of a whitepaper that meets the Act’s provisions of what it should entail. Such provisions include:

  1. The existence of a website that complies with the rules set by the competent authority
  2. The signing up of an independent Virtual Financial Asset Agent according to the rules outlined by the Act
  3. The advertising of the offering that’s consistent with the Act’s provisions
  4. Civil liabilities that could face the issuer for misstatements on their whitepaper, website or even in their advertisements
  5. Principles that the issuer is to adhere to, and
  6. The powers endowed on the competent authority

Licensing requirements

which is a segment that deals with licensing and how application requirements will be determined. This includes the competent authority’s power to determine that token’s nature, that is, if the token will be virtual, a financial instrument, or a virtual financial asset. The competent authority will also establish whether the token will be issued or made in Malta.

Application, granting and cancelling of licenses

This section of the Act states who is responsible for making applications, that is, the VFA Agent only. It also outlines the agent’s qualifications, applicable restrictions, factors that will facilitate the issuance or contribute to the refusal of a license, designation of the license as a revocable right that’s not transferable without consent from the competent authority, and the competent authority’s power to canceling, varying, refusing, or suspending a license.

Obligation license holders and board of administration

This section points out the need to comply with the Money Laundering Act (AML Act). This includes the Board of Administration’s responsibilities and governing principles including their fiduciary responsibility towards their clients. It also states the Board of Administration’s consent requirements when they are participating in reconstructions, disposal of a business, voting rights, mergers, and so on.

Market Abuse Prevention

This is a pertinent part of the VFA Act that summarizes on what would be considered as market abuse. Market abuse practices include; market manipulation, unlawful disclosure of internal data or information, and insider trading. It also outlines on the placement of procedures, systems, and arrangements that will monitor as well as detect abuse in VFA Exchange systems. It states that the competent authority has the power to introduce or issue tests to issuers, VFA Agents, and other stakeholders, especially if they detect that any of them is engaging in market abuse practices.

Governing and Investigative Powers

This section of the Act states the powers of the Minister in charge. Such include; the power to query, issue directives, make necessary appointments, protect the public’s interest, the right of entry, and his powers to impose Administrative Penalties not exceeding €150,000 for every infringement of the Act’s provisions and the rules set out.

Auditors’ Duties

Once a license holder has appointed an auditor, he is obligated to report decisions or facts that could constitute a breach of set regulations immediately and submit annual reports on the licence holder’s security access protocols and systems to the competent authority. An auditor is also required to waiver professional secrecy in view of their reporting obligation.

Confidentiality, Sanctions, Remedies, and Appeals

This segment gives directives on procedures and processes of appealing to a Tribunal against instructions, notices, or decisions on administrative penalties provided for in the Act, and especially under Article 21 of the Malta Financial Services Authority. It also outlines the court’s powers in relation to applications the competent authority makes, a definition of the offences and the penalties provided for under the Act.

Miscellaneous Provisions

As the name suggests, this section outlines miscellaneous items such as the validity of notices, the competent authority’s exclusion of liability, the prerequisites necessary when operating with European Member States (EEA), and the competent authority’s cooperation with other applicable regulatory agencies.

Transitory Provisions

This part of the Act gives provisions such as; 6 months to VFA issuers to come up with and register a white paper, a month to register, and 12 months to people interested in providing VFA services to prepare themselves.

Conclusion

From the above, the intention of the Maltese Authorities to provide a reliable, safe, and regulated environment for the flourishing of the emerging DLT technology is evident. The impact of a comprehensive regulatory framework on Malta’s cryptocurrency and blockchain projects is yet to be established, but it has already created an environment that could propel Malta to a technological giant. The VFA Act is a huge leap and in the right direction as it provides legal certainty in an area that has continued to be controversial especially when it comes to proper regulation. However, only time can tell whether the VFA Malta Act will succeed in offering the appropriate level of protection in and regulation in a dynamic industry such as the one associated with virtual financial assets.

License Categories

VFAA Class 1

Licence holders authorised to receive and transmit orders and, or provide investment advice in relation to one or more virtual financial assets and, or the placing of virtual financial assets.
Application Fee: €3,000
Supervisory Fee: €2,750

(for revenue up to €50,000)

Per tranche: €350

(For each €50,000 up to €1,000,000)

VFAA Class 2

Licence holders authorised to provide any VFA service and to hold or control clients’ money, but not to operate a VFA exchange or deal for their own account.
Application Fee: €5,000
Supervisory Fee: €4,500

(for revenue up to €250,000)

Per tranche: €400

(For each €250,000 up to €5,000,000)

VFAA Class 3

Licence holders authorised to provide any VFA service and to hold or control clients’ money, but not to operate a VFA exchange.
Application Fee: €7,000
Supervisory Fee: €6,000

(for revenue up to €250,000)

Per tranche: €400

(For each €250,000 up to €50,000,000)

VFAA Class 4

Licence holders authorised to operate a VFA exchange and to hold or control clients’ money, virtual financial assets and, or private cryptographic keys and custodian or nominee services solely in relation to the operation and activities of such VFA exchange.
Application Fee: €12,000
Supervisory Fee: €25,000

(for revenue up to €1,000,000)

Per tranche: €2,500

(For each €1,000,000 up to €1,000,000,000)

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