A new land of opportunity for stakeholders in the cryptocurrency revolution has emerged. The Maltese Parliament has, on Friday 20th July published three new pieces of legislation, laying the foundations for Malta's so-called "Innovative Technology" sector, and establishing the smallest EU member state as one of only a handful of jurisdictions worldwide with a fully regulated industry for businesses operating in distributed ledger technology ("DLT") sector. The three Acts were unanimously approved by Parliament on the 4th July 2018.
The content of the three laws have been discussed in previous Mamo TCV publications, particularly as they pertain to the regulation of ICO and cryptocurrency exchanges. What follows is a summary of the most salient aspects of this regime, with particular regard to the issuing of ICOs in or from within Malta.
Rules concerning the licensing of cryptocurrency exchange platforms are discussed in more detail in a separate publication here.
The VFA Act, Act No. XXX of 2018 sets out clear legal parameters on practices already common throughout the industry. One of such practices includes includes the requirement to draft a whitepaper which must contain general and specific matters which lies at the heart of every ICO proposal under the VFA Act.
Article 3(1) of the Act provides that no issuer shall offer a Virtual Financial Asset to the public unless its issuer draws up and registers a whitepaper, according to legal specification, with the Malta Financial Services Authority (MFSA).
The whitepaper requirements under the VFA Act are akin to the securities prospectus requirements for Initial Public Offerings by public limited companies, often incorporating verbatim the language of EU law.
A whitepaper must contain all the information required to enable investors to make "an informed assessment of the prospects of the issuer, the proposed project and of the features of the virtual financial asset". This information must be presented in an "easily analysable and comprehensible form" and any advertisements made in connection with the ICO must correspond with what is indicated in the whitepaper.
The provisions within the VFA Act lays out essential requirements which every whitepaper must contain, and includes, among other things:
- The reason behind the virtual asset offering
- A detailed technical description of the platform and the associated benefits
- Details as to sustainability and scalability of the proposed project underlying the VFA
- An explication of the challenges and risks confronting the project
- A detailed description of the characteristics and functionality of the VFA
- A detailed description of the life cycle of the VFA offering
- A description of the targeted investor base
Appointment of a "VFA Agent"
The VFA Agent is the regulatory intermediary between the issuer of the ICO and the MFSA, whose essential purpose is to ensure that the issuer is in line with the provisions within the VFA Act and the rules and regulations of the MFSA both before the ICO is proposed and after its coin is admitted for trading on a crypto exchange. Every issuer of an ICO is required to appoint a VFA agent.
Applications for admission of a VFA to trade on an exchange must also be made through a VFA Agent and issuers of ICOs are required to have a VFA agent in place at all times.
Apart from advising and guiding the issuer as to its responsibilities and obligations at law, the VFA Agent is obliged to disclose to the MFSA any information that the latter may require so as to determine whether a particular ICO's whitepaper should be registered.
Hence, the first order of business for any business aspiring to issue its own ICO will be the engagement of a VFA Agent.
The Authorization of the "Innovative Technology Arrangements" underlying an ICO
Whereas the VFA Act is strictly concerned with cryptocurrencies as an object of trade, the Innovative Technology Arrangements and Services Act, Act No. XXXIII of 2018is geared toward the underlying technology – namely the software and architectures behind distributed ledger platforms, smart contracts or other arrangements which may emerge in the near or distant future.
The law's collective term for these arrangements is "Innovative Technology Arrangements" ("ITAs")
No Distributed Ledger platform or smart contract can be applied in or from Malta unless it has been duly authorized by the newly formed Malta Digital Innovation Authority ("MDIA"), as it is empowered to do under the MDIA Act, Act No. XXXI of 2018, which Act has come into force on the 15th July 2018 through Legal Notice 250 of 2018.
Certificates for DLTs and smart contracts are issued by the MDIA on the basis of the "qualities", "features", "attributes", "behaviours" or "aspects" of the technology, all of which must be clearly stated in the certificate for the DLT platform or smart contract, along with details as to how the ITA is identified (i.e. a public key or a brand name). The Certificate shall also be given a unique number for the purposes of identification and must be posted on the ITA in such a way that it can easily be accessed, read and understood by users.
The MDIA is entitled to issue authorisations by licence, permission, authorisation, approval, confirmation, certification or registration in terms of any special law which the Authority is entitled to administer or enforce. Hence, certification is simply one method of procuring an authorisation for an ITA, but it is not mandatory. This is simply an option that has been afforded to developers in order to afford legitimacy to their platform
When a person who would like to acquire recognition of an ITAs is not resident in Malta, the applicant must appoint a "Registered Agent" who is both resident in Malta and competent at law to act on its behalf. Furthermore, a validly appointed Resident Agent must be in place at all times when no person involved in the administration of the holder is resident in Malta.
Transition period for existing ICOs
Businesses that have already issued an ICO in or from Malta will be afforded a period of three (3) months from the date of coming into force of the VFA Act,within which to draw up a whitepaper and register it.
Organizations or individuals conducting the activities of a VFA Agent will be afforded a period of one (1) month from the entry into force of the VFA Act within which to register themselves as VFA Agents with the MFSA.
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.