MFSA issues Discussion Paper on the Regulation of ICOs and Virtual Currencies

Cryptocurrency correct size

30 November, 2017 - The Malta Financial Services Authority (the "MFSA") has today issued a Discussion Paper on Initial Coin Offerings ("ICO"s), Virtual Currencies ("VC") and Related Service Providers in the wake of the global phenomenon of Virtual Currencies and Cryptocurrencies, their rapid evolution and the ever-increasing signs of them becoming integrated in the financial services area and other industries that make use of the sector.

The Paper proposes a policy framework for the regulation of Virtual Currencies and ICOs and other involved service providers. It also gives certain explanations, such as of ICOs, Coins and Tokens to show the public its understanding of such terms in order to be able for readers and participants to rebut any notion perceived differently.

- Initial Coin Offerings
The Paper states that the defining feature of an ICO is where propriety Coins or Tokens are issued by businesses to the public in exchange for fiat currencies or other VCs in order for business to raise funds for their projects. Investors in turn would be able to access or purchase services or products developed by the business or obtain voting rights or a share in future revenues of the venture or even exchange such Coins or Tokens into fiat or other VCs. This varies according to the features and purposes of the Tokens issued.

- Virtual Currencies
Virtual Currencies are subdivided into Coins and Tokens, with Tokens being further divided into securitised and utility tokens.
Coins, such as Bitcoin, Ether and other cryptocurrencies may be used as a payment instrument, their value being derived by supply and demand.
Tokens are virtual assets being offered through an ICO which one can acquire in turn for funding a respective project. Due to the different features attributed to different Tokens, it is ideal to further categorise Tokens into Securitised Tokens and Utility Tokens; the first being those Tokens embedding underlying assets or rights, qualifying as financial instruments; the second allowing platform or application utility rights or protocol access rights without any underlying.

The MFSA's above understanding of terms is already in line with the general understanding and other positions held by other authorites, regulators and key players such as the ESMA, the FATF and the Blockchain Policy Initiative.

The MFSA notes that certain VCs and activities fall within the scope of existing legislation, while other activies are unlikely to be caught up by the current framework and would therefore be unregulated.

With this in mind, the Paper proposes the drafting of a new act, the Virtual Currencies Act, to be drafted by the MFSA and adopted by the Maltese Parliament. The Act would include a Financial Instrument Test, through which it shall be determined whether the VC or activity constitutes a financial instrument under any other law, namely MiFID and other relevant EU legislation concerned with transferable securities, units in collective investment schemes, commodities, and financial derivatives contracts. This would see issuers required to comply with relevant legislative frameworks such as the Prospectus Directive, AIMFD and national legislation as applicable. The absence of a categorisation in this regard would mean that a VC or activity would fall under the Virtual Currencies Act.

Therefore, it would be difficult for such activity to be unregulated. The MFSA's raison d'etre is that an absence of regulation would lead to no adequate investor protection, financial market integrity and financial stability in the field, which risks a domino effect in the whole financial sector, particularly in light of this global growth and integration of VC in the Digital Currency sector.

The reader might get the impression that the Paper shows signs of caution with regards to the VC scenario, shown for instance when proposing (or in some cases reconsidering the authority's previous positions) that certain players such as Investment Services Licence Holders, Exchanges, Credit Institutions and Financial Institutions may provide services in relation to VCs only through the setting up of a subsidiary and ensuring complete segregation from their other "regular business". The relatively new character of this activity might make this position adopted by the MFSA understandable.

The Paper's final thoughts, before its concluding remarks, brings up issues of AML where it is noted that should a person, legal or individual, carry an activity requiring a licence or authorisation under any financial services law, this would place such person under the definition of "subject person" and would therefore be obliged to perform all duties required under the Protection of Money Laundering and Funding of Terrorism Regulations (PMLFTR). This would also be extended to include those persons licenced under the Virtual Currencies Act.

The MFSA's move towards proposed regulation shows that the local regulator is not shying away from welcoming technological innovation, in fact, a policy framework supporting new technologies is being preferred to a strict and tighter regime. That said, the authority is nonetheless considering it crucial for VC implementation and activity to be overseen. This is where the MFSA proposed to include another act - the Virtual Currencies Act, to encapsulate those activities which would have seeped through other regulations currently in place.

The consultation closes on the 11th January 2018, meanwhile industry participants would do well to follow any updates in the near future, particularly and hopefully, a draft Virtual Currencies Act which may dispell doubts regarding the obligations of such industry participants.

At Gonzi & Associates, Advocates, we shall continue to be active in the legal developments concerning ICOs, VCs and other related service providers and activities. For more information on this and other related matters, kindly contact us on This email address is being protected from spambots. You need JavaScript enabled to view it. at your convenience.

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