Asia Blockchain Review recently spoke to Steve Muscat Azzopardi, Corporate and Fintech Senior Manager of Chetcuti Cauchi, on Malta’s proactive measures in blockchain adoption, challenges for the blockchain and crypto community, and some of the projects carried out under this initiative.
Asia Blockchain Review: Can you tell us about Malta’s initiative to adopt blockchain across several sectors of the country?
Steve Muscat Azzopardi: In 2018, the Maltese Government enacted three acts that seek to regulate the provision of technical services, with a special focus on distributed ledger technology, ICOs, crypto exchanges, and other services providers. The acts are as follows:
Subsequent to the promulgation of the above laws, in January 2019, the MFSA published a Consultation document called the ‘MFSA FinTech Strategy – harnessing innovation through technology’. The document proposes a wide, cross-sectoral approach to the promotion of the fintech industry. In doing so, it sets out 6 strategic pillars to catalyze innovation, growth, and competition in the financial services sector, while ensuring robust investor protection, market integrity, and financial soundness. The pillars are as follows:
ABR: What are some standout projects that are being carried out under the initiative?
SMA: Malta is gearing up to implement blockchain technology within its capital markets infrastructure. The Malta Stock Exchange established the MSX, a subsidiary to operate its fintech arm, which has entered into Memoranda of Understanding (MoUs) or joint ventures with a number of industry incumbents. It is currently collaborating with Neufund to create the first, end-to-end, primary issuance platform for security tokens. It has entered into a separate agreement with the crypto-giant Binance, which shall act as a secondary market for such platforms. It is also collaborating with OKEx for the trading of institution-grade security tokens. Technology firms offering support services to the industry are also setting up in Malta to service this fast-growing economy.
In light of the attractive environment, several cryptocurrency exchanges, as well as other service providers including brokers and custodians, are setting up shop in Malta.
ABR: Why does Malta proactively support blockchain and cryptocurrency, even as other governments indicate their uncertainty about the technology?
SMA: Malta consistently demonstrates a proactive approach towards the regulation of fintech, particularly blockchain technology and its potential uses, which can disrupt traditional market incumbents. Malta has sought to establish itself as the ‘blockchain island’ and be at the forefront for the development and implementation of regulation of such technologies. Malta, as a small nation of less than half a million people, can serve as an ideal ground to test new emerging and disruptive technologies.
Malta has created a bespoke regime for the regulation of crypto-assets which do not fall under existing regulations. However, there is no common agreement with other EU member states as to the regulatory status of any crypto-asset issued within a particular jurisdiction. Issuers have no guarantee as how another jurisdiction would classify a crypto-asset that is regulated under Maltese law. It is highly probable that in order to be offered to citizens of other member states, the token would need to undergo a licensing or recognition process in the relevant jurisdiction. The lack of harmonization throughout the EU is the Achilles’ heel of any kind of regulation which seeks to control these highly cross-border assets.
Issuers and regulators are expressing interest in Security Token Offerings (STOs) and a new trading venue for such offerings. While being regulated under traditional financial services laws may gain the trust of investors, one can appreciate that such offerings may still be unduly expensive for startups. That is why we envision an increase of interest in Initial Exchange Offerings (IEOs), which would be regulated under the Virtual Financial Assets (VFA) Act.
ABR: What are some of the challenges that the country has faced in working towards becoming “Europe’s blockchain island”?
SMA: The main challenge that fintech companies are facing in Malta is the conservative attitude taken by Maltese banks, which generally refuse to open trading bank accounts for companies whose operations involve cryptocurrencies. Several fintech companies are startups seeking to raise capital, often through Initial Coin Offerings (ICOs). Therefore, the inability to open a bank account to receive contributions for their projects is a major deterrent for these companies and a hindrance that causes significant delays at a time when these companies are trying to take off. Operators are finding solutions abroad, and this situation has opened the market for electronic money institutions and payment institutions as well as digital banks that are willing to address the needs of this growing market.
Another concern that poses a challenge for blockchain companies is privacy, most notably within the context of Regulation (EU) 2016/679, the General Data Protection Regulation. Ensuring compliance with the cornerstone principle of data limitation, which often runs counter to the spirit of data mining, will be a challenge for regulators. Regulatory intervention may be necessary in order to reconcile data limitation with big data, or to redefine the principle of data limitation in the age of big data.
ABR: How have recent laws and regulations attracted blockchain companies from overseas to Malta?
SMA: The government’s pro-innovation stance and its proactive approach to regulation, coupled with Malta’s reputation as being a pro-business, tax-efficient jurisdiction within the European Union, have attracted a number of well-known players in the blockchain arena.
In September 2018, Bitfury entered into a partnership with a Maltese up-and-coming influencer in the blockchain sector, Ledger Projects. Binance, one of the largest crypto-exchanges in the world, relocated its headquarters to Malta in a move echoed by other world-renowned exchanges such as OKEx and eToro, which have also expanded their operations to Malta.
Such companies and others are taking up the opportunity to gain an edge over their competitors by becoming regulated entities, with approval granted from a financial services authority within the European Union.
ABR: How have these technologies changed the way business is done in Malta? Are cryptocurrencies going mainstream or will it take time to gain widespread adoption in the country?
SMA: Maltese businesses are rapidly seeing and understanding the benefits that may be achieved through the implementation of blockchain technologies in their day-to-day operations. However, the deployment of such technologies by Maltese businesses is still in an embryonic stage. The use of cryptocurrencies to conduct day-to-day transactions is still a rare occurrence on the island, which tends to gravitate towards more traditional payment systems, fintech innovators such as Revolut, and contactless cards.
However, some businesses have seen the attraction of this type of technology and jumped on the crypto-bandwagon — these include restaurants, real estate agencies, auto showrooms, and, interestingly enough, even one tattoo parlour. The lack of widespread adoption is also attributed to the stance taken by the local banks that do not accept proceeds from transactions that involve cryptocurrency — making access to such innovative payment systems available only to those with a solid technological understanding.
ABR: How can companies in Malta ensure the transparency of transactions being made with cryptocurrency and blockchain?
SMA: Financial Services entities that carry out a licensable or regulated business — which under the new laws include ICOs and VFA service providers — will generally need to carry out risk management and risk oversight practices to ensure that all decisions are taken in an informed and transparent manner. Moreover, such ICOs and VFA service providers will become subject persons under the local anti-money laundering regulations. Therefore, such entities will need to abide by the rules and regulations issued by competent authorities and ensure that policies and procedures are prepared with the objective of putting them into practice.
ABR: What has been your company’s role in promoting blockchain and cryptocurrency in Malta?
SMA: Our fintech specialists have been following the progress in the industry and have participated in discussion fora related to the launch of Malta’s legislative framework. Our partners and senior managers penned contribution documents during the drafting process of the legislation and have contributed several researched thought leadership articles on the topic. We have assisted clients to set up on the island and are advising clients seeking to launch ICOs and STOs in Malta, as well as operators of crypto businesses such as crypto exchanges, wallets, and trading. Through one of our licensed companies, we act as VFA agents and can assist the clients throughout every step of the process.
ABR: In general, how has the population of Malta embraced blockchain and cryptocurrency?
SMA: While the technology-driven businesses in Malta have embraced the stance of the administration of welcoming nascent and disruptive technologies and seeking to ensure that more such businesses are attracted to Malta, the general population of the islands is still some way from embracing blockchain and cryptocurrency. We believe that more widespread adoption will take place once state-run blockchain and cryptocurrency initiatives take off. The government has already announced its intention to run the company registry on blockchain, with similar initiatives expected for the land registry, healthcare provision, and a national tokenized identity for citizens to interact with the administration, tax authorities, etc.
ABR: In your opinion, what is the future of utility token initial coin offerings (ICOs)?
SMA: With the introduction of ‘tokenization’, blockchain technology is also promising a revolution of the way capital is raised through initial public offerings and trading on secondary markets. Although the trend in the market is that ICOs are making way for STOs, we believe that ICOs remain extremely valid for businesses with a large existing or planned community, such as airlines, hotels, supermarkets or in gaming, just to name a few.
ABR: What services related to security token offerings (STOs) does your firm offer and where is the trend for STOs heading?
SMA: Chetcuti Cauchi is able to assist clients to launch their STO project, from initial advice, carrying out the requisite Financial Instruments Test, token design and features to the licensing process or obtaining exemption approval as the case may be. We may assist clients to passport the token throughout the EU/EEA, and, through trusted collaborators, we are also able to guide the token to be listed on security exchanges, to organize PR campaigns, and to seek financial backing.
STOs are already gaining popularity in Malta and will be one of the areas which shall be targeted within the MFSA’s FinTech Strategy. Tokens which bear the qualities of financial instruments as defined in the Markets in Financial Instruments Directive (MiFID II) will be regulated under the present regimes applicable for various financial instruments. These tokens are often informally referred to as ‘security tokens’. For example, where a token represents a share or a debt instrument, it will qualify as a transferable security under MiFID and, therefore, will need a Prospectus unless it qualifies under one of the applicable exemptions in the Prospectus Regulation (EU) 2017/1129.
STOs promise to revolutionize capital markets by offering cheaper and quicker settlements, along with an immutable audit trail. STOs may be a means to provide access to and liquidity in hitherto illiquid markets, such as long-term infrastructure, real estate, or shipbuilding. One obstacle so far is the limited number of regulated trading venues for security tokens, although more are in the process of licensing. As mentioned above, practical initiatives are already in motion in Malta, as the Malta Stock Exchange (MSE) has set up the MSX and is entering into agreements and negotiations with Neufund, Binance, and OKEx precisely to offer such secure trading venues.
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