Launching an ICO in Malta

The picturesque EU island state of Malta is on the brink of becoming one of the first, if not the first, jurisdiction to offer a clear registration and incorporation scheme for ICO Startups.


Back in the noughties Malta showed a penchant for supporting disruptive technology by becoming one of the first jurisdictions to regulate the growing Internet Gaming industry. As things now stand it has grown to become one of the largest and most respected online gambling regulators in the world.


Of late it has taken an active interest in recent development in the digital world, and in particular as regards the advent of blockchain technology, ICOs and cryptocurrencies and is becoming a target jurisdiction for startups and businesses working within the crypto-sphere.


Most saliently the government of Malta is now making moves to regulate these new industries proposing a legislative framework that will both support the organic growth and development of the sector and protect investors looking to point their hard-earned towards the Cryptospace.


The Malta Financial Services Authority (“MFSA) has also released a feedback statement proposing an upcoming array of regulations for collective investment schemes looking to invest in virtual currencies, designed to protect the interests of investors as well as the integrity of the virtual currency market.


The Three Acts


In February this year, the Maltese Government revealed its intentions to table three draft Acts that would aim to deliver extensive regulation for ICOs, Virtual Currencies (“VCs”), and blockchain technology.


At the core of the program the Maltese government’ has announced its intention to create a new Authority which will be known as the Malta Digital Innovation Authority (MDIA). The MDIA will manage the certification of blockchain platforms and cryptocurrencies, and will oversee the operation of ICOs.


It is proposed that the MDIA:


(a) will function as both a regulator and a watchdog over ICOs and will also operate as a consultative organization in that it will be saddled with promoting government policy and protecting the reputation of the jurisdiction.

(b) will be solely responsible for the registration and certification of Technology Service Providers with respect to the proposed TAS Act

(c) will operate as the National Competent Authority.

(d) will hire inspectors and have the capacity to hand down administrative penalties


Regulation of Initial Coin Offerings Act


The second Act will cover virtual currencies and will include stringent guidance and regulation guidelines for Initial Coin Offerings and other services related to VCs.


The Act is also likely to effect brokers, Cryptocurrency exchanges, wallet providers, investment advisors, market makers, and asset managers that deal with cryptocurrency/s.


Certain ICOs will be able to come within the ambit of investment services regulations; consequently the MFSA proposes to roll out a proposed Financial Instruments Test which will determine whether the ICO or cryptocurrency could be considered as a financial instrument as covered by the investment services regulations or whether it will fall under the ambit of the VC Bill.


The Financial Instruments Test will apply to persons or companies which are offering ICOs conducted in Malta to determine whether same should fall under the ambit of the relevant Maltese Authority. The test will also impact on individuals who provide services or activities regarding non-classified VCs. It is anticipated that the analysis will provide a badly -needed modicum of legal certainty and clarification regarding the asset in question.


The Act will give rise to the first legal framework of its type (in any international jurisdiction) to govern ICOs and will deliver a regulatory framework applicable to service providers.


ICOs introducing VCs which do not currently qualify as financial instrument will under the proposed new regime be set transparency requirements including a standardized list of disclosures which must be provided in the whitepaper.


Individuals providing such services will be required to meet licensing requirements in addition to complying with ongoing obligations. The MFSA will also have the power to investigate and if necessary, suspend an ICO or the trading of a VC on any exchange or platform.


Technology Service Providers Act


The second proposed Act in the new raft of legislation will be the Technology Service Providers Act (“TAS Act”).


This statute will regulate Technology Service Providers, and will also certify and verify Technology Arrangements provided they feature an administrator which has been registered with the MIDA.


Virtual Currencies Act


In February 2018 the Maltese Government announced that “The MFSA is proposing that, in order to achieve the objectives of financial regulation, certain VCs and activities pertaining to them would be licensed and regulated under a new legislative framework to be drafted by the MFSA and adopted by the Maltese Parliament, the Malta ‘Virtual Currencies Act’.”


Securitized tokens will be regulated under the new regime, and utility tokens will be given more autonomy to conduct business without having to obtain a financial services license from the FMSA. The definitions of both under the proposed Malta law are as follows:


“‘Securitised tokens’ are defined as those embedding either underlying assets (akin to commodities) or rights (e.g. quasi-equity rights) and effectively refer to those tokens that qualify as financial instruments.


‘Utility tokens’ are further defined as those providing either platform/application utility rights or protocol access rights, without any underlying.”


There is no statement as to whether the product must be working prior to the ICO, rather focusing on just the intention of the product itself. This is vitally important, as many ICOs would find it very difficult to create a working prototype without funding.


There is also no mention of a token losing its utility status if the company receives funding before the ICO, which is also a serious plus for VC backed tokens.


Bi Finance Move to Malta


In March 2018 Japanese regulators took issue with giant cryptocurrency exchange Binance for failing to register with their regulators, the FSA. That registration would have caused regulatory scrutiny such as would seriously affect the exchange’s able to offer non-identity verified trading accounts in the international marketplace.


By this time Binance had evolved to become the biggest cryptocurrency exchange by volume handling billions of dollars of daily transactions and holding Cryptocurrency for millions in a business that stakeholders did not wish to change. Its popularity hitherto had been dependent on its ease of doing business, which registration in Japan would have seriously curtailed.


This led Binance to decide to abandon Japan and relocate…. to Malta! With some pundits predicting that they will employ as many as 200 people in Malta, the news of their planned move was welcomed by none other than the Maltese Prime Minister who publicly welcomed Bifnance to Malta via Twitter.


Latest News Out of Malta


In a consultation paper published on 13 April (which you can read here: file:///C:/Users/Pat/Downloads/20180413_FITest.pdf ) the Malta Financial Services Authority (FSA) has laid out a proposal for a so-called Financial Instrument Test, which will ultimately become part of the proposed Virtual Financial Asset Act (VFAA).


The FSA says the methodology of the test has been arrived at based on feedback from its previous discussion paper, released in November 2017, which for the first time announced the concept.


Per the latest release, the test will comprise a three-stage process that will first verify whether a distributed ledger technology (DLT) asset falls under the category of “virtual tokens” – (ie Utility Tokens).The paper states:


“Virtual token is a DLT asset which has no utility, value or application outside of the DLT platform on which it was issued and that cannot be exchanged for funds on such platform or with the issuer of such DLT asset.”


Tokens falling within this definition will be exempted from the VFAA, according to the FSA.


Assets capable of being traded in a secondary market will fall within the scrutiny of the second phase of the test, where various securities definitions set by European financial regulators will be applied, including transferable securities, money market instruments or financial derivatives.


Should a token sit within the definition of any of those assets, it would then fall within the reach of the regulatory oversight of the existing Markets in Financial Instruments Directive (MiFID) that is enforced within the European Union financial markets.


That said, a negative result in stage two will lead to the third stage of the test, which would see ICO tokens regulated under the proposed VFAA. The FSA said this method will embrace a hybrid framework that adopts both existing EU regulations, as well as a Maltese regs.


The Future?


The proposed legislative Crypto framework in Malta arrives at a time when the island’s government is looking to embrace blockchain innovation with a well-established legal environment aimed to attract blockchain businesses to the country.


The vision is starting to bear fruit:

•          Several notable cryptocurrency exchanges – including now OKEx as well as Binance – have already set up business operations in the country; &

•          Malta’s first digital asset hedge fund has grown into a multi-million dollar exchange; &

•          ICOs are starting to consult with Maltese law firms, and the largest cryptocurrency exchange with the aim of total decentralization has been welcomed with open arms.


Moreover the process to license and launch an ICO via Malta is anticipated to be months quicker than it would be if you were trying to launch out of a larger, more bureaucratic jurisdiction (eg Switzerland).


Hopefully the legislation will be enacted before years end. Watch this space for developments.


Why Incorporate in Malta?


In addition to its looking to embrace Crypto related business Malta is also a very attractive jurisdiction in which to incorporate. Key features include:


• Low corporate tax (maximum of 5% or lower effective tax rate for trading companies)

•          A highly educated, reasonably-priced English-speaking workforce (88% per cent of the population speaks English), particularly in the legal, accounting, insurance, banking and maritime professions

•          A strong stable economy

•          A high (and ever improving) standard of living

•          Political stability

•          Certainty of the rule of Law (much of Malta’s laws were derived from its former ruler Great Britain)

•          Reliable telecommunication systems

•          Access to European markets (Malta is an EU member)

•          An extensive double-taxation treaty network (with over 50 countries)

•          Low operating costs relative to the rest of Europe

•          Strategic location at the crossroads of three continents, serving also as Europe’s Middle Eastern outpost

•          Liberal foreign direct investment regime


Taxation Benefits


Malta has a full-imputation system of corporate taxation and hence any income tax that is paid by a Maltese company is fully imputed or credited to the shareholder who receives dividends from the company, enabling the same to benefit from the full relief of economic double taxation of corporate profits.


Although the standard rate of taxation in Malta is 35% of the chargeable income of the company, a shareholder of such company is entitled to a refund of any tax paid by the company of 5/7ths, 6/7ths or 7/7ths depending on the source of income of the company. This typically results in an effective net tax rate of approximately 10%, 5% or 0% respectively


Low Incorporation and Maintenance Costs


A company can be set up in Malta with a minimum share capital of Euro 1,165, 20% of which should be paid up. This means that the minimum amount that you need to commit by way of Capital to incorporate a company in Malta is only 245 Euros. The minimum Registry fee required to be paid is Euro 240 with minimum annual payments of Euro 100!


Exemption from Duty on Documents


Malta companies carrying out international activities are exempt from stamp duty on documents meaning that the transfer of shares in and increases of share capital of a Maltese company are exempt from duty.


Double Taxation Treaties Signed


Malta has signed over fifty double taxation treaties, with the latest being the Malta – Russian Double Taxation Treaty which should come into force at the beginning of next year.


Capital Gains Tax


Capital gains realised by non-residents on transfers of shares and increases of share capital are not subject to tax in Malta if the assets of the company do not include immovable property situated in Malta.


Other Benefits of Incorporating a Company in Malta:

•          No withholding tax on the payment of dividends, interest or royalties;

•          No controlled foreign company legislation or transfer of pricing rules;

•          No thin capitalization rules;

•          No exit taxes, wealth taxes, payroll based tax or trade tax.


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