On the 30th of November 2017, the Malta Financial Services Authority (MFSA) published a discussion paper on Initial Coin Offerings, Virtual Currencies (VCs) and Related Service Providers.
The Authority acknowledged that virtual currencies are certainly an important development in carrying out transactions over the internet but also noted the importance of distinguishing between virtual currency and fiat currency [the coin and paper money of a country known as ‘legal tender’]. The scope of the paper presented to the public is to devise a coherent strategy ‘that supports the innovation and new technologies for financial services in VCs whilst ensuring effective investor protection, financial market integrity and financial stability’.
The paper states that certain Virtual Currencies could fall within the scope of existing financial services legislation, such as the Investment Services Act. However, the MFSA noted that other activities related to VCs are likely to fall out of scope of the existing framework and would therefore be ‘unregulated’.
Noting the policy statement of ESMA which was issued on the 13th November 2017 relating to firms involved in ICOs and VCs, if a VC is to be classified as a financial instrument under Section C of Annex 1 of the Markets in Financial Instruments Directive [MiFID] and the activities of the firm involved in such VC constitute a regulated activity as listed in Section A of Annex 1 of MiFID, the applicable EU and respective national legislative and regulatory frameworks would therefore apply.
However, if the VC does not fall under the definition of a financial instrument [and hence outside the scope of MIFID], then other applicable EU/national legislation would come into force. In this connection, the MFSA is proposing that, in order to achieve the objectives of financial regulation, certain VCs and activities pertaining to them would be licensed and regulated under a new law known as the ‘Virtual Currencies Act’ (VCA).
Based on the above information, it is being proposed that a test would be introduced to determine whether the features of a VC, either on a stand-alone basis or within the context of an ICO constitutes a financial instrument under MIFID or not. This test is currently being devised by the MFSA and will form part of the proposed Virtual Currencies Act so as to determine the scope of activity and instruments that would fall under this Act.
Investment services license holders wishing to provide an investment service in relation to a VC will be required to conduct the proposed Financial Instrument Test on the relevant VC. As previously stated, any investment service or activity in relation to a VC, which does not qualify as a financial instrument would require a separate license under the VCA. VCs which qualify as financial instruments under MIFID shall be assessed against the criteria set out under MIFID to determine whether the respective instruments should be classified as complex instruments or otherwise. If a VC does not qualify as a financial instrument, the VCA would provide for a framework for the regulation of the issuer and exchange platform.
Whilst appreciating the fact that the abovementioned framework being proposed by the MFSA is somewhat complex and open to wide scrutiny and interpretation, it is nevertheless warming to note that the Authority has acknowledged the need to introduce a new structure to both regulate and provide coherence to VCs. The wording of the discussion paper seems to imply acceptance on the part of the MFSA that VCs will sooner or later be part of the country’s financial structure. This is indeed a positive move by the Authority but whether or not the proposed legalisation/framework will bring about the necessary solution to regulate cryptocurrencies [especially in light of the proposed (but very vague) ‘test’ which is being suggested] remains to be seen.
