By Ivan Kuznetsov
November 19th, 2018

Rocky path to the crypto valley: Malta’s first steps to blockchain regulation

Rocky path to the crypto valley: Malta’s first steps to blockchain regulation

By Ivan Kuznetsov
November 19th, 2018

Lately, more and more locations have been competing for the title of “the main Crypto Valley”. And although it’s been a tough choice, Malta with the amount of hype and coverage alone seems to have outrun them all. It’s as if all stars have aligned there: isolated, yet very accessible location, regulators’ fintech experience, and loyal, yet thoughtful legislation approach promising a great start for this tech hub. After the Delta Summit back in October, our feet brought us back for the Malta Blockchain Summit, where we tried to feel the zeitgeist asking the industry leaders about their expectations and visions for this place. In our first interview, that jumpstarted a whole series devoted to Malta, we spoke to Steve Muscat Azzopardi, Senior Manager, Corporate & Fintech at Chetcuti Cauchi Advocates, about the road ahead for this venue.

Future Times: Hi, Steve. So, the main idea of the Summit is to attract attention to Malta and raise interest in the blockchain community, companies, and individuals who come here to open their offices and make business.

That being said, why would you recommend a company or an individual to come to Malta? Why is it a good place to work with blockchain right now? What are the opportunities and the main reasons to choose Malta over Zug or any other “valley”, that markets itself as a blockchain paradise?

Steve: Sure. I think the key difference here is Malta has issued legislation and regulations specifically for this area. Other countries have either ignored blockchain and cryptocurrencies, banned them completely or have simply changed their existing laws to cater for blockchain or cryptocurrencies, but mostly crypto.

Malta has a long history of being a fintech hub. We are an established world leader in iGaming, an industry that is fast-paced, high-value and has great potential.

The regulators here are used to dealing with such an environment and have nearly 15 years of similar regulation experience. That gave Malta the credentials to roll out such regulation. What makes a regulation like this one attractive for startups is the certainty. If one is operating in a country where there is no certainty in how their business should be run, this business can be shut down at any time for any reason. Let’s say someone is running a crypto exchange, they invested their time, people, money, got the platform together, and are now marketing it to get clients; but then, the regulator knocks on their door and says, ‘ok, I don’t like what you are doing you need to stop that’.

Whereas in Malta, they can get proper regulation, meet the requirements and therefore operate with confidence. Focus on the business. They don’t have to worry about a change of laws or that the way they operate will be questioned, as long as they remain complinat of course. That provides a certain level of stability, an environment in which to build a company that can grow. They are finally able to focus on growth.

Future Times: Great, so Malta is creating this opportunity with the government actively participating in the whole movement. Are government regulators actually consulting local blockchain startups, lawyers, banks, other companies servicing these startups?

Steve: Of course! The idea of a DLT regulation, the DLT phenomenon itself is new. The Maltese government did not have the luxury of looking at the laws of another country as the starting point and then modifying them accordingly. They had to establish them from scratch. So, the government has invited several industry experts to help with guidance on what the industry really is. Because the regulator, understandably, started with a a very raw idea of how blockchain works and how it can be utilized.

In 2017, all around the world there were a lot of scam ICO projects that have now vanished in one way or another, with millions lost for investors, unfortunately creating a dubious reputation for blockchain startups among the general public. Thus, there is a need for credibility in the industry, and ensuring trust. This led to the development of certain legal criteria for companies to be able to operate here.

For example, a company servicing Virtual Financial Asset in Malta has to either be registered in Malta or have a branch over here. The leaders of the company, senior managers, executives, decision-makers will need to be tested to show that they are fit and proper. The result of such verification is that when said company pitches its services to a consumer, he or she knows that this company has been carefully analysed by a regulatory authority and is subject to local laws.

From the company’s point of view, they have a framework that gives them that certainty of operations, helps them to safely deliver service to their customers, while at the same time allowing that flexibility so essential for the company’s growth. There is an environment for growth and expansion as long as they remain within the bounds of the law. As the business grows, they might need to upgrade their license. Meaning you can have a class 1 license and work your way up to license class 2, 3 or 4, which permits a crypto exchange. There are no restrictions on nationality of the promoter actually, everyone has to be of good background and competent at their role and.

Future Times: Personally, I think this is a very productive approach. However, there is a possibility of companies adapting to the new rules and still sneakily scamming people. How exactly are those checks conducted on every bureaucratic level?

Steve: The regulator appoints a VFA agent to any firm that deals with virtual financial assets based on DLT.

Actually, the first thing that VFA agent does is help the issuer carry out the financial instrument test. This test allows the VFA agent to understand the nature of the token and put it into one of the 4 categories.

There are 4 types of tokens that are now permitted in Malta.

The first one is the virtual (or utility) token, where the benefit of the token may only be exchanged on the same issuer’s platform. The second is a financial instrument. This would be a token that is commonly called on the market ‘security token’, or ‘asset-backed’ token, which is where the token links directly to anything deemed to be a financial instrument. That could be equity, bonds, derivatives, futures or even emissions trading schemes. That would be a security token or financial instrument.

Then there is electronic money or a ‘stable coin’ or a coin that is bought at a given price and can be redeemed for that same value. So, if I bought it for 1 EUR, I can cash it back from the issuer at the same 1 EUR value. As you see, it is obviously much less speculative than other types.

The last one is VFA: if it is not a utility token, not a financial instrument, nor electronic money, then it is a VFA. For example, Bitcoin or Ethereum would be VFA, so would virtual tokens that are traded on exchanges.

All of them have different conditions. With the VFA, for example, the issuer needs to have a money laundering reporting officer and a compliance officer, and they will carry out different checks and compliance on investors that they onboard. Similarly, a crypto exchange is required to carry out KYC [Know Your Customer procedure – author’s note] on their clients to not only know who they are but also to analyze their actual wallets that participate in the exchange, reviewing all interactions, so they can look for links to dark web or privacy coins that have, let’s say, a bad history or bad reputation.

Future Times: To summarize, what advice can you give to companies that are looking forward to moving to Malta?

Steve: Malta is a very interesting location for blockchain startups. The main players are already here: Binance, OKEx, a lot of big names and new start ups too. It is going to become more of a fintech hub, even more great talent will flock to this island. Banks are behind the curve but they will arrive. . Additionally Malta government welcomes foreign investment with grants and incentives and there are attractive programs for personal relocation. There are different agencies aimed at attracting foreign investors. As you can see, there are numerous schemes for an individual or a company to join this hub and reap the benefits of the talent network and clear legislation.

Future Times: Thank you, that was a great interview!

Steve: Thank you!

We were very excited to make friends with one of the main actors on Malta’s changing legal landscape! Our team will keep you updated on how events unfold on the Blockchain Island. Stay tuned!