Malta ICO Regulation

Early on, Malta saw the crypto sector as an economic niche for which it wanted to roll out the biggest of welcome mats. Knowing that regulatory clarity is the cornerstone from which a vibrant blockchain economy will grow, Malta set up a specialised government unit focused solely on researching blockchain technologies and ideas on how to establish Malta as the world’s standard-bearer for transparent and easily-understood ICO regulation.

All of Malta’s efforts to truly become the “Blockchain Island” culminated with unanimous Parliamentary approval these three bills:

1. Malta Digital Innovation Authority Act
2. Innovative Technological Arrangement and Services Act
3. Virtual Financial Asset Act

The Malta Digital Innovation Authority (MDIA) Act

The MDIA Act provides for the establishment of the Malta Digital Innovation Authority (MDIA) and outlines the Authority’s mission to promote the development of the blockchain technology sector in Malta. As per the Malta Digital Innovation Authority Act, the MDIA will certify DLT platform software and the internal governance thereof. Certification provides, in turn, legal, technical, and tokenomic certainty to users of Malta-based DLT platforms. MDIA CEO Stephen McCarthy is charged with ensuring that businesses accepted as Technology Service Providers and the services that they offer are carried out in a transparent and honest manner.

The Innovative Technology Arrangements and Services Act (the ‘ITAS Act’)

The ITAS Act promulgates a framework for “Innovative Technology Arrangements and Services” (‘ITAS’). The ITAS Act establishes the definitional criteria and registration requirements for innovative technology arrangements (‘ITA’), innovative technology services (‘ITS’), and persons providing innovative technology services (‘ITS providers’), all of which will be regulated by the MDIA (the ‘Authority’). The Innovative Technology Arrangements and Services Act further provides for auditing and certification of software and architectures used in designing and delivering DLT, smart contracts, token exchanges, decentralized autonomous organizations, as well as other similar innovative technologies as may be designated by the Minister, on recommendation of the Authority. Wide definitions in the language used in the act are intended to make the legislation future-adaptive.

The Virtual Financial Assets Act (the ‘VFAA’)

The VFA Act establishes a regulatory framework to govern entities that work directly or indirectly with Virtual Financial Assets, including ICOs, token exchanges, custodian wallet providers, nominee service providers, brokerages, portfolio managers, and investment advisors. The Virtual Financial Assets Act also establishes a set of requirements and guidelines for ICO and STO (Security Token Offering) whitepapers to be delivered to the Malta Financial Services Authority. The Virtual Financial Assets Act stipulates that the token issuer must appoint a VFA agent who is approved by the MFSA as the competent authority who monitors and reports on the token offering.

Malta’s “Technology First” Approach to ICO Regulation

The three cryptocurrency and blockchain acts summarised above are designed to work seamlessly together as a triad to provide the industry with a comprehensive framework that certifies the integrity of DLT (“Distributed Ledger Technology”) software and consolidates safeguards for token buyers.

While other jurisdictions look to simply certify a white paper based on the strength of the use case and its tokenomic assumptions, Malta will look at the software and technology behind the white paper, and at the strength of the potential for successful implementation of what is written.

No other country has delved into technical detail on the regulation of disruptive blockchain technologies. Silvio Schembri, Malta’s Parliamentary Secretary on Financial Services, noted that “If the technology is flawed, the product won’t deliver what is stated in the white paper. We are looking heavily at the technology behind these blockchain-focused companies.”

So Malta looks at ICO regulation differently. Its “technology first” approach means carefully evaluating the technology explained in white papers of operators interested in setting up shop in Malta. The Malta Financial Services Authority (MFSA), Malta’s financial watchdog, decided a new and technologically competent body should audit and license crypto businesses. The newly established Maltese Digital Innovation Authority (MDIA) will determine if a crypto business is eligible for a license or not based on the quality of the computer code in the white paper.

In most countries, cryptocurrencies are not considered currencies or legal tender, but, rather, a form of investment or asset. The Maltese Financial Instruments Test (the ‘Test’), as outlined in The Virtual Financial Assets Act, determines the category under which a DLT asset falls. Companies that want to either set up an ICO from within Malta, or issue DLT assets overseas but carry out related activity from Malta, and all other proposed Malta-based entities which shall be dealing with DLT assets, must take Test. The Test defines all cryptocurrencies and tokens as DLT assets.

Silvio Schembri stated that the passage of the three bills makes the country “the first world jurisdiction to provide legal certainty to this space.” He said that “When we started looking into what was needed for the blockchain industry to flourish, we understood early on that the serious operators wanted legal certainty. As of now, operators are functioning in jurisdictions of legal uncertainty. Operators fear that one day a government in that particular legislation will tell them they aren’t within the law – even though there are currently very few laws in place. This is creating legal uncertainty and we wanted to change this.”

With the passage of the three bills, the Maltese government has drafted a set of laws to guide the operations of cryptocurrency companies with regulations based on principles of market integrity, and consumer and industry protection. Malta is the first jurisdiction in the world to have laws which comprehensively cover cryptocurrencies, ICOs and subsequent treatment of assets offered to investors, and blockchain service providers and the services they offer, including setting up a cryptocurrency exchange. Malta now has the world’s most robust framework for monitoring and regulating a country’s burgeoning cryptocurrency industry in a way that invigorates innovation.

Building on experience as innovators financial services and gaming, Malta was ideally positioned in the world to meet this challenge, provide a world-first comprehensive legal framework. Joseph Muscat, Malta’s Prime Minister, said of the passage of the Malta Digital Innovation Authority Act, the Innovative Technological Arrangement and Services Act, and the Virtual Financial Asset Act, “I think that blockchain technology, DLT, and cryptocurrency is where innovation is happening right now and we are very glad that Malta can offer the first jurisdiction in the world to regulate this sector. We are excited about what this will lead to in the future.”

With the regulatory certainty created by the passage of the three bills, Malta is pulling far ahead of other countries purportedly positioning themselves as crypto havens, such as Switzerland (Zug is branded as “Crypto Valley”), Estonia, Hong Kong, Singapore, Liechtenstein, Isle of Man, Bermuda, and Lithuania. These other jurisdictions are falling far behind Malta because they view ICO regulation from the vantage point of old financial paradigms. They are much more concerned with short-term financial gains associated with the space than with the smart contract software which provides strength and security to the underlying technology and the tokenomic ecosystems built upon it. Malta’s new crypto laws not only deal with ICOs, cryptocurrencies, and exchanges but also applied to other blockchain technologies that are not necessarily financial in nature.

Malta has found a holistic formula for a solid regulatory framework that protects consumers, safeguard investors, and allows for transparency. With its strong technical perspective approach to crypto regulation, Malta provides itself with legal flexibility that is “principle-based”, an approach through which Malta will tailor laws around evolving technology.

The laws and regulatory entities created by the passage of the three Malta crypto bills provide regulatory certainty that is expected to vastly increase the number of new crypto projects locating in Malta, thus supercharging an already vibrant Malta blockchain sector. The biggest players in the industry are formalizing plans to launch projects from the Blockchain Island because of the clarity of Malta ICO regulation.