MALTA SECURITY TOKENS OFFERING
In the past weeks, the Malta Financial Services Authority (MFSA), took another giant step forward towards the regulation of STOs in order to streamline this emerging concept with the current trends of blockchain while at the same time ensuring consumer protection and market stability.
Building on Malta’s recently enacted Virtual Financial Assets (VFA) framework which regulates initial VFA offerings (i.e. ICOs), the MFSA has just published a Consultation Document to establish legal certainty for STOs in the Maltese financial markets. This document has a number of features, the most salient of which are highlighted below.
A key aim is to define STOs, and distinguish DLT assets that qualify as financial instruments which would be captured under traditional financial services framework from other DLT assets which would fall out of scope of the traditional legal framework. In order to cater such a distinction, one should refer to the Financial Instrument Test, which has been instrumental in the whole FinTech regulation.
The Consultation Document also proposes to sub-categorize instruments that qualify as transferable securities in terms of MiFID II into either:
Traditional STOs, i.e. securities such as share bonds and derivatives that are dependent on DLT; or
Other STOs, i.e. token dependent on DLT that may share some qualities with traditional transferable securities and may be classified as other securities in terms of MiFID II.
The MFSA also clarified that applications for approval of prospectuses and admissibility to listing of traditional STOs are to be done via limited liability companies (Maltese or otherwise) rather than via other vehicles including Foundations.
Even more interestingly, the Consultation Document also revealed that the MFSA is currently liaising with the Malta Business Registry in order to consider the necessary amendments to the Companies Act, which would enable companies to keep a register of members in a dematerialised form, using DLT. Other potential amendments which may be required to allow and facilitate the issuance of securities in tokenised form include amendments to the provisions of the Transfers of Shares and Debentures, the Issuance of Certificates as well as the Pledging of Securities amongst others.
In addition, the MFSA is also proposing a revised evaluation system for the approval of a prospectus or admission to listing in order to ensure financial soundness, corporate governance and transparency. For instance, the authority is introducing a requirement for the issuer to draw a Financial Due Diligence Report prior to the issuing of securities.
Another innovative approach by the MFSA is the proposal of having both centralized and decentralized exchange systems in order for STOs to be traded. A decentralised exchange consists of multiple users connected to each other, whereby each user would have the same copy of the ledger, thus forming a distributed ledger. In a decentralised exchange, assets are traded in a peer to-peer manner, automatically. When a new transaction takes place, the ledger is updated following a consensus. As opposed to a centralised environment, the tokens are not held by a central party (the trading venue), but are held by the user. The user has the option to keep the assets saved either on a server which is connected to the internet, or on a disconnected device.
With Security Token Offering being an interface between traditional securities offerings and technology-enabled securities offerings and trading, the MFSA is confident that Malta is distinctively positioned to offer a conducive environment for Security Token Offering. In this respect, the MFSA is aiming to continue strengthening the Maltese financial services industry, amongst others, by enhancing the capital markets and bridge the gap between the constantly developing technologies and the traditional securities legislation.
Dr. Francesco Sultana
Kinanis Fiduciaries Limited Francesco.Sultana@kinanis.com
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.
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refers to the service mark through which Kinanis LLC of Cyprus, Kinanis Fiduciaries Limited of Malta and their affiliated
companies are conducting business, each of which is a separate legal entity.