Register cryptocurrency exchange in Malta

Malta has developed a progressive attitude and approach to DLTs, cryptocurrencies, as well as blockchain technology, which has attracted some of the world largest crypto-exchanges to the island. Most of them have either relocated their bases to Malta or moved a large chunk of their operations to it.

On the other hand, Malta has created a regulated framework that covers different forms of innovative technology built on pillars like market integrity, consumer protection and financial stability. This is the world’s first comprehensive regulatory framework and has been anticipated by Fintech players, including operators, experts and investors.

The Regulation

A crypto-exchange that is comprised of a series of three laws:

• Malta Digital Innovation Authority Act (MDIA Act) that establishes the Malta Digital Innovation Authority (MDIA)
• Innovative Technology Arrangements and Services Act (ITAS Act) that provides for the registration of technology service providers and the certification of technology arrangements
• Virtual Financial Assets Act (VFAA), which is charged with the regulation of VFA service providers, the Initial Coin Offerings (ICOs) and VFA agents

As stipulated by VFAA, no entity is allowed to offer a VFA service in or from Malta’s jurisdiction unless with a license from Malta Financial Services Authority. The VFAA act covers a wide range of services and providers in the VFA field that include the order reception and transmission, orders executions on behalf of other parties, dealing with own accounts, nominee and custodian services, portfolio management, VFAs placements, investment advice and how the VFA exchange operates.

Despite MFSA being the lead regulator for VFA service providers and services, specific disruptive technologies that include smart contracts and DLTs are referred to Malta Digital Innovation Authority for further scrutiny and certification.

Benefits:

• A pragmatic regulator
• A reputable jurisdiction
• Consumer protection, financial stability and market integrity
• Rules and documentation in English
• An attractive passporting corporate tax framework

Eligibility:

• Undertake a proper test and fitness check
• Have a physical presence
• Appoint a credible VFA agent
• Undertake and pass the Financial Instrument Test
• Initial share capital, liquidity and capital adequacy requirements

Key Requirements

• Comes from a recognised jurisdiction and can open a branch in Malta
• There are no restrictions on the nationality of the owners of the entity
• Directors, designated persons, senior management, qualifying shareholders and beneficial owners required to take a fit and proper test
• The applicant must appoint a VFA agent which then files an application with the MFSA and acts as the liaison between MFSA and the applicant
• Applicant must take a Financial Instrument Test (FIT) through the VFA Agent to ensure that the applicant provides a DLT asset that ensures that the VFA Service offered falls within the VFAA’s definition of a virtual financial instrument
• At least two persons must hold the positions of directors or board of administrators
• The applicant is further required to appoint a money laundering reporting officer, a compliance officer and a risk manager
• Have a minimum share capital of €730,000

The cryptocurrency Exchange License

Ongoing Obligations

• Organisational requirements that involve setting up a board of directors or administrators, formulating governance policies, having risk management and compliance measures and having measures to safeguard clients’ investments.
• Prudential requirements that cover own funds, liquidity, initial share capital and ongoing capital and fixed overhead requirements
• Obligations on the conduct of business that covers how to regulate conflict of interest, sales procedures and sales practices and the way client’s orders are executed
• Keeping records, appointing an auditor, reporting and disclosure

There are other obligations that crypto-exchanges must meet, and these include the guidelines on the VFAs order marching and listing criteria, settlement, custody and suspension/removal from trading of the VFA by the crypto-exchange.

Custody

The licence holder is further required to ensure a combination of hot and cold storage. There should be appropriate insurance coverage to mitigate risks that come with hot storage.

Process and Time

1. Engagement
2. Drafting the letter of intent, which includes a business description and its proposed structure
3. Request a preliminary meeting with MFSA
4. Preparing an application and other supporting documentation
5. Submitting an application
6. MFSA reviews the application
7. An in-principle approval
8. Fulfilling all the pre-licensing conditions
9. The issue of licenses

Crypto-exchange applicants require a class 4 VFAA license for operations. As said earlier, to get a license under the VFAA for cryptocurrency exchange set up in or from Malta, one needs a fit and proper test. The test assures the MFSA that the applicant can comply and observe all the rules set up by the VFAA.

Governance Arrangements

External Reporting Requirement

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