Last year, the Prime Minister was enthusiastic to learn that Malta might be one of the first countries to welcome blockchain technology. In his opinion, this is not just about bitcoin, but because it can be so versatile that, for example, it can be implemented in the Lands Registry and the National Health registers.
In his vision, such systems could be used for cross-border payments in, for example, the remote gaming and the oil and gas industries, where operators want "immediate and transparent transactions". He also foresaw other applications, including the archiving of the music industry and the collection of royalties, as well as smart contracts, allowing individuals in one country to purchase property in another without the need for a middle-man.
Certainly, using the technology in the public sector will make it more efficient, so it follows that a closer examination is needed to ascertain how it can be implemented, particularly for maintaining public registers and related information. In this respect, when properly administered it can simplify the management of such information and make it easier for users to access critical public sector areas.
The regulating of this technology is about to begin and we have recently seen the publication of three bills. The first one is entitled the 'MDIA Bill', and when it is enacted it will provide for the establishment of the Malta Digital Innovation Authority as a central regulator. It is expected that this law will promote government policy towards the industry and lay the foundation for the development of Malta as a hub for new and innovative technologies.
Another piece of legislation, called the TAS bill, will lay out the regime for the registration of technology service providers and the certification of 'technology arrangements'.
This framework will allow for the registration of auditors and administrators of distributed ledger technology (DLT) platforms and their certification. This will be complementary to the Virtual Currency Bill, which will provide a framework for initial coin offerings (ICOs) and the regulatory regime on the provision of services related to virtual currencies. Silvio Schembri, the junior minister who is piloting the laws, says that they will provide legal certainty in an area that is currently unregulated and pave the way for Malta to become the natural destination for businesses working in this field.
It goes without saying that virtual currencies have become a phenomenon that has reached a mainstream audience. They have become so ubiquitous that the word 'bitcoin' has been accepted into the vernacular of people across the world. For those who are not sure what bitcoin is, it was invented in 2008, languished as a niche currency with little take-up until 2013 when it then exploded in value and has shot up exponentially in the last two years.
The MFSA issued a warning to the public that a virtual currency is an unregulated digital instrument used as a form of money that is not issued or guaranteed by the Central Bank or by any other authority and is not equivalent to traditional currencies.
On the other hand, the IMF was less cautious and recently conceded these currencies are facing 'technological' problems which could eventually be resolved, and that as such they could then be "easier and safer" to hold than paper notes in remote regions or countries with an unstable national currency or 'weak institutions'.
Not so sanguine was the European Banking Authority which, four years ago, issued a warning that highlighted the possible risks that people may face when buying, holding or trading virtual currencies. It pointed out the risks involved when trading on exchange platforms, which are unregulated. A number of exchange platforms have gone out of business or failed - in some instances due to hacking by third parties.
Money can be stolen from your digital wallet as these are not impervious to hackers. At this juncture, one may delve into the labyrinth that has shrouded the mysterious currency and explain in some detail how it works. A virtual currency digitally represents the concept of value and can be used in a digital framework as a medium of exchange, a unit of account and value storage.
However, it should be noted that it does not have a link to any particular jurisdiction and hence does not qualify for legal tender status. In other words, no jurisdiction guarantees the performance of its functions, which is only held together by the mutual consensus of the community of users. Paper money and coins, to which we have traditionally been accustomed, is referred to in various ways, such as 'fiat money', 'real money' or 'national currency'. As a matter of fact, fiat money is recognised in the country that issues it.
The uniqueness of a virtual currency is that in itself it does not entail prior authorisation by a centralised entity. Both a business trader and a customer can effect payments in a virtual currency without being caught up in the banking hegemony or the financial services market. This is not to say that the regulator cannot have a presence in the process nor that the commercial usage of virtual currencies will, in the future, justify the intervention of the competent authority.
So how does someone start to trade? It is possible to earn or purchase virtual currencies. The issuance and management of a virtual currency is dictated by elaborate open source code algorithms that necessitate the property of uniqueness.
Crypto-currency operates by means of a combination of public and private keys. Put simply, the purpose of the public key is the confirmation of the existence of a discrete virtual currency unit and its uniqueness. The private key is more or less a secret code that is stored in the owner's digital wallet which is created by means of software or a platform intended for virtual currency trading and used for the acquisition of goods and services.
So what are the advantages of using such currencies? The answer is that virtual currencies are decentralised, free from bank formalities and make use of a secure ledger holding the details of the movement of virtual currency values. Like Gibraltar, Malta is taking a tripartite approach that will address 'the promotion, sale and distribution of virtual currencies.' Time will tell if we succeed in creating a well-regulated market and establish standards for the harnessing of this technological revolution.
George M. Mangion
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The writer is a partner in audit and business advisory firm PKF