Register cryptocurrency exchange in Malta

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Malta has positioned itself as a prime Fintech island over the last decade. As a result, it has attracted many electronic money establishments, payment service providers, as well as developing into the largest iGaming hub in the world. To keep up with the demand for IT resources for these establishments, Malta has invested heavily on IT infrastructure and brought in lots of highly qualified IT talent to the island. As a result of experience in the high risk, tech-based industry, Malta has been able to position itself as the right base for the rise of the distributed ledger technology (DLT).

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

Malta has drafted a legal framework to regulate various forms of Virtual Financial Assets (VFAs) and Virtual Financial Assets-related services (also called VFA Services), and also includes the operations of the following.

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

Service providers must fulfil the following before filing an application and getting a cryptocurrency exchange license. Where an applicant is a natural person, a physical presence in Malta would be required. If the applicant is a legal entity, it can be constituted in Malta or abroad and meet the following:

• 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

The VFAs regulated by the VFAA are classified into four classes. Crypto-exchanges fall under category four, which covers all provisions of VFA service and control or holding of clients cash in relation with providing a VFA service.

Ongoing Obligations

Chapter 3 of the rulebook of VFAA and its regulation of VFA service providers has several ongoing obligations that all VFA service providers, including the crypto-exchanges shall observe. They include the following:

• 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

If the licence holder has a business model that involves custody of investors’ funds and assets, he should appoint a custodian for VFAs safekeeping. An authorised credit institution or bank should hold all FIAT currencies.

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

Here is the process of licensing a cryptocurrency exchange. The timeline between the engagement until the issuance of the license does not take more than four months.

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

Every VFA Exchange must put in place governance arrangements to safeguard customer assets. The VFA exchange shall appoint an officer who has sufficient skill and authority to be responsible for matters relating to compliance of the exchange and obligations on safeguarding customer assets. The VFA exchange shall decide if the officer is to dedicate his time solely to this task or will have additional responsibilities.

External Reporting Requirement

The cryptocurrency exchange shall submit an external auditor’s report at least once a year to the Competent Authority on the adequacy of the exchange’s arrangements. The report will be part of the annual reports sent to the Competent Authority to fulfil the VFAA act’s Article 50(6).

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