Financial Technology, often shortened to Fintech, fuses together the traditional concepts as we know them in Financial Services with innovative, bespoke technologies that are set to revolutionise the industry as we know it. Although the phrase was coined back in the 1980s, it has only gained traction in recent years when cryptocurrencies and blockchain technology (also referred to as distributed ledger technology (“DLT”) ) took centre stage as the next big thing to shake up business as we know it after the Internet. Few countries have embraced the concept of Fintech as wholeheartedly as Malta which has recently enacted three acts aimed at regulating the industry. Its efforts to provide legal guidance to businesses seeking to set up shop in a blockchain-friendly jurisdiction which does not stifle innovation, yet allows companies to be compliant has led Malta to be dubbed as the ‘Blockchain Island’. Indeed, this progressive and open-minded approach to regulating the blockchain and crypto ecosystem has led some of the biggest names in the industry, including cryptocurrency exchanges Binance and OKEx to expand their operations to Malta. 

What is blockchain? 

Blockchain or DLT is a technology that essentially allows us to digitalise trust. Blockchain has been defined as a digitized, decentralised, public ledger which operates on a peer-to-peer network and essentially facilitates the process by which transactions are recorded, and which can also be used to track assets in a business network, irrespective of whether the thing is corporeal or incorporeal. Anything of value can be tracked or traded on the blockchain in a safer, faster and less cost-effective manner which is why it has such great potential for streamlining business operations. 

Apart from the prospect of saving time and money, perhaps the most promising feature of blockchain technology is its transparency and immutability which makes it extremely hard to hack the blockchain. 

More information: What is Blockchain Technology? How Blockchain Works?  

What are cryptocurrencies?

Cryptocurrencies are just one of the potential uses for blockchain technology which was initially created back in 2009 as the technology which underpinned Bitcoin, the most popular cryptocurrency in the world. However, the two are not one and the same thing since cryptocurrencies are just one of the many applications of blockchain technology. 

There is no single definition which captures the scope of all cryptocurrencies due to the fact that different cryptocurrencies often have different characteristics. Indeed, while it is probable that everyone will agree that cryptocurrencies are a form of digital assets, it is still too early for cryptocurrency to be equated to a normal fiat currency in the sense that it can be used as legal tender. The legal uncertainty surrounding the status of cryptocurrencies has confused regulators and tax authorities alike. Although very few countries have outright banned the use of cryptocurrencies, others have warned the public of the extreme volatility and potential risk associated with investing in cryptocurrencies but have steered clear of pronouncing themselves on the matter. Others have hinted that cryptocurrencies are to be treated as commodities or securities, but no country has gone so far as to legislate on the manner in-depth in the way that Malta did. 

What are Initial Coin Offerings (‘ICOs’)?

Similarly to Initial Public Offerings and crowdfunding, Initial Coin Offerings are swiftly becoming a popular option to raise finance. It is a process where tech start-ups, mainly from inside the digital-currency sector, create a new virtual coin or token and offer it for public sale. Companies seeking to set up an ICO will generally need to draw up a whitepaper wherein they explain in simplified terms the goal behind the project, the future value of the asset which they are promising investors, information about the issuer and the technology backing the project. 

 ICOs remain widely unregulated around the world, and this is significantly worrying since these assets are offered to the public with no protection at law. Malta has put an end to this legal vacuum through its Virtual Financial Assets Act which regulates the issuing of ICOs, the contents of the white paper and the treatment of the DLT asset.



Legal Framework

The Malta Digital Innovation Authority 

Malta has recently enacted three acts which seek to comprehensively regulate the blockchain and cryptocurrency sphere. In order to ensure the orderly growth of this industry, the Malta Digital Innovation Authority (the ‘MDIA’) was established by the MDIA Act and it was recently announced by Parliamentary Secretary for Digital Innovation Silvio Schembri that Mr Stephen McCarthy shall be taking on the role of CEO at the MDIA. The Authority shall be responsible for ensuring that the highest industry standards are respected and business in Malta shall be conducted as honestly and transparently as possible. The MDIA will also be responsible for the certification of technology arrangements and the registration of Technology Service Providers. 

Innovative Technology Arrangements & Services Act

The legislator has also felt the need to set out a regime for the registration of Technology Service Providers and the certification of Technology Arrangements through the Innovative Technology Arrangements & Services Act which is a highly technical piece of legislation drafted with the aid of technology experts with a thorough understanding of software and architectures used in designing and delivering DLT, smart contracts and related applications and other types of innovative technology arrangements

The Virtual Financial Assets Act (the ‘VFAA’)

The VFAA provides a legal framework for the issuing of ICOs and the treatment of cryptocurrencies. The lack of certainty in the legal status of tokens and cryptocurrencies has caused significant difficulties, particularly in cases where tokens have the characteristics of financial instruments but circumvent MiFID under the guise of their nature as digital assets. Malta has sought to clarify this ambiguity by creating the Financial Instruments Test (the ‘test’) that clearly categorises all DLT assets into three categories: virtual tokens, financial instruments or virtual financial assets. 

The Financial Instruments Test

Firstly, the Test will determine whether the DLT asset can be considered as a virtual token and would fall outside the scope of both the VFAA and the Investment Services Act/ MiFID. A virtual token is a token which does not have any value outside of its platform and thus cannot be traded or exchanged outside of its platform. A ‘utility token’ would generally be considered as a virtual token. 

Secondly, the Test will enquire whether the DLT asset qualifies as a financial instrument under MiFID and the local Investment Services Act. A ‘security token’ would generally be captured under the aforementioned legislation. 

Thirdly, if a DLT asset cannot be classified as a virtual token or as a financial instrument, it will be captured by the new Virtual Financial Assets Act once it becomes law and will be considered a Virtual Financial Asset. 

Companies seeking to set up an ICO in or from within Malta, companies which issued DLT assets overseas but wish to carry out a related activity in or from Malta; and all other entities which shall be dealing with DLT-assets shall need to take the Test to determine how their DLT asset should be classified. 

Services offered by our Fintech Practice 

Setting up ICO in Malta

Prior to setting up an ICO in Malta, it is imperative to determine what kind of DLT asset shall be offered to investors in order to determine the appropriate law which shall govern the issuing process. If the test determines that the DLT asset can be classified as a virtual financial asset, a whitepaper will need to be drawn up in accordance with the First Schedule of the VFAA which sets out a detailed list of required information.

Additionally, physical presence is required in Malta. The issuer will also need to appoint a VFA Agent who shall be responsible for ensuring that the issuer has complied with the rules of the VFAA and any subsidiary legislation under the act, and who will also liaise with the MFSA on the issuer’s behalf.

Our Fintech advisors have been following the progress in the industry and contributing by penning contribution documents as requested by the Government during the drafting process of the legislation, as well as contributing several researched articles on the topic.  We are already assisting clients seeking to set up an ICO in Malta by guiding them through the Financial Instruments Test. Our advisors may also act as VFA agents and can assist the client in the drafting of the whitepaper as required.

Setting up a Cryptocurrency Exchange in Malta

It has been reported that the majority of cryptocurrency trading volumes operate out of companies which are legally located in Malta, surpassing even South Korea. Indeed, some of the largest crypto exchanges, including giants such as Binance, OKEx have chosen Malta to set up shop owing to its crypto-friendly attitude. 

Although there are no fully-fledged rules on the setting up of cryptocurrency exchanges, it is already clear that physical presence will be required on the island. An Exchange may opt to manage and operate its own business or appoint a VFA exchange Operator to do so on its behalf. The Exchange will also need to draft a programme of operations wherein the systems and security access protocols are set out. 

Setting up a Cryptocurrency Fund 

So far, investing in crypto through a regulated investment fund can only be done by hedge funds aimed at professional investors who are considered to be well aware of the risk tied with such investment and who have significant capital and experience in such investments. This was clarified by the MFSA when it recently issued supplementary conditions which Professional Investor Funds (PIFs), the Maltese Hedge fund, will need to satisfy when investing in cryptocurrencies. 

PIFs investing as cryptocurrencies, often referred to as Crypto Hedge Funds, will need to ensure that the parties to the Scheme and sufficient service providers have sufficient knowledge in the field of information technology, virtual technologies and their underlying technologies which is not limited to DLT. A minimum of three directors will be required one of whom must be a local director who can also act as compliance and MLRO. At least one of these directors must be competent in IT as reiterated above. 

A minimum of two investors is required who will need to maintain a minimum investment of EUR 100,000 respectively at all times. Assessments will need to be undertaken to ensure the quality of the cryptocurrencies invested in and whether they fit the risk profile of the PIF.

Our Fintech experts have longstanding experience in the field of investment funds and have already been chosen as the team of choice by individuals seeking to set up crypto funds. 



Malta the Blockchain Island

The Maltese Government, together with practitioners in the field have worked tirelessly through 2017-2018 to prepare the local financial services industry for the oncoming changes which blockchain technology, also referred to as distributed ledger technology (DLT), promises to bring. In the past year, we have seen a number of developments such as the setting up of a  National Blockchain Strategy, the sandbox testing of cryptocurrencies carried out by the Malta Gaming Authority, and a number of companies who have launched successful products based on DLT. Now that Malta has issued its laws on blockchain and cryptocurrencies, the future looks brighter than ever for Malta’s vision as a Blockchain Island. 

There are a number of benefits to setting up in Malta for businesses seeking a flexible, blockchain friendly jurisdiction and to do business in a manner that is fully compliant with the law. Firstly, as an EU member state, Malta is renowned as a reputable, but cost-effective jurisdiction whose regulator maintains an open-door policy that encourages the unfettered carrying out of business. Maltese businesses will also benefit from the free movement of services in the EU/EEA. Whilst guaranteeing consumer protection, market integrity and financial stability, the Maltese regulator offers an attractive corporate tax regime which does not stifle business. Finally, it should be noted that all rules and documentation is in English which facilitates the setting up processes for most clients.  

Our Fintech Practice 

Our lawyers and financial services specialists at Chetcuti Cauchi Advocates provide bespoke solutions to clients by combining the traditional legal fabric with new technologies. Our Fintech Practice strives to assist clients in this burgeoning and evolving sector of law, which is set to reshape the financial services sector as we know it.

If you would like more information as to how the Financial Instruments Test may impact your business once you set up in Malta, or are interested in the setting up of a DLT company, an ICO, a cryptocurrency exchange, or alternatively, would like to set up a Crypto Fund in Malta, we welcome you to get in touch with our specialists

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