Last week on the 16th of February, the Parliamentary Secretary Hon. Silvio Schembri unveiled a framework for the regulation of distributed ledger technology (DLT), which framework shall take the form of three bills covering fundamental aspects of the underpinning legislation that shall be regulating the sector for years to come.
The blockchain technology, which is the most prominent form of DLT to date, has taken the world by storm and promises positive disruption in many industries on a global level. In essence, a blockchain is a network of nodes responsible for the maintenance and updating of a ledger of transactions, which transactions comprise the transfer of data rather than just financial transactions. Due to the oversight and participation of the network, any input to the ledger is scrutinized and approved by a special group of network participants called miners, and inputs to the ledger are immutable and permanent. The term "blockchain" is derived from the fact that the transactions are collected into and confirmed in blocks, with each and every block of transactions linked, or chained, one to the other. On paper, this technology is fascinating; in practice, it is groundbreaking, and its applications are endless. One such application is that of smart contracts, which are snippets of code that are self-executable upon the trigger of pre-determined events, and stored on the blockchain ledger.
Several jurisdictions have been, to a greater or lesser extent, working towards embracing DLT and participants therein. Over the past two years, most of the business and regulatory focus has been on cryptocurrencies and crypto-assets issued on top of blockchains, as well as initial coin offerings (ICOs), a recent fintech phenomenon whereby an entity can issue its own cryptocurrency or crypto-asset in exchange for other cryptocurrencies such as Bitcoin and Ether. ICOs, in fact, have been used to collect funds amounting to more than two billion U.S. Dollars in 2017 alone. To date, the most active jurisdictions especially vis-à-vis ICOs have been Singapore, Switzerland, and Estonia. None of these jurisdictions, however, possess a holistic regulatory framework covering ICOs and other applications or uses of DLT, which is where Malta enters the scene.
The three proposed bills will essentially cover three core aspects: (i) the MDIA Bill shall cover the establishment of a regulatory authority, called the Malta Digital Innovation Authority (MDIA), dedicated towards the supervision and certification of DLT platforms and smart contracts, which are referred to as technology arrangements under the relevant proposed bill; (ii) the TAS Bill shall cover the setting-up of a registration & certification mechanism for any technology arrangements which voluntarily decide to register themselves as such, which technology arrangements shall be certified by approved systems auditors; and (iii) the VC Bill which shall lay out a financial instruments test for all ICOs conducted in or from Malta, which test shall determine whether an ICO falls under existing Maltese and/or EU regulation, or whether it classifies as a financial instrument outside the scope of existing regulation but caught under the proposed VC Act, or whether it would entirely fall outside the scope of any applicable regulation.
This three-pronged approach would place Malta in a very favourable position when compared to its peers, mostly due to the creation of the MDIA, which would be the first regulatory authority of its kind in the world. The MDIA would serve as a seal of quality for any DLT-based platforms or applications, separating the wheat from the chaff. The voluntary nature of any applications by those constructing DLT-based platforms ensures that any development taking place in Malta is not stifled, and only those who wish to obtain regulatory approval would be invited to tender their applications and submit themselves to regulatory and technical scrutiny. System auditors need not be based in Malta, meaning that the doors are open for anyone with a legitimate interest in aiding the regulatory framework covering DLT-based projects.
The process proposed by the MFSA in the VC Bill gives further security to investors and platform developers & issuers alike vis-à-vis the ICO offering at hand. The financial instruments test would ensure that any cryptographic token issued during the ICO would either be within the confines of existing regulation or not. This, in particular, is the cause of frustration for most entities seeking a jurisdiction within which to launch and run an ICO due to the regulatory uncertainty, which uncertainty leads to an unstable environment for business. The proposed VC Bill would therefore eliminate such uncertainty.
Overall, the feedback received by local stakeholders and industries is positive. The same can be said by those who are eyeing Malta as a base for their DLT-based project or venture; in all the international conferences which I have attended as a keynote speaker, both in the EU and outside, the response has been one of eagerness and willingness to do such business in Malta. This would furthermore attract precious specific talent which is still very scarce within the blockchain industry, such as development and advisory services. With the regulatory authorities moving ahead with their work, it is now time for other important stakeholders, such as the banks, to pull the same rope and place Malta at the top of what may well be the largest paradigm technological shift of a lifetime.
Jonathan Galea
Managing Director of Blockchain Advisory Ltd / Head of Consulting at TokenKey Ltd / President of Bitmalta