Not a day passes that social media feeds are not inundated with tons of posts relating to cryptocurrencies. Typically, the views are highly polarised, ranging from how individuals have become overnight millionaires by investing all their life savings into cryptocurrencies to comparisons with practically every major financial crash in the history of mankind and opinion posts of how cryptocurrencies could drop to zero at any time.

Unfortunately, the media headlines on cryptocurrencies have created a smokescreen with many people missing the wood for the trees. What is really interesting is the technology that is permitting these cryptocurrencies to achieve such a widespread distribution, effectively creating one global market for an asset, which, this time is a currency like thing but could be a thing really. There is the need for less talk about Bitcoin and more talk about blockchain.

In the same way that the internet has revolutionised practically every existing industry, be it shopping, entertainment, charities, financial services, gaming, social interaction and the like, blockchain has the potential to propel us into the next era of technological development.

The internet ‘of things’ (I0T) will soon become mainstream talk. Malta has already managed to position itself as a blockchain-friendly jurisdiction. Back in September, the island grabbed the headlines by launching a blockchain based education certification system, rather than relying exclusively on the good old paper certificates. Weeks later, a local enterprise by the name of Ledger Projects launched their own blockchain-based tool for notaries handling property transfers.

All of these were symptomatic of the blockchain ecosystem growing on the island. Many professionals in all fields have noticed the relevance of this development and have dedicated time and focus to it. A regular steam of proposals emerged over the last year of so.

It is with this in mind that Malta has embarked on creating a legal framework around the use of distributed ledger technology, which is set out in the consultation document issued by the Parliamentary Secretary for Financial Services, Digital Economy and Innovation within the Office of the Prime Minister. Malta is not alone in aiming to create a legislative framework for blockchain. The main difference, however, is that while some other jurisdictions have focused predominantly on the use of such technology within the financial services sector, the reality is that this technology has already spread well beyond the remits of financial services.

The consultation documents reflect this by suggesting the setting up of a Malta Digital Innovation Authority, which will initially be tasked with focusing on distributed ledger technology but in the future could also extend to other technological innovations, such as artificial intelligence, another mind-boggling innovation.

The need for a Malta Digital Innovation Authority is one of the three pillars of the consultation document. The second main principle that emerges from the consultation document is the need to create a framework to allow for the voluntary registration of technology service providers and the certification of distributed ledger platforms.

While there are many libertarians who argue against legislation in this area, there is a strong argument to be made that, until legal certainty is provided and until the technology is provided with a stamp of approval, it will remain a fringe technology which does not achieve its full potential. Malta is clearly embracing the latter approach while appreciating that the key will be in finding the right balance between achieving these positive aims without suffocating innovation. The third pillar is slightly distinct as it focuses on new products and new players in the financial services industry which are emerging as a result of this technology and which are to a degree competing with existing regulatory regimes under the remit of the Malta Financial Services Authority.

The terms ICO (initial coin offering) or TGE (token generation events) have been extensively used in the market as a way how to use coins/token to fund new initiatives in the market. Theses coins or tokens can vary from a customer loyalty scheme to a de facto replica of shares in a company or a currency.

Unfortunately, the current regulatory regime did not anticipate the quantum leap taking place as a result of this new technology and, therefore, it ends up being a matter of fitting a square peg into a round hole. Issuers are often uncertain about which regulatory framework to apply, purchasers are not clear about the legal rights and regulators are taking different approaches on detail. Defining standards and obligations on operators in this space will provide some badly-needed legal certainty and recognition to an industry that is in a hurry.

Apart from the issue of products, the framework being developed by the MFSA will also focus on a number of service providers in this space such as wallet providers and exchanges. This also follows the trend at European levels where custodian wallet providers and virtual currency exchanges will become subject persons in terms of the Fifth Anti-Money Laundering Directive.

The consultation document clearly shows Malta’s vision to be a trailblazer in this industry and create a new niche in the Maltese economy. Being first movers has its difficulties and challenges but the signs on the horizon
are positive.

This article was published in the Times of Malta, 2 March 2018.

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