The cryptocurrency-friendly jurisdiction that Malta has created has already attracted major cryptocurrency exchanges in the world who are to set up offices on the island. The stable system and the forward approach that the island has to offer is creating the ideal setting to attract further investment.

On the 4th of July 2018, the Maltese Parliament passed three bills into law, giving any interested investor a clear picture of the legal framework required to set up a legitimate cryptocurrency business in Malta. These are the Malta Digital Innovation Authority Act, the Innovative Technological Arrangement and Services Act, and the Virtual Financial Asset Act.

An Initial Coin Offering, or ICO, is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for bitcoin and ether. It’s somewhat similar to an Initial Public Offering (IPO) in which investors purchase shares of a company.

Malta has introduced a clear regulatory framework for ICOs, tokens as well as cryptocurrencies. Malta has also gone a step further by clarifying that if a token is classified as a Utility Token, then such tokens are not regulated in terms of law.

For clarity sake a utility token is one which does not give the token holder any rights or obligations. In order to determine the type of digital asset (DLT Asset) which an issuer will be undertaking the Malta Financial Services Authority (“MFSA” or “Competent Authority”) has devised a financial instruments test, which is a mandatory requirement for:

- companies seeking to set up an ICO in or from within Malta;
- companies which issued DLT assets overseas but wish to carry out a related activity in or from Malta; and
- all other entities which shall be dealing with DLT-assets.

- if the applicant is a natural person, physical presence in Malta is required. Where the applicant is a legal person, it may be constituted in Malta, or, if constituted abroad in a recognized jurisdiction, it shall establish a branch in Malta;

- no restrictions on the nationality of the ultimate beneficial owners of the applicant;

- designated persons, directors, senior management, qualifying shareholders and ultimate beneficial owners must undertake a fit and proper test;

- a licensed VFA Agent must be appointed by the applicant which will file the application with the MFSA and act as liaison between the applicant and the MFSA;

- the applicant must undertake, through the VFA Agent, a Financial Instrument Test (FIT) to ensure that the DLT asset in relation to which the applicant will be providing the VFA Service falls within the meaning of a virtual financial instrument as per the VFAA;

- the board of administrators/directors must effectively be directed by at least two individuals. The applicant needs also to appoint a compliance officer, a money laundering reporting officer and a risk manager; and

- minimum share capital: €730,000

The VFAA and chapter 3 of the rule book regulating VFA service providers list the ongoing obligations that shall be observed by all VFA service providers including crypto exchanges.

These include:

- organisational requirements including the setting up of a board of administrators/directors, having in place governance policies, risk management and compliance measures, and methods to safeguard clients’ assets;

- prudential requirements covering initial share capital and ongoing capital, own funds, liquidity and fixed overhead requirements;

- conduct of business obligations regulating conflicts of interest, sales processes and selling practices and execution of clients’ orders;

- record keeping, appointment of auditor, reporting and disclosure requirements.

Crypto exchanges also need to observe additional requirements including guidelines on VFAs listing criteria, order matching, settlement, custody and suspension /removal from trading of any VFA by the crypto exchange.

In order to be able to provide the above services an applicant would need to obtain a VFAA License as described hereunder.

VFAA Class 1
License holders authorised to receive and transmit orders and or provide investment advice in relation to one or more virtual financial assets and, or the placing of virtual financial assets.

VFAA Class 2
License holders authorised to provide any VFA service and to hold or control clients’ money, but not to operate a VFA exchange or deal for their own account.

VFAA Class 3
License holders authorised to provide any VFA service and to hold or control clients’ money, but not to operate a VFA exchange.

VFAA Class 4
License holders authorised to operate a VFA exchange and to hold or control clients’ money, virtual financial assets and, or private cryptographic keys and custodian or nominee services solely in relation to the operation and activities of such VFA exchange.

A crypto exchange fall under class 4 which covers the provision of any VFA service and the holding or control of clients’ money in conjunction with the provision of a VFA Service.

The main legal instrument which shall regulate ICOs issued in or from within Malta will be the Virtual Financial Assets Act (the ‘VFAA’ or the ‘Act’) which was tabled in Parliament in April 2018, and which is expected to become law by June 2018. The VFAA, supported by the Technology and Service Providers Act and the Malta Digital Investment Authority Act sets out the framework for Distributed Ledger Technology Assets (DLT Assets). An issuer of an ICO (referred to in the VFAA as an ‘Initial Virtual Financial Asset Offering’) who seeks to issue tokens (referred to in the VFAA as ‘Virtual Financial Assets’ or ‘VFAs’) which can later be exchanged or traded on a cryptocurrency exchange (‘VFA exchange’), will require a license by the Malta Financial Services Authority (‘MFSA’).

Persons seeking to attain a license under the VFAA in order to issue an ICO in or from Malta will need to undertake a fit and proper test. The MFSA will need to be satisfied that the applicant will comply with and observe the requirements of the VFAA and any other rules issued hereafter.

The Financial Instruments Test (the ‘Test’) is a mandatory requirement for anyone seeking to issue a virtual financial asset which shall be traded on a VFA exchange. The Test will determine whether the proposed DLT asset should be exempt from regulations, regulated under Investment Services Act, or whether it classifies as a VFA which can be traded on a VFA exchange. The Test must be carried out prior to the submission of the Whitepaper to the MFSA and will also be applicable to companies which issued DLT assets overseas, but which wish to carry out a related activity in or from within Malta.

A Whitepaper will need to be drawn up in English, and any other language at the Issuer’s discretion. The Whitepaper will need to contain specific information as laid down in the VFAA which will allow interested investors to make an informed assessment of the prospects of the issuer, the proposed project and of the features of the virtual financial assets

If the applicant is a natural person, physical presence in Malta is required. Where the applicant is a legal person, they may be constituted in Malta, or, if constituted abroad in a reputable jurisdiction, shall establish a branch in Malta.

The Issuer which issues or proposes to issue VFAs in or from within Malta will need to appoint an approved VFA agent. The VFA Agent will need to ensure that the issuer has complied with the rules of the VFAA and subsidiary legislation under the Act and will also liaise with the MFSA on behalf of the Issuer.

This shall set out the systems, security access protocols and any other matters as may be required to be set out by the MFSA from time to time.
Our Fintech advisors have been following the progress in the industry and contributing by penning contribution documents as requested by the Government during the drafting process of the legislation, as well as contributing several researched articles on the topic. We are already assisting clients seeking to set up an ICO in Malta by guiding them through the Financial Instruments Test and subsequent regulatory matters.

This shall set out the systems, security access protocols and any other matters as may be required to be set out by the MFSA from time to time.

Our Fintech advisors have been following the progress in the industry and contributing by penning contribution documents as requested by the Government during the drafting process of the legislation, as well as contributing several researched articles on the topic. We are already assisting clients seeking to set up an ICO in Malta by guiding them through the Financial Instruments Test and subsequent regulatory matters.

Our lawyers and financial services specialists at ATRIUM LEGAL LAB provide solutions to clients by combining the traditional legal fabric with new technologies.

If you would like more information as to how setting up of an ICO, a cryptocurrency exchange, or alternatively would like to set up a Crypto Fund in Malta, we welcome you to get in touch with our specialists.