Crypto Businesses in Malta: An Overview Malta is the frontrunner in entire Europe in terms of having a regulatory framework for Blockchain technology and embracing the technology revolution. Maltese Parliament has passed three laws giving an investor a clear picture of the regulatory framework that will be required for setting up legitimate crypto businesses in Malta. The laws that have been passed are the Innovative Technological Arrangement and Services Act, the Malta Digital Innovation Authority Act and the Virtual Financial Asset Act. With the passing of these crypto-friendly laws, Malta has attracted investors from across the world to set up offices of their crypto businesses in Malta. The stable environment of Malta and the foresightedness of the government is paving the way for making Malta an ideal destination for attracting further investment. Regulatory Framework of Crypto Businesses in Malta In order to regulate crypto businesses in Malta, the Maltese authorities had to align with the European requirements and create three important sets of laws specifically governing cryptocurrency activities and crypto businesses in Malta. Following are the 3 most important laws governing crypto businesses in Malta: The Malta Digital Innovation Authority Act The Innovative Technological Authority Act The Virtual Financial Asset Act for licensing, regulations and restrictions. The Malta Financial Services Authority (MFSA) is the statutory authority that is responsible for the supervision and issuing of licenses to the companies involved in the blockchain space, cryptocurrencies and other related technologies in Malta that are associated with the traditional financial services business such as insurance, banking and investment services etc. It takes pride in having its own FinTech Regulatory Sandbox and Fintech Innovation Hub, providing a conducive and flourishing environment for innovation. The Malta Digital Innovation Authority (MDIA) is the body that is responsible for promoting and developing the innovative technology sector in Malta. It provides formal recognition and regulation to relevant innovative technology arrangements. Its main objectives include the promotion and regulation of innovative technology arrangements that are legitimate and ethical, harmonising domestic standards with those of foreign standards, introducing transparency and accountability and auditing of technology arrangements. Malta has been recognised as one of the most reliable and important financial hubs for crypto businesses, especially in Europe. Foreign investors are attracted by concrete legislation and regulations coupled with a trusted business environment. If you wish to set up your cryptocurrency business in Malta, speak to our Crypto business and Fintech Consultants at Enterslice. Reasons for setting up crypto businesses in Malta Friendly jurisdiction: Malta is one of the most crypto-friendly jurisdictions in the entire European Union, attracting foreign investors to choose this as a destination for their crypto businesses. Quick registration: The registration of a crypto company hardly takes a time period of a few weeks and the promoter does not need to fly down to Malta or be physically present in Malta for the registration of a Crypto company. Lower tax rates: foreign investors having foreign management, benefit from the lower corporate tax rate of just 5% under certain conditions. Cryptocurrency transactions in other sectors: Maltese law permits cryptocurrency transactions in the online gaming sector etc. making it attractive for other gaming companies to set up their offices in Malta. Regulation of Crypto businesses offering Initial Coin Offerings in Malta Before proceeding with the regulation of Initial Coin Offering (ICO) in Malta, let us first understand the meaning of ICO. ICO is nothing but a fundraising mechanism for new crypto tokens in exchange for bitcoin and ether. It is a similar process to an IPO where shares of a new company are purchased by investors. The Maltese government has introduced a clear regulatory framework for ICOs and cryptocurrencies. It must be noted that if a token that is classified as a Utility token, then it is not regulated in terms of the law. A utility token is a token that does not institute any rights or obligations on the token holder. To find out the type of digital asset being offered, that an issuer wants to take out for an ICO; the MFSA has laid down a financial instruments test which has been made mandatory for the following entities: Companies that want to set up an ICO in or from Malta Companies that want to issue digital assets outside Malta but want to carry out related activities in Malta; and For all the entities that will be dealing in Digital assets This financial instruments test will help in determining whether the digital asset will be: Regulated by the Virtual Financial Assets Act (VFAA) Regulated by the Investment Services Act and Markets in Financial Instruments Directive Exempted from any applicable regulations It is necessary to conduct the test before making a submission of the following: Whitepaper to the competent authority; or Making an application to be admitted to a Virtual Financial Asset Exchange or the provision of a VFA service Stages of the test The test takes place in the following two stages: Stage 1: Does the digital asset qualify as a Virtual Token (VT) under the VFAA? If the answer to this question is Yes, i.e. the VT cannot be exchanged outside the platform, it will be exempted from regulation. If the answer is no, then the issuer moves on to the next stage. Stage 2: Do the digital assets qualify as a financial instrument under Sec. C of Annexure 1 to Markets in Financial Instruments Directive? If the answer to this question comes out to be positive i.e. the digital asset is a financial instrument, then it will be regulated by the Markets in Financial Instruments Directive and other applicable national legislation. In case the answer is no, then the digital asset will be considered a Virtual Financial Asset and be regulated under the provisions of VFAA. All the issuers of ICO have to cooperate with the MFSA and its applicable rules, Maltese law and related regulations along with the guidance notes issued by the competent authority from time to time. The issuers are also supposed to comply with the concurrent EU laws, industry best practices, statements and guidance notes. Appointment of a VFA Agent Every entity that wants to apply to the competent authority for making an ICO, has to appoint a Virtual Financial Asset Agent (VFA Agent). It is incumbent on the VFA Agent to undertake a Financial Instruments Test on the digital asset to find out whether the underlying nature of the coin or token to be issued under ICO is a virtual token or virtual financial asset or financial instrument. This test is very important to determine which laws and regulations will be applicable to the issue and the classification of such assets. It is the responsibility of the VFA Agent to ensure that a proper and robust business plan is prepared. VFA Agent also guides the issuer i.e. the client about the requirements, disclosures and information that is supposed to be included in the white paper before such details are submitted to MFSA for obtaining the approval. A VFA Agent also acts as a gatekeeper who is responsible for protecting the public interest by ensuring that it is satisfied with the client, the client’s background, its operational set up and its ability to deliver on the proposed promises made in the application that is tabled in the application submitted to MFSA for approval. VFA Agent acts as the main point of contact and liaison between the issuer and MFSA. VFA Agent is also supposed to maintain all the necessary documents and other information on the issue made. It is the agent’s responsibility to furnish the said information to MFSA or any other competent authority during the offsite and onsite compliance monitoring. All the above-mentioned responsibilities ensure that the VFA Agent ensures that all the required due diligence documentation is properly compiled and kept up to date in accordance with the applicable anti-money laundering laws and related regulations. The VFA Agent is also subject to the Chapter 273 of the Laws of Malta which talks about the Prevention of Money Laundering. The VFA Agent also needs to ensure that on a yearly basis, an annual compliance report is submitted to MFSA. Procedure of Registration of Crypto Exchanges in Malta In order to register a crypto exchange in Malta, a crypto exchange needs to obtain a Class 4 VFAA license. The companies who want to obtain a Class 4 VFAA license for the registration of their crypto exchanges in or from Malta need to undertake a fit and proper test. Through this test, MFSA wants to ensure that the applicant will comply with all the requirements mentioned under the Virtual Financial Assets Act and other related rules mentioned thereunder: Making Governance arrangements It is compulsory for a VFA exchange to install such measures in place to safeguard the assets of the customers. For this, the VFA Exchange has to appoint a single officer having the required expertise and authority with specific responsibility for matters relating to compliance by the VFA Exchange with its obligations regarding safeguarding the assets of the customers. The VFA Exchange has the authority to decide whether the officer appointed is to be dedicated solely to the task or whether the officer can discharge responsibilities effectively while having the same responsibilities. Reporting Requirements to External auditors Every VFA Exchange has to ensure that its external auditors report at least once on an annual basis to the Competent Authority in the form of a report. This report forms part of the annual report to be submitted by the VFA Exchange to the Competent Authority as per the terms of Article 50(6) of the Act. Fees to be Paid for VFA Class 4 license All the license holders that have been authorised to run a VFA Exchange and to control and hold client’s money, private cryptographic keys, virtual financial assets and custodian or nominee services solely in relation to the operations and activities of such exchange have to pay the following statutory fee: Application Fee €24,000 Annual supervisory fee for annual revenue of VFA exchange upto €1 million = €50,000 For a further amount of €1 million to €100 million = €50,000 per tranche. Enterslice is an international consulting firm offering Crypto business advisory services across the globe.