Malta has established itself as a prime fintech hub for over more than a decade by attracting to the island a large number of electronic money institutions and payment service providers, as well as having developed into the world’s largest iGaming hub.
This led Malta to invest heavily in its IT infrastructure and has drawn a large proportion of senior IT talent to the island. This experience in a tech based, high-risk industry positioned Malta perfectly to capitalise on the rise of distributed ledger technology (DLT).
Malta’s progressive attitude towards DLTs (including blockchain) and cryptocurrencies has already attracted some of the world’s largest crypto-exchanges who have either relocated to or commenced additional operations in Malta.
Malta has sought to create a regulated framework for innovative technology that is built upon three pillars: consumer protection, market integrity and financial stability. This comprehensive legal framework is a world first and was eagerly anticipated by fintech experts, operators and investors.
Legal Basic
The legal framework specifically designed by the Government of Malta to regulate virtual financial assets (VFAs) and virtual financial assets related services (‘VFA Services’) including the operation of a crypto exchange comprises a series of three laws:
- The Malta Digital Innovation Authority Act (MDIA Act) establishing the Malta Digital Innovation Authority (MDIA);
- Innovative Technology Arrangements and Services Act (ITAS Act) providing for registration of technology service providers and the certification of technology arrangements; and
- The Virtual Financial Assets Act (VFAA) mainly regulating initial coin offerings (ICOs), VFA service providers and VFA
Under the VFAA, no person can provide a VFA service in or from within Malta unless licenced by the Malta Financial Services Authority (MFSA) prior to commencing operations. The VFAA regulates a whole range of service providers and services provided in relation to VFAs covering reception and transmission of orders, execution of order on behalf of others, dealing on own account, portfolio management, custodian and nominee services, investment advice, VFAs placements and the operation of a VFA exchange.
The MFSA is the lead regulator for VFAs and VFA service providers. However, certain innovative technology arrangements, including DLTs and smart contracts may be referred to the Malta Digital Innovation Authority for further certification.
Key Requirements
The main requirements to file and application and obtain a crypto exchange licence are the following:
- If the applicant is a natural person, physical presence in Malta is required. Where the applicant is a legal person, it may be constituted in Malta, or, if constituted abroad in a recognized jurisdiction, it shall establish a branch in Malta;
- No restrictions on the nationality of the ultimate beneficial owners of the applicant;
- Designated persons, directors, senior management, qualifying shareholders and ultimate beneficial owners must undertake a fit and proper test;
- A licensed VFA Agent must be appointed by the applicant which will file the application with the MFSA and act as liaison between the applicant and the MFSA;
- The applicant must undertake, through the VFA Agent, a Financial Instrument Test (FIT) to ensure that the DLT asset in relation to which the applicant will be providing the VFA Service falls within the meaning of a virtual financial instrument as per the VFAA;
- The board of administrators/directors must effectively be directed by at least two The applicant needs also to appoint a compliance officer, a money laundering reporting officer and a risk manager; and
- Minimum share capital: €730,000
Ongoing obligations
The VFAA and chapter 3 of the rule book regulating VFA service providers list the ongoing obligations that shall be observed by all VFA service providers including crypto exchanges. These include:
- Organisational requirements including the setting up of a board of administrators/directors, having in place governance policies, risk management and compliance measures, and methods to safeguard clients’ assets;
- Prudential requirements covering initial share capital and ongoing capital, own funds, liquidity and fixed overhead requirements;
- Conduct of business obligations regulating conflicts of interest, sales processes and selling practices and execution of clients’ orders;
- Record keeping, appointment of auditor, reporting and disclosure
Crypto exchanges need also to observe additional requirements including guidelines on VFAs listing criteria, order matching, settlement, custody and suspension /removal from trading of any VFA by the crypto exchange.
Type of Licence
The VFAA regulates a whole range of service providers and services provided in relation to VFAs classified in four classes. A crypto exchange fall under class 4 which covers the provision of any VFA service and the holding or control of clients’ money in conjunction with the provision of a VFA Service
Custody
Where the business model of the licence holder involves the custody of assets and investors’ funds, a custodian needs to be appointed for the safe keeping of VFAs. Any FIAT currencies are to be held by an authorised bank/credit institution.
The licence holder shall ensure that a combination of cold and hot storage is provided. Appropriate insurance coverage shall also be required to mitigate the risks associated with hot storage.
