World 1st Comprehensive DLT Legislation enacted in Malta

The Maltese Parliament has approved three Bills aimed at seamlessly regulating DLTs, i.e. blockchain, cryptocurrencies, and ICOs. Malta is not the first to regulate this sector, but it will be the first to have a comprehensive legislative framework. To create a decentralised system, independent of traditional institutions like banks, the regulator needed to minimise feelings of risk and uneasiness and promote innovation and long-term growth. Malta sought to replicate its successes in the financial services and iGaming sectors here. In view of Malta’s future as a blockchain island, key players such as Binance and Okex have established themselves here.

Mr Nicholas Warren, Senior Manager Financial Services at Chetcuti Cauchi Advocates, addresses what we should inquire at this stage: “The logical question to be asked here is: how is Malta going to create this framework? Transparency in is of paramount importance in this regard. This is ensured through the Malta Digital Innovation Authority Act (MDIA).”

The MDIA establishes an Authority to promote and develop the innovative technology sector through recognition and regulation of arrangements and related services. With CEO Stephen McCarthy, the MDIA shall ensure that businesses accepted as Technology Service Providers, and their services, act honestly and transparently.

While the MDIA regulates the conduct of Technology Service Providers, the Innovative Technology Arrangements and Services Act provides how such structures may come into existence in the first place. This is because this act regulates the registration of Technology Service Providers and the certification of Technology Arrangements. This includes software architecture used in designing and delivering DLT, smart contracts and related applications including decentralised autonomous organisations. Other similar arrangements may be designated by the Minister on the Authority’s recommendation, making the Act futureproof.

The parameters within which ICOs and cryptocurrency exchanges may operate are specified in the Virtual Financial Assets Act. These include specific requirements for a whitepaper draft. Most countries agree that cryptocurrencies are not to be considered currencies or legal tender, despite often being used as a form of investment or asset. Several DLT assets issued in an ICO would qualify as financial instruments under the relevant MiFID directive, but the issuers would not have applied for the proper licences due to the confusion surrounding classification of DLT assets. Companies seeking to establish an ICO must take the Financial Instruments Test to classify DLT assets: virtual tokens, financial instruments and virtual financial assets.