On 26 June 2018, the Maltese Parliament unanimously approved the Virtual Financial Assets Bill in an act to embrace the exciting future of digital currencies and their use in building tomorrow's businesses.
The Virtual Financial Assets Bill
The bill, which is the very first of its kind in any jurisdiction, covers both issuers as well as investors in regards to any form of crypto-currencies, crypto exchanges and any other crypto-related services. The bill also provides a regulatory framework for Blockchain technology, smart contracts and other innovative technological arrangements.
The bill terms a Virtual Financial Asset as any form of digital medium recordation used as a digital medium of exchange, unit of account or store of value that excludes electronic money, financial instruments and virtual tokens. The bill intends to categorically distinguish popular Bitcoin, Ether and Litecoin amongst others from other virtual assets that have no utility, value or application outside a limited platform which cannot be exchanged for funds.
The VFA bill also regulates the provision of VFA services as well as VFA exchanges, and therefore applies to all those involved in the provision of such VFA services and exchanges. These include brokers, wallet providers, asset managers, investment advisors as well as market makers offering cryptocurrency services. Consequently, these activities will be subject to a license to be issued by the Malta Financial Services Authority (MFSA) as the competent regulatory authority.
On the other hand, VFA exchanges have further been classified as a VFR service and are thus deemed to be a licensable activity. This will regulate those platforms that act as an exchange for converting fiat money (i.e bank notes and regular money denominated in Euro, USD, GBP etc.) to cryptocurrencies such as Bitcoin and Litecoin, and vice-versa, as well as exchanges converting one type of cryptocurrencies to another.
Financial Instruments Test
The bill also attains a financial instrument test to determine whether a VFA falls under the mentioned bill or falls outside the scope of such bill. As mentioned earlier, the bill only covers financial instruments and not virtual tokens.
Intial VFA Offerings (ICO)
The bill's primary element is the regulation of ICOs (Initial Coin Offerings) which are termed as initial Virtual Financial Assets Offering. An ICO allows businesses to generate capital through the launch of a cryptocurrency which can then be publicly traded, surpassing the vigorous regulative processes required in bringing a private company to a publicly traded and listed venture.
However, due to the lack of regulation worldwide, the market was infiltrated by fraudulent platforms allowing seemingly legitimate entrepreneurs seeking crowdfunding to accumulate millions of investors only then to disappear with the money and leaving bona fide investors in the dark.
Given that in 2017, 10% of the funds of the reportedly $5 billion rised through ICOs have been deemed lost or stolen, the need for regulation is therefore paramount. The law outlines the requirements when offering VFAs to the public, including obligations when presenting advertisements and ensuing liability should any statements used be misleading, inaccurate or inconsistent.
The bill also includes the required information which must be included in a Whitepaper, a document presented upon an issue of a VFA to the public, explaining the purpose behind the ICO, how funds collected will be used and the people behind the entity seeking funding. The aim of such docuemnt is therefore to offer clarity to potential investors, instilling trust and legitimacy in the minds of those investing.
The Digital Innovation Authority
The VFA framework also envisages the creation of a Digital Innovation Authority, the voluntary registration of Innovative Technology Service Providers and the certification of DLT Platforms and related smart contracts categorised as Innovative Technology Arrangements.
Through such a bill, both the general public as well as entrepreneurs have acquired a basis which can be embraced in investing and making use of new and emerging technologies in a pragmatic approach. In addition to this, such embrace of proliferation of new and emerging technologies will turn Malta into a hub for digital technology innovation, adding to its endless list of fiscal and tax benefits, an opportunity which cannot be missed by businesses and entrepreneurs.
For further infomration on ICOs, VFAs, Blockchain, Smart Contracts and related areas, please contact us to set up an appointment, and we will guide you in making use of such technology in gaining advantage for your business.
BGMT is a multi-disciplinary firm offering accounting, taxation and advisory services to multi-tier business operating in various industries.