Progressive attitude towards virtual currencies positioned Malta as the champion in crypto regulation for its plain legal framework and efforts to furnish legal certainty to the industry. Being an EU based jurisdiction might add another value to do business, in lieu of choosing an offshore country. Malta is appealing to an increasing number of fintech businesses, crypto exchanges and investors thanks to its holistic legal framework.

Overview of legislations

Financial service providers in Malta are bound to comply with all EU directives and General Data Protection Regulation, inter alia, Investment services Act, the Banking Act, the Financial Institutions Act and the Insurance Intermediaries Act. In response to a growing demand for laying out a regulative framework on digital assets, Maltese government enacted following acts in 2018 to regulate Blockchain, Distributed Ledger Technology (“DLT”) and Initial Coin Offering (“ICO”):

• Virtual Financial Assets Act (hereinafter referred as “VFA”);
• Innovative Technology Arrangements and Services Act (hereinafter referred as: “ITAS”);
• Malta Digital Innovation Authority Act (hereinafter referred as: “MDIA”).

These legislations are predicated on the fundamental basic principles of market integrity, consumer and industry protection. Below is the brief outline for each legislative act.

VFA Act

While the cryptocurrencies are not considered as a legal tender, the Maltese government recognizes them as “a medium of exchange, a unit of account, or a store of value”. They represent the cryptographic format proportional to fiat currencies or utility tokens.

The VFA Act defines the classes of digital financial assets, establishes a framework for offerings of virtual financial assets to the public, such as ICOs and services based around virtual assets. In compliance with EU markets in financial instruments directive (MiFID), digital assets might be characterised as financial instruments. To alleviate this uncertainty, pursuant to VFA Act, Malta developed the financial instruments test for virtual and security token issuers to identify the type of asset and applicable legislation to the ICO and token. The test is designed to identify whether a certain asset qualifies as DLT or VFT.

Virtual financial asset means any form of digital medium recordation that is used as a digital medium of exchange, unit of account, or store of value and that is not: electronic money, a financial instrument; or a virtual token;

While DLT asset means virtual token, virtual financial asset; electronic money; or financial instrument, which is intrinsically dependent on, or utilises; Distributed; Ledger Technology.

If the asset at issue is found to be a virtual financial asset, this asset shall be regulated under the VFA Act.

As per article 3 of the VFA Act, issuers must publish “whitepaper” which has been signed by each member of the issuer’s board administration and contains all relevant information on the nature of the assets offered to public to allow investors to make informed judgement on the prospects of the issuer, presented project and features of virtual financial asset. The document should contain a disclaimer that “offering of virtual financial assets does not constitute an offer or solicitation to sell financial instruments.” The document must be in the “easily analysable and comprehensible form” and approved by the registered VFA agent who must be present with the issuer “at all times in place” to ensure compliance with the law.

Through regulation of each class of the digital assets, the Act deems to protect stakeholders and investors in the industry.

ITAS Act

The ITAS Act is primarily intended to establish a framework for registration of Innovative Technology arrangements, involving smart contracts, technology service providers and certifying technology platforms. Registration and certification will facilitate consumers and investors to be favoured with legal assurance that their investments are sound and will not be challenged by any sort of fraud. The provisions of the Act also refers to a Malta Digital Innovation Authority which functions as a regulator.

MDIA Act

On the basis of MDIA Act, the Malta Digital Innovation Authority was established in 2018, to found internal administration to inspect and certify DLT platforms to guarantee credibility for customers intending to use the platforms. The Act gave the Authority exhaustive power to recognise, certify, and regulate applications related to “innovative technology arrangements and services” (described in article 2 as “intrinsic elements including software, codes, computer protocols and other architectures which are used in the context of DLT, smart contracts and related applications”). The main reason why Malta chose this method is to make sure that technical sides of the matters are inspected by Tech specialists to keep standards and quality high and security is ensured.

Regulatory bodies

The purpose of the establishment of the Malta Digital Innovation Authority was to “address the development in Malta of all innovative technology arrangements and innovative technology services”) and to “seek the development of the innovative technology sector in Malta through proper recognition and regulation of relevant innovative technology arrangements and related services” (under Article 5 and 6 of the MDIA Act).

Specifically Malta Digital Innovation Authority in charge of the following statutory duties:

• promotion and facilitation of the use of innovative technologies, to make them accessible and to hinder unethical application;
• establishment of standards and norms for Innovative Technology Arrangements, applications, software and derivative products to remain in accordance with international rules, standards and laws;
• policy reforms in cryptocurrency and blockchain technologies;
• certification and audit of DLT and blockchain technology systems.

Malta Digital Innovation Authority has an authority to investigate the applicants who do not meet “quality and integrity standards required” under the current legislation and penalize those who do not meet compliance requirements with a fine up to €12,000 (about US$13,976) or/and imprisonment for up to 3 months. Malta Digital Innovation Authority IA collaborates with Malta Financial Services Authority (hereinafter referred as “MFSA”) to grant licences to service providers which use DLT and blockchain technology. Being a unified financial regulator of the country, the MFSA supervises financial exchanges in the country to thwart money laundering and related crimes and enforce applicable rules and has an authority to revoke licenses and to issue fines for non-compliance.

Taxation

Malta does not have a particular tax law or VAT applied to cryptocurrency transactions; the government published guidelines on tax treatment of transactions involving DLT assets. Transactions involving coins are treated in the same way as transactions involving fiat and conventional currency. Thus cryptocurrencies and bitcoins do not fall under the scope of income, duty and capital gains taxes within this jurisdiction.

On the contrary, coins transferred within coin exchange trade, earnings from this business are taxed similarly as trading stocks, at 35% corporate income tax rate. Mining is not subject to VAT, with the exception of cases when it is done against transaction fee payment.

Summary and future

Maltese regulations that prioritised the importance of the blockchain industry fostered blockchain business to meet the challenges brought by the fast-evolving digital landscape. Basically, the government laid down high standards to ensure the protection of market stakeholders and to preserve financial stability. New regulations might arise as the government plans to integrate artificial intelligence with cryptocurrency regulation, and might implement precise guidelines in relation to security token offerings. Thus, further regulatory measures might arise in the time to come. While digital assets and blockchain technologies remain largely unregulated leading to uncertainty, Malta might serve as a role model for regulatory efforts in other jurisdictions.

The content of this article is intended to provide a general guide to the subject matter, not be considered as a legal consultation.

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