MALTA – CRYPTO-EXCHANGE PLATFORMS
THE NEW LEGISLATION
Blockchain technology has revolutionized the way of doing business globally. In fact, similar to Investment Services, a number of ancillary business activities are now connected to the industry, ejecting the Blockchain technology to endless fields of everyday life.
Instead of shying away from the technological challenge, the Maltese government has adopted legislation that regulates the offering of certain services (known as Virtual Financial Asset Services) to cryptocurrencies, which includes the operation of platforms to exchange such cryptocurrencies, portfolio management and providing investment advice amongst others. This makes Malta a pioneer in this sector and offers legal certainty, to such an extent that following such a commitment from the Government, crypto-giants are already relocating to Malta, seeking to benefit from a regulated environment and a beneficial tax rate.
This publication in fact seeks to give an overview of the recent laws and regulations relating to the Virtual Financial Asset Exchange Platforms (which is a type of licensable VFA Services).
B. TO WHOM DOES THE NEW LAW APPLY?
The legislation applies to any person who intends to operate a crypto-exchange platform (i.e. a Virtual Financial Asset (VFA) Exchange Platform) in or from within Malta.
In order for a person to operate such a VFA Exchange Platform a license which is duly issued by the Malta Financial Services Authority (MFSA) is required, together with all the supporting documentation and requirements as outlined below.
C. DEFINITION OF VIRTUAL FINANCIAL ASSET (VFA)
By way of a definition, a VFA is any form of digital medium recordation that is used as a digital medium of exchange, unit of account, or store of value and that is not one of the following as defined below:
Financial Instrument; and
Legal definitions of the above:
Electronic Money means electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions (as defined) and which is accepted by a natural or legal person other than the financial institutions that issued the electronic money.
Financial Instrument includes the following:
Transferable securities, including shares and bonds;
Money market instruments such as treasury bills and certificates of deposit;
Units in a collective investment scheme;
Options, futures, swaps and any other derivative contracts relating to securities, currencies interest rates, yields, commodities or those that are traded on a regulated market etc.;
Derivative instruments for transfer of credit risk;
Rights under a contract for difference;
Instruments which confer property rights;
Foreign exchange held for investment purposes; and
Emission allowances under EU Emissions Trading Scheme.
Virtual Tokens have been defined as a form of digital medium recordation that:
Is restricted solely to the acquisiton of goods or services;
Restricted within the DLT platform or within a limited network of DLT platforms (excluding exchanges).
Provided that if the token may be converted into another DLT asset type, it shall be treated as the DLT asset type into which it may be converted.
Electronic money is excluded from this definition.
The MFSA requires a compulsory Financial Instrument Test in order to determine whether an asset is a Financial Instrument or not.
In essence, the process is a two-fold test, being:
Does the VFA qualify as a Virtual Token as defined under the new laws? If it does, having in mind its restricted definition as per the new laws herein specified, then it is exempted under the new VFA Law and the licensing requirements do not apply.
If it is not qualified as a Virtual Token, then one has to determine whether this qualifies as a Financial Instrument under MiFID (Section C, Annex 1) considering all the categories of Financial Instatements as identified above. If the answer is negative, then the asset is caught under the VFA Law and its licensing procedure must be followed.
More detailed information about the Financial Instrument Test can be found in our publication: Malta – The Financial Instrument Test
If a cryptocurrency qualifies as a Virtual Token as defined in the new law and does not qualify as a Financial Instrument or Electronic Money, then it is exempted from the ambit of applicability of the new law and the licensing requirements are not needed for its issuing or trading.
D. LICENSE APPLICATION PROCESS
In order for a person to offer the services of a crypto-exchange platform in or from within Malta, one needs to establish a company in Malta and obtain a VFA Service License from the MFSA. The type of license in question depends heavily on the business model of the applicant.
In essence, there are two main categories that such exchanges can fall into. In simple terms, the main difference stems on the type of ‘platform’ that will be offered, i.e.:
Will the exchange be dealing on its own account? In this situation, the License Holder will be trading against proprietary capital resulting in conclusion of transactions in one or more virtual financial assets, hence incurring the risk. Under the new laws, this is not considered to be an exchange per se, specifically due to the fact that the License Holder is trading on its own account. This business model will require a Class 3 VFA License.
Will the License Holder operate a more conventional exchange platform which assimilates the Stock-Exchanges model? This business model will require a Class 4 VFA license.
The below table highlights the main characteristics that each Class holds:
The stages of getting a license involve various steps, but the following shows the main ones.
It is difficult to give any accurate time-frames of the duration of all the process. Much will depend on the client’s co-operation with the provision of the supporting documentation. Realistically, time frames will not be less than 9 months.
E. MAIN PARTIES INVOLVED – STRUCTURAL REQUIREMENTS
The rules and regulations prescribe a number of mandatory positions that need to be satisfied.
All persons need to be fit and proper as determined by the MFSA. This means that the following criteria must be satisfied at all times by the below persons:
Integrity – must be of good repute and with the intention to act in an honest and trustworthy manner.
Competence – must prove an acceptable level of knowledge, professional expertise and experience in the VFA sector.
Solvency – must be financially sound and prove that proper financial control is ensured and management of liquidity will be applied in the course of the provision of the proposed VFA services.
The following are the main parties involved in the set-up:
F. MINIMUM CAPITAL & LIQUIDITY – FINANCIAL REQUIREMENTS
The below table highlights the main financial requirements of the License Holder:
The License Holder shall have in place sound, effective and comprehensive strategies and processes to assess and maintain on an ongoing basis the amounts, types and distribution of internal capital that they consider adequate to cover the nature and level of risks to which it is or might be exposed, and such policies shall be be subject to regular internal review to ensure that they remain comprehensive and proportionate to the nature, scale and complexity of the activities of the License Holder.
G. INTERNAL SET-UP – ORGANIZATIONAL REQUIREMENTS
The rules set out the on-going obligations for the License Holder in terms of organizational matters and requirements.
The MFSA has identified various ‘organizational pillars’ which need to be strictly adhered to. The main focus is on good governance, risk management and compliance. The authority will require detailed policies as well as evidence of review of the same, and that these are periodically tested.
The main areas of focus can be summarized in the following sections:
H. REPORTING REQUIREMENTS
The License Holder shall ensure compliance with the following reporting requirements:
If the License Holder maintains a website, its homepage shall contain such information and in such a format as may be required by the MFSA by means of duly published Rules.
Any type of advertisement in relation to a VFA service can only be done by a License Holder and must be vetted and approved by its board of administration.
J. CONTROL OF ASSETS
A License Holder that controls assets belonging to a customer in the course of rendering a VFA Service shall hold such assets solely in the interest of the customer.
To this effect, such assets shall:
Form a distinct patrimony and be separate from the assets belonging to the License Holder;
Be still deemed to be owned by the customer, notwithstanding that they are registered in the name of the License Holder;
Not be subject to the rights of creditors of the License Holder.
Upon receipt of clients’ money, the License Holder shall promptly place such money with any of the following:
Credit institution duly Licensed in EU;
Bank authorized in a non-EU country;
Qualifying money market fund (Collective investment undertaking duly authorized under EU directive), provided customers give their explicit consent for such placement.
A License Holder may deposit VFA held by it on behalf of its customers into an account opened with a third party provided that the third party holds a License under the Malta VFA Law or any other equivalent authorization issued by a European or overseas authority.
The License Holder shall not use the VFA which it holds on behalf of the customer for another person or customer unless both the following are met:
Customer has given his prior express consent and
Use of customer’s VFA is restricted to the specific term of consent.
K. FUNCTIONS AND DUTIES OF THE LICENSE HOLDER
The following are the salient functions and duties of the License Holder as detailed out in the regulations:
Safeguard assets in the interest of customers;
Maintain proper and adequate records and accounts of all customers’ assets held under control. Such records are to clearly indicate that the assets of every customer are separate and distinct from assets belonging to the License Holder, and should indicate where any pledge or right over assets held by the License Holder has been given by customers to any third party;
Conduct reconciliations between its records and accounts of third parties with whom customer’s VFA has been deposited on a regular basis;
Segregate in a proper manner all assets of every customer from assets belonging to the License Holder;
Make all appropriate arrangements for protection of customers’ assets;
Take all steps to ensure that VFA deposited with a third party in accordance to the law are identifiable separately from the VFA belonging to that third party, via tilted accounts;
Implement organizational arrangement to minimize risk of loss or diminution of assets.
A License Holder may delegate the above functions to another Licensed person and may also entrust or deposit customer’s assets to such person. However, the original License Holder shall remain fully liable notwithstanding such delegation.
L. DUTIES UNDER ANTI-MONEY LAUNDERING LAWS
By law, the License Holder shall be considered a Subject Person in terms of the Anti-Money Laundering laws.
In essence, this implies that the License Holder has to:
Have adequate procedures and systems to detect and combat money laundering and financing of international terrorism;
Appoint a qualified Money Laundering Reporting Officer;
Perform customer due diligence;
Conduct periodical risk assessment on the clients;
Submit suspicious transaction reports to the relevant authorities.
M. PREVENTION OF MARKET ABUSE
The following prohibitions apply to acts carried out by any person concerning VFA that are admitted to trading on a VFA exchange:
Prohibition of insider dealing or recommending or inducing another person to engage in such insider dealing;
Prohibition of unlawful disclosure of inside information;
Prohibition of market manipulation.
It shall also be mandatary for the VFA Exchange to have effective systems, procedures and arrangements to monitor and detect market abuse.
N. EXEMPTIONS FROM REQUIREMENT OF LICENSE
The following persons are exempt by law from the requirement to obtain a License for the provision of VFA services:
Central Banks that are members of the European System of Central Banks;
Liquidator or curator in bankruptcy acting in liquidation or bankruptcy;
Persons dealing on own account and not providing any other VFA services unless such persons are (i) market makers or (ii) deal on own account when executing client orders;
Persons providing VFA services exclusively for their own group companies;
Persons Licensed to act as custodians under Maltese Law in regards to a collective investment scheme – in such a case, the exemption shall solely be with regards to custodian services to VFA;
Persons Licensed to provide services of management of investment under Maltese Law – in such a case, the exemption shall solely be with regards to provision of Portfolio Management and Investment Advice services;
Individual providing portfolio management of VFA for close family, or personal VFA, provided he is not remunerated and does not hold himself as providing VFA Services;
Persons providing VFA Service where that service is provided in an incidental manner in the course of a legally regulated professional activity;
Licensed Securitization Special Purpose entities and Collective Investment Schemes.
1. Corporate Taxation
As a company resident in Malta, a License Holder may also benefit from the advantageous fiscal treatment wherein a shareholder may apply for refunds equivalent to 6/7th of the income tax paid at corporate level, leaving the tax leakage to a maximum of 5% on company profits.
The above is explained in the following basic graphical representation -
2. Taxation on transfers
Provided that there is no change in beneficial owner of the VFA, the following shall not be deemed to constitute a chargeable transfer for the purposes of the Maltese Income Tax and Stamp Duty legislation:
delivery of a VFA of a customer to a License Holder;
delivery of a VFA from a License Holder to a customer;
delivery of a VFA from a License Holder to another License Holder.
3. Personal tax incentives for directors
Foreigners who seek to relocate to Malta and be employed or occupy certain positions in the License Holder, may apply for a special Scheme in order to be granted a special tax status. The employment income will be taxed at a flat 15% on all income derived in Malta up to a maximum of €5,000,000, following which the excess is not subject to tax.
Further information on this may be found specifically on our other publications.
P. TRANSITORY PROVISIONS
Any person who is conducting any regulated activity is required to comply with the new laws once they come into force. The law provides a stipulated time frame of twelve months for a person that is offering VFA Services to apply for a License and regulate its position accordingly.
The application of the transitory period is subject to a notification to the MFSA to be made immediately upon the coming into force of the new laws. The notification to the Authority should be accompanied by a legal opinion stating that the activity falls within the scope of the Virtual Financial Assets Act.
The MFSA has issued guidance that that mere incorporation is not deemed sufficient; and entities are required to be actively operating prior to the coming into force of the Act.
The innovative Blockchain technology has affected all areas of business. Malta took the initiative to regulate not merely ICOs, but also any provision of services that relate to such Virtual Financial Assets, in order to offer a unique and pioneering legislation seeking to transform Malta into a Blockchain island.
R. HOW WE CAN ASSIST
Our Firm is ready to assist clients with:
Legal, Tax, Vat and Accounting advice for the Blockchain project or a VFA License;
Review and consultation on Whitepaper, Prospectus or Offering Memorandum to confirm legal compliance;
Classification of Tokens and assets in connection to ICOs, STOs and Licenses;
Drafting or review of various agreements relating to ICOs, STOs and Licensing application;
Notification and Licensing to Authorities re: ICO or STO project as well as VFA Services;
Advice on the ICO, STO and VFA Licensee corporate structure to be used;
Formation and management of companies to be used in the project;
Legal analysis of the Maltese or Cypriot regulatory framework;
Advise on AML, KYC, and Compliance issues - preparation of relevant manuals;
Advise on Data Protection law issues - GDPR - and Technical support on GDPR issues;
Support on banking issues for the opening of bank accounts;
Drafting of Shareholders’ agreements;
Ongoing legal advising on the matter and related issues.
This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case. No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.
Dr. Francesco Sultana
Kinanis Fiduciaries Limited Francesco.Sultana@kinanis.com
ANNEX I – LICENSING FEES PAYABLE TO THE MFSA
The fees payable to the MFSA depend on the Class of license and are payable as follows:
*Payable upon the anniversary of the date of the granting of registration.
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We consider ourselves as ‘traditional pioneers’ and our motto is to foresee and anticipate any issues that may potentially impact our clients’ business and to offer effective advice and solutions proactively.
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