I. Innovative Technology Arrangements
Innovative Technology Arrangements are considered the software and architectures which are used in designing and delivering Distributed Ledger Technology (DLT), subject to specified conditions, including the use of distributed, decentralized, shared and, or replicated ledger; being permissioned or permissionless or hybrids thereof; protection with cryptography; and auditability. A very important part therein are also the smart contracts and related applications, including decentralized autonomous organizations, as well as other similar arrangements; and any other Innovative Technology Arrangement that may be designed in the future. The general requirements of an Innovative Technology Arrangement are intended to meet the standards of legality, integrity, transparency, compliance and accountability.
According to the Law no.66/2020, dated 21.5.2020 "On Financial Markets Based on the Technology of Distributed Ledgers" (the "Albanian DLT Law" or simply the "Law"), innovative technology agreements are smart contracts and any software used to design, program and implement services based on DLT. Furthermore, the Law is defining smart contracts is a technological agreement, essentially dependent on or linked to a DLT, containing a set of rules and conditions, which set in motion predetermined reactions, and which are automatically implemented in case of fulfillment of the conditions set out in it.
In order for innovative technology agreements to be valid, a certification process must be followed. The requesting entity, for obtaining a certificate of innovative technology agreement, must:
- exercise its activity with honesty and integrity, paying due attention to the interests and needs of each of its users;
- exercise its activity with the necessary ability, care and vigilance, treating its users in a fair, clean and honest manner;
- maintain the level of security and access protocols of its system to the highest appropriate standards;
- establish, by itself or through a third party, systems for the prevention, detection, elimination and identification of financial crime risks, as well as money laundering and terrorist financing;
- have sufficient financial resources.
The evaluation of the above criteria is performed by the provider of innovative services, who must submit to the Albanian National Agency of ICT (AKSHI) and attach to the application for certification a self-declaration regarding the fulfillment of these criteria by the requesting entity
The use of innovative technology agreements is certified only in cases where the requesting entity:
- has appointed a provider of innovative services;
- has drafted, through the provider of innovative designated services, the technical report regarding the innovative technology agreement. The manner of drafting and the content of the technical report are determined by sub-legal or regulatory acts of the responsible authorities, which must be in accordance with this law and the bylaws in its implementation;
- submits to AKSHI, through the appointed innovative service provider, the request for certification of the innovative technology agreement, attaching the technical report and the self-declaration of the innovative service provider.
I. Innovative service providers
Any legal person that wants to operate as an innovative service provider, in accordance with the Law, must obtain the relevant license issued by AKSHI, may only operate during the period of validity of the license, as well as be registered in the register of innovative service providers in accordance with the Albanian DLT Law. In addition to the licensing requirements provided above, specific licensing requirements of innovative service providers are provided in article 63 of the Law.
Innovative technological services provided by the innovative service providers are the audit and technical opposition services of innovative technology and technical administration agreements.
II. Third party wallet custodians
The Wallet is a computer program or other mechanism that maintains on-line or off-line private and public keys and interacts with DLT to enable the user to hold, store, send, receive and monitor its Digital Token (DT) or Virtual Coin (VC). Wallets can be managed by the users or by a third party acting as a wallet custodian.
Wallet of DT and/or VC, without the use of a custodian is a digital wallet, where DT and/or VC can be deposited and held, the holder of which is in possession of a private key to access this portfolio and for which he bears personal responsibility.
What is a public and private key in a Wallet?
Public-key cryptography, or asymmetric cryptography, is a cryptographic system that uses pairs of keys, which may be disseminated widely, and private keys, which are known only to the owner. The generation of such keys depends on cryptographic algorithms based on mathematical problems to produce one-way functions. Effective security only requires keeping the private key. The public key can be openly distributed without compromising security.
In such a system, any person can encrypt a message using the receiver's public key, but that encrypted message can only be decrypted with the receiver's private key.
In other words, the purpose of the public key is similar to the bank account number used for other parties to send money, while the private key is the code which allows the user to access their Wallet.
Wallets are divided in Cold Wallets - a wallet which is completely offline and used for storing DT and/or VC – and Hot wallet – a wallet that is connected to the internet and used for storing DT and/or VC.
Third party wallet custodians are wallets in which the private keys are held by a third party. Meaning, the third party has a full control over your funds while you only have to give permission to send or receive payments. Third party wallet custodians are always considered as Hot wallets.
According to the Law, any legal entity that wants to operate as a third party wallet custodians must obtain:
- the relevant license from the Bank of Albania;
- license as a custodian of third party wallets; and
- registration in the register of custodians of third party wallets.
The services and activities specified for third party wallet custodians may be performed only by those third-party portfolio custodians who have the relevant license and only during the period of validity of this license. The third-party wallet custodial service provider is liable to any client for all damages caused as a direct result of the breach of any of his duties or responsibilities set out in the Law. Article 77 and 78 of the Law provides all criteria and duties applying to the third-party wallet custodians.
III. Automated enterprises of collective Digital Token (DT) investment
Automated enterprises of collective DT investment is any legal entity or asset that is administered by a licensed entity, in accordance with applicable law for collective investment enterprises and licensed as an automated enterprise of collective DT investment, in accordance with the Law. The quotas of the DT automated collective investment enterprise are represented by DT and/or VC. Automated enterprises of collective DT investment invest exclusively in DT or VC, enabling the use of smart contracts, or other innovative technology agreements, through the integration of an automated robotic consulting system that acts as an investment advisor and/or as a fund management company.
Any legal entity or assets merger that acts as an automated enterprises of collective DT investment, in accordance with this law, must:
- be administered by a subject licensed by the AMF as an administrative company of the alternative investment fund, in accordance with Law no. 56/2020, dated 30.4.2020 "On Collective Investment Enterprises" ("Law on Collective Investment Enterprises"); and
- have a license as an automated enterprises of collective DT investment, issued by AKSHI; and
- be registered in the register of automated enterprises of collective DT investment.
The services and activities defined for automated enterprises of collective DT investment can be performed only by those automated enterprises of collective DT investment, which have obtained the relevant licenses and only during the period of validity of these licenses.
Automated enterprises of collective DT investment are considered as alternative investment funds and are offered only to professional clients, according to the provisions of Law on Collective Investment Enterprises.
Non-automated enterprises of collective DT investment are considered as alternative investment funds and are regulated by Law on Collective Investment Enterprises and are excluded from the implementation of the Law.
The automated enterprises of collective DT investment are liable to any customer for all damages caused as a direct result of the violation of the requirements set out in the Law, bylaws and the full prospect of automated enterprises of collective DT investment. Articles 82 and 84 of the Law provide all criteria and duties applying to automated enterprises of collective DT investment.
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.