How To Launch a Cryptocurrency Exchange in Malta

With the passing of legislation regulating cryptocurrencies, ICOs, and associated technology service providers, Malta has announced itself as a major Fintech player (and is even being referred to as “The Blockchain Island”). Malta’s worldly attitude towards cryptocurrencies and Distributed Ledger Technology (“DLT”) has recently seduced some of the world’s biggest cryptocurrency exchanges, motivating them to redomicile to, or open fresh offices, in Malta.

The legal framework is pragmatic with its prime focus being on:

Consumer protection
Market integrity &
Financial stability.

The primary legislative tool which will regulate cryptocurrency exchanges licensed in Malta is the Virtual Financial Assets Act (hereinafter the ‘VFAA’ or the ‘Act’) which was originally tabled in Parliament in April 2018, (and has just passed into law – see below Legislation Update). The VFAA, (along with the Technology and Service Providers Act and the Malta Digital Investment Authority Act) sets out the regulatory framework for DLT Assets.

Primary Obligations

To be able to operate as a VFA Exchange, a license is required from the Malta Financial Services Authority (‘MFSA’).

Key Persons behind the proposed VFA exchange will need to undertake a fit and proper test: – The MFSA will need to be satisfied that the applicant/s can/will comply with and adhere to the the requirements of the VFAA and any other subsequent or related guidelines as may be prescribed.

PHYSICAL PRESENCE REQUIREMENT: If the applicant is a natural person/s, this person/s will need to be domiciled in Malta. Where the applicant is a Company, the Company may be incorporated in Malta. Alternatively the Company can be incorporated abroad in a “reputable jurisdiction” but it must set up a branch office in Malta.

PROGRAMME OF OPERATIONS: The Applicant/Licensee must at all times have, and must submit to the MFSA for initial approval, a Manual documenting and explaining the business/operational/IT etc systems, security access protocols and any other items as the MFSA may from to time require you to include in the manual.

VFA EXCHANGE OPERATOR (OPTIONAL): The act provides for a VFA Exchange Operator to (at the discretion of the business) be appointed. If so appointed the VFA Exchange Operator’s role will be to manage and operate the business of the VFA exchange. This role however may be performed by the VFA exchange itself. Where a VFA Exchange Operator is appointed, the MFSA will decide, by means of Rules, how the different duties are going to be allocated as between the VFA exchange and the VFA exchange operator.

FINANCIAL INSTRUMENTS TEST: The Financial Instruments Test is a mandatory requirement for issuers of ICOs. That said, it may help all license holders to decide (a) whether a DLT Asset would qualify as a “VFA” within the ambit of the VFAA or (b) whether it should be regulated under any other law or (c) whether it should be exempt from regulation altogether.

STEPS TO GETTING A CRYPTO EXCHANGE LICENSE IN MALTA:

Here are the essential steps/stages involved in applying for a Cryptocurrency Exchange License in Malta:

The application and supporting documents are prepared
A Preliminary meeting is held with the “MFSA”
The MFSA Authorisation Unit will review the application docs and provides feedback
In Principle approval is then given (ie The license is approved subject to the applicant providing certain further docs or info)
The Applicant fulfils the outstanding requirements
The License is Issued

Timeline: Minimum 3 months

Cost: Circa $US30,000

Malta Cryptocurrency Exchange Legislation Update

On 20 July this year (2018) the Parliament of Malta approved and enacted three pieces of Legislation aimed at regulating Distributed Ledger Technology (hereafter referred to as “DLT”) and services relating thereto. The primary Act governing the licensing and operation of Cryptocurrency Exchanges is the Virtual Financial Assets Act (herineafter the “VFA Act” or “the Act”) – a copy of which can be accessed via this link: https://parlament.mt/media/95198/act-xxx-virtual-financial-assets-act.pdf ). The Act purports to regulate, amongst other things, the issuing of ICO/Virtual Financials Assets, (hereinafter referred to as ‘VFAs’) in or from within Malta.

One of the primary activities regulated by the VFA Act is the setting up and operation of DLT Exchanges and VFA exchanges. (The VFA Act defines a DLT exchange as any trading and, or exchange platform or facility on which any form of DLT asset may be transacted. )

A DLT asset is classified as any virtual token, virtual financial asset, electronic money, or financial instrument that is intrinsically dependant on or utilises DLT. The term VFA exchange refers to any DLT exchange on which only VFAs may be transacted in accordance with the rules of the platform or facility.

A virtual financial asset (“VFA”) means any form of digital recordation that is used as a digital medium of exchange, unit or account and that is not electronic money, a financial instrument or a virtual token. Resultingly exchanges on which only financial instruments are traded, shall not be licensable under the VFA Act but will fall within the jurisdiction/application of the Investment Services Act.

Primarily the VFA Act provides that before a VFA can be offered to the public in or from within Malta (or before a VFA can be traded on a DLT exchange) the issuer of the VFA must compile a whitepaper (in compliance with the requirements set out in the act) and have it registered with the MFSA. Additionally, the VFA Act purports to regulate/control the structure and content of the whitepaper, likewise any advertisements placed by the issuer of the VFA.

In terms of VFA Services to able to operate a VFA Exchange in or from Malta (eg under the guise of a Malta Company) a person (or company as the case may be) would need a licence granted by the MFSA as provided for in the VFA Act. The VFA Act specifically sets outs the licensing requirements that licensees wishing to offer VFA Services in or from within Malta will have to meet. The VFA Act also outlines the procedures as regards how to go about applying for such a license and the issuance of the said licence/s.

The Act also provides that an application for a licence under the VFA Act can only be made via a VFA Agent which is duly registered under the VFA Act. Apart from having to be registered by the MFSA, such individual must be authorised to carry out the profession of advocate (ie Lawyer), accountant or auditor. (OCI has achieved this requirement with our In House Lawyer having taken on a Consultant Advocate role at/with a Maltese Law Firm).

The VFA Act also makes it mandatory for a licencee to appoint or engage the services of an ‘administrator’ or ‘board of administrators’. The administrator (or board of administrators as the case may be) is/are entrusted with the duty of carrying out representative and fiduciary responsibilitiess on behalf of the licencee. The Administrator “must be of good repute, possess sufficient collective knowledge, skills and experience and commit sufficient time to perform their duties and be able to understand the licence holder’s activities, including the main risks”.

The VFA Act also contains other provisions which are aimed at stopping market manipulation by licence holders. Activities including insider dealing, unlawful disclosure of inside information and market manipulation are specifically prohibited under the Act.

The law also makes it incumbent on the VFA exchange to show that, at all times, it has effective systems, procedures and arrangements in place to monitor and detect market abuse. Whenever the possibility of any such activity is suspected by a Licensee, there is a mandatory requirement to report this finding to the MFSA.

The VFA Act also (as is common with such legislation) prescribes: