Late last year, the Malta Financial Services Authority (the "MFSA") extended its series titled "The Nature and Art of Financial Supervision" by issuing the second volume of the same, this time targeting virtual financial assets ("VFAs"), VFA agents, providers and issuers. The aim of the document is to provide an overview of the Virtual Financial Assets Act (Chapter 590 of the Laws of Malta) and the manner this is being implemented in Malta. The key takeaways from the document may be found below.

On VFA Agents

The document outlines the manner VFA agents were initially authorized, outlining the aforementioned as being the primary line of defence with regards to the vetting of prospective VFA issuers and service providers in Malta. It was also outlined that the MFSA conducted inspections on select VFA agents, with the main focus being on assessing the efficacy of client onboarding, due diligence, governance and the carrying out of fitness and properness assessments. Whilst highlighting general shortcomings related to VFA agents' operations (including, for example, the potential conflict of interest due to employees assuming different tasks), the document also optimistically noted that during 2020, VFA agent registrations increased, albeit as a slower rate than the 2019 intake.

On VFA Service Providers

The document noted that following the lapse of the transitory period, within which VFA service providers benefitted from a period of grace within which they could have operated in or from Malta without being in possession of a VFA license, a healthy number of operators proceeded with submitted a letter of intent and eventually applied for a license in terms of the VFA Act. As of the time of writing of the document, a healthy number of 27 VFA service providers were receiving by the MFSA, of which some were withdrawn and others were approved.

The MFSA stressed the importance of the submission of complete applications which expound a high level of governance arrangements and risk management. The need for local substance was also emphasized, as it was to the requirement of continuity and regularity in the performance of activities of applicants.

The document moves on to highlight the good news that all applicants which required the auditing of an innovative technology arrangement successfully appointed a systems auditor. This is a welcome step in Malta's quest to provide for a 'blueprint' of sorts for DLT based technologies. The document also noted that a key challenging aspect of the application processes in question was to establish some form of congruency in the terminology used by applicants to described their operating models, noting that discrepancies were mainly down to cross-jurisdictional legal divergence and innovation in operating models.

On Initial VFA Offerings

It was highlighted that the issue of VFA assets was aimed at mirroring the EU-wide prospectus regime, with the primary aim being to provide investors with a basis upon which an informed decision as to whether to invest in the offer in question is based. The publication also noted that the MFSA received a total of 4 whitepapers for registration.

On collaboration with other authorities

The publication shed light on the MFSA's interactions with the Financial Intelligence Analysis Unit, particularly in the field of interviewing subjects prior to the latter assuming roles within to be licensed entities, as well as the interaction with the Malta Digital Innovation Authority, particularly in the field of innovative technology arrangements and systems audits pertaining to the same.

On Ongoing Work

The publication sheds a light on the MFSA's change in approach with respect to the VFA rulebook, highlighting an evolution in this regard from a rule-based to a principle-based approach. The MFSA also noted that further developments to the respective rulebook are expected, with an aim to always enhancing consumer protection, market integrity and financial stability.


MiCA, which is composed of a package inclusive of a draft regulation, which aims at regulating the issuance and services pertaining to crypto assets as well as what are commonly known as 'stablecoins'. The public generally states that the VFA framework is generally aligned with the MiCA regulation and whilst there may be discrepancies with regards to, for example, definitions, the scope of both regimes are generally aligned.

On the matter of the issuance of crypto assets, it is noted that the MiCA regulation adopts a different approach that that as noted in the VFA Act. Whilst the formed procures for mere notification to competent authorities, the latter requires an issuer to obtain pre-approval of a prospectus prior to offering the VFA to the public. On the matter of crypto-asset service providers, the publication provides that in general terms, the VFA framework seems to provide for a more robust and onerous checklist for service providers' ongoing compliance obligations.

Looking into 2021

Without excluding the ongoing aim to add to the list of fully licensed VFA service providers and registered whitepapers, the MFSA has noted the following as '2021' focus areas with respect to VFA service providers:

  1. The effective implementation and robustness of the governance structures;
  2. The implementation and quality of the compliance function and its compliance monitoring programme, with particular attention on the level and nature of testing undertaken by compliance officers to ensure compliance;
  3. The operational aspects of the business models adopted, including outsourcing and resource sharing;
  4. Examination of asset safekeeping;
  5. AML/CFT controls including the travel rule implementation;
  6. Cybersecurity and its systems, including the reviews of the submitted it and system audit reports; and
  7. The implementation of the live audit log.

With respect to VFA agents and issuers, the MFSA has identified the following areas as forming part of the 2021 focus areas:

  1. Examination of the systems to enable VFA Agents fulfil their ongoing obligations with respect to VFA Issuers;
  2. Continued focus on the inherent and residual risks within the governing structures of VFA Agents which may weaken their role as the first line of defence within the VFA framework; and
  3. A review on the competence of the VFA Agents in fulling their obligations with respect to their registration.

Final note

The publication highlights the areas of success and shortcomings within the VFA space and sets the tone for what is to come in this ever-evolving sector, providing prospective and current promoters of VFA projects with a useful guiding tool which helps the same to understand the MFSA's approach going forward.

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.