Malta is the first country in the world to create and implement a comprehensive legal and regulatory framework for cryptocurrency and blockchain technology. Malta’s stable system and forward-looking approach create the ideal framework for attracting new investment. In fact, Malta has attracted some of the largest cryptocurrency exchanges in the world that have moved or established offices on the island.
The Maltese legal framework consists of three main pieces of legislation, namely:
I. The Virtual Financial Assets Act (the “Act“);
ii. Maltese Authority for Digital Innovation Act; &
iii. The Innovative Technology Arrangements and Services Act.
The most important and relevant piece of legislation is the Law, which regulates, among others, Initial offerings of virtual financial assets, Virtual financial assets (“VFA“) and the provision of VFA services. By law, cryptocurrencies are classified as” virtual financial assets “.
In addition, Chapter 3 of the VFA Regulation is also very relevant in this regard, as it applies to VFA service providers seeking to obtain a VFA license and those who have already obtained a VFA license.
1. The test of financial instruments
In the Maltese framework, the starting point for any valuation is the financial instrument test, which is a test that determines the classification of the DLT asset as:
I. a virtual financial asset;
ii. a financial instrument;
iii. electronic money; or
iv. a virtual token (aka utility token).
This classification ultimately determines the applicable regulatory framework. Therefore, a person applying for a VFA license (the “Applicant“) must, before submitting the request, complete the financial instrument test, which must be signed by its directors and approved by its compliance officer. The DLT asset (s) must be classified as VFA for the VFA framework This is because the law defines a VFA exchange as a DLT exchange operating in or from Malta, on which only VFAs can be treated.
2. License requirements
The law states that no person shall provide, or purport to provide, a VFA service in Malta or from Malta unless that person is in possession of a valid license granted by law by the competent authority. , i.e. the Malta Financial Services Authority (“MFSA“).
Where the applicant is a natural person, that person must reside in Malta. On the other hand, when the Applicant is a legal person:
- I. it must be constituted either in Malta or in a recognized jurisdiction;
- ii. its purposes or objects must be limited to acting as the licensee and carrying out any activity incidental or ancillary to it, and must not include any purposes or objects which are not compatible with a licensee’s VFA services license; &
- iii. its actual activities are compatible and linked to the VFA services of a licensee.
The provision and operation of a VFA exchange will be subject to the requirement to obtain a Class 4 VFA license which applies to:
“Licensees authorized to provide any VFA service. Class 4 licensees may own or control customer money in conjunction with the provision of a VFA service. “
3. VFA agent requirement
An applicant wishing to obtain a license to operate an exchange must appoint a VFA agent registered with the MFSA. The applicant should ensure that all communications, meetings, notifications and / or submissions to the MFSA are made through their VFA agent.
Indeed, a VFA service license request can only be made through a VFA agent. However, once the application is submitted and the applicant is approved, the requirement to have a VFA agent in place no longer exists.
4. The VFA Service Provider Application Process
The application process consists of three phases:
(i) the preparatory phase;
(ii) the pre-license phase; and
(iii) the post-license / pre-start-up phase of the business.
The applicant must notify MFSA in writing, through their VFA agent, of their intention to apply for a VFA license. The declaration of intent must include:
- I. a complete written description of the proposed structure;
- ii. the VFA service for which a license is requested, by identifying the persons proposed to occupy key positions therein; and
- iii. a legal opinion indicating that the proposed activity does not fall within the scope of traditional financial services law.
The MFSA, upon receipt of the aforementioned declaration of intent, will schedule a preliminary meeting with the applicant. Following this meeting, the applicant has 60 days to submit a complete application package.
Once MFSA is satisfied with the information provided in the application and the completion of the suitability and suitability assessment, it will issue a “Approval in principle”, which is valid for a period of three months from the date of issue.
During these three months, applicants must finalize all outstanding issues raised during the application process and all license prerequisites as determined by the MFSA in the approval in principle. Once these requirements are met, a VFA Services license will be issued by the MFSA.
Post-license and pre-start of the commercial phase
Licensees may be required to complete a number of post-licensing questions, as determined by the MFSA, within defined timeframes, prior to the commencement of operations. The license holder must start their VFA services business within twelve months from the date of issue of the VFA services license.
5. Fitness and fitness
Applicants are required to meet the aptitude and aptitude requirements both during the application phase and continuously thereafter. To assess whether a person is fit and suitable, the MFSA requires that the following three criteria be met, namely integrity, competence and creditworthiness.
In addition, the assessment of suitability and suitability should be applicable to each:
- I. person who holds an eligible interest in the applicant;
- ii. beneficial owner;
- iii. member of the applicant’s Board of Directors;
- iv. senior;
- v. MLRO;
- vi. responsible for compliance;
- vii.r isk manager (if applicable); and
- viii. any other person who will effectively direct the applicant’s VFA activity.
6. Fees and capital required
The fees for a Class 4 VFA license are as follows:
- I. Application fees of € 24,000; &
- ii. Annual monitoring costs of € 50,000.
In addition, a holder of a class 4 VFA license must have a minimum share capital of € 730,000.
7. Key officials
The license holder is required to appoint and have in place at all times the following officials:
- I. Listener;
- ii. MLRO;
- iii. Compliance officer; &
- iv. Board of Directors.
Whereas the appointment of the following officials is optional:
- I. Systems auditor; &
- ii. Guardian
As mentioned above, a VFA agent should be appointed in order to assist with the license application process.
8. Current obligations
There are several ongoing obligations that the license holder must meet. These include organizational, governance, prudential and business conduct requirements.
Organizational requirements involve:
- I. the establishment of a board of directors which must be composed of at least two people responding to the “principle of double control”;
- ii. formulate governance policies;
- iii. have adequate and effective risk management and compliance policies and procedures in place;
- iv. have measures in place to protect customers’ money.
In addition, there are also prudential requirements that must be respected, relating to the requirements of own funds, liquidity, share capital and fixed overheads.
In addition, the license holder must have policies and procedures in place that address:
- I. Conflicts of interest;
- ii. Risk management;
- iii. Remuneration;
- iv. Record keeping;
- v. Registration criteria;
- vi. Keep;
- vii. Correspondence of orders;
- viii. Rules.