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 advanced approach creates 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 set up 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. The Malta Digital Innovation Authority Act; &
iii. The Innovative Technology Arrangements and Services Act.
The most important and relevant piece of legislation is the law, which regulates, among othersInitial Offerings of Virtual Financial Assets, Virtual Financial Assets (“VFA“) and the provision of VFA services. Under the law, cryptocurrencies are classified as “virtual financial assets”.
In addition, Chapter 3 of the VFA Regulations is also very relevant in this regard, as it applies to VFA service providers who wish 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 assessment 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; Where
iv.a virtual token (aka utility token).
This classification ultimately determines the applicable regulatory framework. Thus, a person applying for a VFA license (the “Applicant“) must, prior to submitting the application, undertake the Financial Instrument Test, which must be signed off by its directors and approved by its compliance officer. The DLT asset(s) must be classified as a VFA for the VFA framework to s Indeed, the law defines a VFA exchange as a DLT exchange operating in or from Malta, on which only VFAs can be traded.
2. License requirement
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 issued under the law by the authority competent authority, namely the Malta Financial Services Authority ( “MFSA“).
Where the applicant is a natural person, that person must be resident in Malta. On the other hand, when the Applicant is a legal entity:
- I. it must be incorporated either in Malta or in a recognized jurisdiction;
- ii. its purposes or objects shall be limited to the function of licensee and the exercise of any activity incidental or incidental thereto, and does not include purposes or objects that are not compatible with the VFA services of a license holder; &
- iii. its actual activities are compatible and related to a licensee’s VFA services.
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 hold or control Customers’ money in conjunction with the provision of any VFA Service.”
3. VFA Agent Requirement
An applicant seeking a license to operate an exchange must appoint a VFA agent registered with the MFSA. The applicant must ensure that all communications, meetings, notifications and/or submissions to the MFSA are made through their VFA agent.
This is because a license request for VFA services 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 in place no longer remains.
4. The VFA Service Provider Application Process
The application process consists of three phases:
(i) the preparatory phase;
(ii) the pre-licensing phase; and
(iii) the post-authorisation / pre-start-up phase of the activity.
The applicant must notify the MFSA in writing, through their VFA agent, of their intention to apply for a VFA license. The statement of intent should include:
- I. a detailed written description of the proposed structure;
- ii. the VFA service for which a license is requested, identifying the persons proposed to occupy key positions therein; and
- iii. a legal opinion that the proposed activity does not fall within the scope of traditional financial services legislation.
The MFSA, upon receipt of the above statement of intent, will arrange a preliminary meeting with the applicant. Following this meeting, the applicant has 60 days to submit a complete application file.
Once AMSF is satisfied with the information in the application and the completion of the fitness and suitability assessment, it will issue a ‘approval in principle’which is valid for a period of three months from the date of its issue.
During these three months, applicants must finalize any outstanding issues raised during the application process and any pre-licensing requirements 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-licensing and pre-start of the commercial phase
Licensees may be required to satisfy, within set deadlines, a number of post-licensing questions, as determined by the MFSA, before commencing operations. The Licensee must commence VFA Services activity within twelve months from the date of issuance of the VFA Services License.
5. Fitness and suitability
Applicants are required to meet the suitability and aptitude requirements both at the application stage and on an ongoing basis thereafter. To assess whether a person is fit and suitable, the MFSA requires that the following three criteria be met, namely integrity, competence and solvency.
In addition, suitability and suitability assessment applies to any:
- I. person who holds a qualifying holding in the applicant;
- ii. beneficial owner;
- iii. member of the applicant’s board of directors;
- iv. senior ;
- vs. MLRO;
- vi. compliance officer;
- vii. risk manager (if applicable); and
- viii. any other person who will actually direct the VFA activities of the applicant.
6. Charges and capital requirements
The fees for a Class 4 VFA license are as follows:
- I. Administrative fees of €24,000; &
- ii. Annual monitoring fee of €50,000.
In addition, the holder of a class 4 VFA license must have a minimum share capital of €730,000.
7. Key Officials
The licensee 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 must be appointed in order to assist with the license application process.
8. Continuing Obligations
There are several ongoing obligations that the licensee 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 in accordance with the “double control principle”;
- ii. formulate governance policies;
- iii. have in place adequate and effective risk management and compliance policies and procedures;
- iv. have measures in place to protect customers’ money.
In addition, there are also prudential requirements that must be met, relating to equity, liquidity, share capital and fixed overheads.
In addition, the licensee 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. Order matching;
- viii. Regulations.