The Blockchain Revolution in Malta
Although blockchain was already making rounds among tech circles and tech savvy lawyers as early as 2015 with promises of revolutionising business, there is no doubt that the technology exploded in mid-2017. When the Maltese Government announced that it would be undertaking efforts to make Malta a global trailblazer within the Fintech arena, Malta’s financial services sector experienced a surge of queries that seasoned practitioners likened to the advent of Malta’s iGaming laws.
True to its word, Malta enacted three comprehensive acts which together constitute a first in the world. Malta now stands as one of top jurisdictions in Fintech, establishing itself as a blockchain hub, as attested by the excitement building the run-up to the DELTA Summit taking place between the 3-5 of October.
The past few months have been an exhilarating experience for Financial Services specialists and lawyers, where the line distinguishing traditional and innovative services has been blurred to a point of no return. Businesses are realising that failure to keep up with innovation will marginalise a growing sector of consumers who have already normalised the use of cryptocurrencies, both as means of payment, as well as for investment. Additionally, consumers are becoming increasingly demanding and expect a more expedient service now that the technology is becoming more widely available.
Why Malta?
During a particular client meeting, an intriguing question was put forward – what right does the Maltese authority have to regulate this industry? How come the regulator is willing to give its blessing to the issuer of a virtual token without subjecting such a DLT asset to regulation?
These are extremely pertinent questions, particularly when all those seeking to regulate the industry are attempting to provide a regulatory framework for something which was created precisely to bypass the rigorous requirements imposed at law by employing a technology solution.
First and foremost, it is only natural that innovation will progress at a faster rate than regulation. Nonetheless, while the promotion of innovation should be a priority for mankind as a whole, there are other considerations which no serious regulator can turn a blind eye to, namely: consumer protection, market integrity and financial stability. These are particularly poignant in such an industry where volatility is the order of the day, and no safeguards exist for investors.
Providing a legal framework for this highly unregulated sphere has enticed clients from all over the globe for a multitude of reasons. Serious operators are keen to obtain a seal of approval from a recognised and reputable regulator which in turn may provide a measure of peace of mind for investors within an industry where the reality is that scams are rather more common than genuine undertakings.
Malta’s Answers to Grey Areas
While demand and interest in tokens have skyrocketed, a number of worrying statistics have also emerged. Cointelegraph has reported that a study conducted by ICO advisory firm Statis Group shows that more than 80% of Initial Coin Offerings conducted in 2017 were identified as scams. Having taken this into consideration, the regulator has created the role of the VFA Agent as the first filter in terms of compliance and due diligence, as well as the main point of contact for Issuers and service providers. The role of VFA Agent at the launch of an ICO includes vetting the White Paper; ensuring proper compliance with all applicable laws, including the Prevention of Anti-Money Laundering Act; and facilitating the process in which the tokenomics of digital assets are determined by created what is known as the Financial Instruments Test (the ‘Test’).
The objective of this Test is to set out a simple framework that clearly outlines which law will regulate the DLT Asset of the ICO in question. This is of particular importance owing to the fact that a number of security tokens are incorrectly issued as virtual tokens, escaping the application of relevant financial services legislation, notably Directive 2014/65/EU on Markets in Financial Instruments, and the corresponding local Investment Services Act.
The Test has managed to strike a much-needed balance between the need to provide a legal framework for investor protection, and the importance of allowing the industry to maintain its dynamic nature. Although Malta is acting as a pioneer within the industry, it must remain compliant with its obligations under EU law due to the fact that it is regulating a product which would fall under the remit of EU legislation.
Apart from its duties at the launch of a new ICO, the VFA Agent is also obliged to ensure that the issuer delivers on the commitments as upheld within the White Paper. This includes promises that particular milestones will be reached within deadline.
The Next Step
The efforts Malta has made to regulate the area are truly commendable, where the regulator must be applauded for what it has managed to achieve within such a short period of time, without the luxury of precedent laws to learn from. Nonetheless, it is our firm belief that in order for this industry to thrive, all stakeholders must pool their efforts in order to herald Malta into a bright new future as a worldwide Blockchain hub.
The legal industry, as a whole, must take on the challenge of embracing these technologies, in particular, smart contracts on Blockchain platforms. Financial Services lawyers must be ready to understand concepts that were unfathomable as little as ten years ago and fuse traditional concepts with modern practice. Additionally, they must have a sufficient understanding of the clients’ business, and quite possibly may need to learn to think like a developer to understand where the implementation of blockchain solutions would most benefit the client’s business. This may involve automating particular processes or opening new revenue streams for businesses that would otherwise be too costly to service under existing methodologies. Although the mere mention of Blockchain seems to pique investor interest, Blockchain is not a solution to all challenges, therefore client expectations must be managed in this respect.
A secondary, yet important, consideration which may make or break the Fintech industry in Malta is the EU’s perception and its readiness to accommodate this style of regulation in light of the needs of this specific industry. While certain key pieces of legislation, such as the Prospectus Directive and MiFID, have helped the EU’s financial services hubs become renowned for its high levels of investor protection and market stability, it cannot be denied that in certain cases, the cumbersome style of legislation and long timeframes needed to comply with such onerous regulations, were counterproductive. In the fast-paced world of technology and technology-based offerings, firms cannot afford such burdensome timelines as are currently being imposed.
While due caution is appreciated, the EU cannot afford to fall behind financial services giants such as Singapore and New York.
Author: Dr Priscilla Mifsud ParkerDr Priscilla Mifsud Parker is a private client lawyer who heads the Corporate & Trust, Families & Wealth teams at Chetcuti Cauchi Advocates. Through her wealth of knowledge, she is able to provide tailor made solutions for high net worth businesses and business families, assisting them in business start-ups, corporate restructuring and any day-to-day issues which may arise. Also holding a prominent role within the Fintech Services team, Dr Mifsud Parker assists clients seeking to set up blockchain-related businesses in Malta, ensuring they are fully-compliant with the latest regulations.
For more information go on https://www.chetcuticauchi.com/fintech or you can contact Priscilla on ask.pmp@cclex.com and by telephone on +356 22056603