Since joining the European Union in 2004 and especially over the past decade, Malta has successfully established itself as a popular fund domicile. It has also earned itself a well-deserved reputation as a serious but flexible jurisdiction with a can-do approach, embracing new technologies and creating the right conditions for innovative sectors to flourish. In the gaming industry, for instance, Malta is now a leading global player. Following the introduction of the Virtual Financial Assets and supplementary regulations in 2018, Malta is now hoping to repeat this success in the field of Digital Ledger Technology. Indeed in the short period since the launch of this innovative legal framework, Malta has already earned itself the nickname of 'Blockchain Island', successfully attracting some of the largest global players to its shores.
The launch of the VFA Act in Malta coincided with peak hype and peak prices for cryptocurrencies and ICOs in general. This was followed by a severe price correction and a slowdown in interest in the last half of 2018. However, as the market recovered in 2019, so has interest in the sector. Dormant projects have risen from the dead, new exchanges and popping up and we are once again seeing institutional interest in asset management solutions.
Bitcoin has been around now for 10 years and there has been strong demand for cryptocurrencies, or virtual financial assets since at least 2017 as evidenced by the success of the Ethereum ICO and the subsequent ICO frenzy. This demand has been dominated by the retail sector and specifically by a tech-savvy and typically younger sector of that market. However, as the market has matured and as serious institutional players have started to embrace digital ledger technology, so too has the appetite to invest in cryptocurrencies spread to more conventional sectors of the market. In order to satisfy that demand, asset managers are looking for ways to invest in digital currencies using traditional regulated vehicles.
Until recently, it was not possible for regulated funds to invest in cryptocurrencies and the only way an investor could get exposure to Bitcoin in a regulated package was through a derivative contract or structured note issued by a regulated entity. This was expensive and did not allow for portfolio management solutions or strategies as only very few cryptocurrencies could be bought in this way. Even if a structured note replicated the performance of a basket of cryptocurrencies, there was no scope for active management. Other solutions which did allow for active management were only available through internet-based platforms which were unregulated and offered no guarantees, most crucially in the area of custody where investors would have to literally put their faith in an unregulated and unknown entity.
Although it remains difficult to invest in virtual currencies through a regulated entity and impossible to invest through the popular UCITS funds, the Maltese regulator has provided a solution through the Professional Investor Fund (PIF) structure. This structure has been around for some time and is the most popular fund structure in Malta.
As the name implies, PIFs are aimed at the professional investor so there are certain eligibility requirements for investors as well as a minimum investment threshold of EUR 100,000. Most PIFs are set up as open-ended SICAVs but they can also be closed-ended investment companies. Custody arrangements are also more flexible than AIF or UCITS funds and PIFs can appoint an investment manager or choose to be self-managed. In the case of self-managed PIFs, an investment committee must be formed with at least 3 members.
In addition to the ordinary rules, the following supplementary rules apply when a Professional Investor Fund (PIF) is investing in virtual currencies:
Competence – All parties involved must have adequate knowledge and expertise in the area of VCs and their underlying technologies. This test extends to third party service providers.
Risk Warnings – Risk warning must be related to the direct or indirect investments in VCs.
Quality Assessment – The appointed investment manager must perform appropriate research for the assessment of the "quality" of the VCs being invested into. In the case of self-managed PIFs, the investment committee must have at least one member who is competent in the field of virtual currencies.
Risk Management - Before investing in any VC on the behalf of the PIF, the investment manager must assess whether the risk profile of the proposed VC falls within the scope of the PIF's risk management policy. Liquidity risk must also be assessed taking into account the fund's redemption frequency.
Valuation - Appointed service providers must have the business organization, systems, experience and expertise required to conduct the necessary verification and valuation of the PIF's investments in VCs.
As PIFS are aimed at more sophisticated investors, the requirements are less onerous than other fund structures which this allows for a quicker setup process. A typical PIF setup would take between 4 to 6 months from the initial onboarding to launch.
Author Jasper de Trafford - Zeta
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