The second half of 2018 and first quarter of 2019 have seen a considerable increase in the interest in Professional Investor Funds ("PIFs") investing in virtual currencies. The main driver behind this interest is the national strategy implemented by the Government of Malta and the Malta Financial Services Authority ("MFSA") to establish Malta as the "Blockchain Island", coupled with MFSA issuing rules on this subject matter in January 2018.
The key theme for Fund managers looking to set up a Virtual Currency PIF in Malta is that of competency. The MFSA requires that the parties servicing the Fund including, inter alia, the Manager, Administrator, Custodian, and Auditor, have the necessary knowledge and experience in the fundamental technologies behind virtual currencies such as, for example, Distributed Ledger Technology ("DLT"). Additionally, such parties are required to have the business organisation, systems, experience, and expertise deemed necessary by the MFSA to ensure investors are protected appropriately.
Practical examples of requirements to be implemented in Virtual Currency PIFs include the Manager carrying out quality assessments to determine the standard of the virtual currencies being invested into (including an assessment on the issuer, the fundamental infrastructure, the reliability of information and its readily availability, the third party service providers appointed, and the exchanges where the virtual currency trades), putting in place a suitable liquidity management system, habitually undertaking stress testing, and a verification and valuation function to be adopted by the Virtual Currency PIF. Given that the risk management element of Virtual Currency PIFs is one of the cornerstones of the rules issued by the MFSA on this subject matter, the afore mentioned quality assessment procedure is required to be suitable, recognised, and frequently updated.
With the MFSA rules on Virtual Currency PIFs having been published on the 29th January 2018, traditional fund service providers have had the time to invest in gaining the competence and systems to cater for such vehicles. This, together with the drive from the Government of Malta and the MFSA in DLT and Virtual Financial Assets in the second half of 2018 has resulted in the first licences being issued by the MFSA to Virtual Currency PIFs, and has made Malta an attractive European location for Fund promoters to establish and licence funds to invest in virtual currencies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.