Malta’s launch of three new laws are attracting great interest as a destination for crypto and blockchain businesses to find a secure home. Dr Christian Ellul and Karl Schranz, Directors E&S Group discuss how their firm has pioneered legal advisory in this jurisdiction in tandem with the Maltese government creating confidence for industry entrants to navigate and structure compliant virtual asset businesses.
On November 1st, 2018, the Maltese Government enforced three acts that would provide much needed regulatory certainty for operators in the fields of Distributed Ledger Technology (DLT), cryptocurrency and other forms of virtual asset. This move also placed Malta at the forefront of industry on a global scale as it became the first jurisdiction to provide a comprehensive legal framework for the developing sector.
In March of 2018, just prior to the laws being drafted and presented to parliament, a public consultation was launched that was led by the Parliamentary Secretary, Hon. Silvio Schembri along with key stakeholders within the industry. During this time, as news of the impending legislation spread, Malta began to attract a lot of attention from foreign-based enterprises such as BitBay, OKEx, and Binance – the world’s largest cryptocurrency exchange – all of which, relocated their operations to the country.
Since the introduction of the Malta Digital Innovation Authority Act, the Virtual Financial Assets Act, and the Innovative Technology Arrangements and Services Act, interest in Malta as a destination for crypto and blockchain businesses has increased. This influx of interest in operating in the country, as well as the burgeoning local business sector led to the country being dubbed “The Blockchain Island”. Thanks to the progressive and well-structured laws laid down by the government, Malta is set to become a leading location for businesses such as exchanges, ICO start-ups, and other service providers catering to the DLT and virtual assets industry.
A pioneering Maltese company
In 2017, Dr Christian Ellul and co-founder Karl Schranz of E&S Group advised their first client who was set to launch an ICO. At this time, it was a totally unregulated market and E&S Group decided after assisting their first customer in terms of legal advice and document drafting, that they would take 3 months to dedicate to studying token distribution. Much time and money was invested in learning the technical ins and outs of token distribution and blockchain.
Technological and legal knowhow
After publicising the fact they were able to assist with ICOs, E&S Group began being inundated with requests for assistance with clients appreciating their legal plus technical know-how. Through word of about referrals, the market boomed for E&S Group in October 2017. Today, E&S Group have 8 lawyers specialising full-time in blockchain and cryptocurrency, and two tokenomics advisors; these are all fully qualified accountants that are able to advise on the financial aspect of clients’ projects. So far E&S Group have assisted in over 90 ICOs as well as other crypto and blockchain-related projects, for both local and international clients.
The impact on clients
Whilst many other countries are still unsure of how to handle ICOs and cryptocurrency, Malta is trailblazing by providing a clear framework that explains what is acceptable, how things should be categorised, and what recourse can be pursued- this is a valuable seal of approval for both Malta and the industry as a whole. With uncertainty being the biggest enemy of business, the fact that Malta offers greater certainty is vital for both the country, and businesses operating within the sphere.
A world first
Not only is E&S Group leading the way in terms of the scope and breadth of its experience in the ICO, tokenomics and blockchain sector, but it was also the first in the world to tokenise its services in the field. The group became the first of their kind to accept tokens instead of fiat currencies, in exchange for their services.
The token called “ESTS” works on a proof-of-work protocol on the Ethereum blockchain platform. Clients are able to pay for the services of the group by acquiring ESTS tokens via the platform. The project has been a success so far with clients being incredibly receptive to this new way of doing things and it also acting as something of a vote of confidence that not only do the professional services firm know about the industry, but they are implementing it into their own operations as well.
The Malta Blockchain Summit 2018
In November 2018, Malta hosted the world’s first blockchain summit to resounding success with over 8500 attendees from all over the world and around 400 businesses exhibiting their services. As well as the exhibition that took place over three days, there were a range of panels and seminars hosted by local and international stakeholders and speakers, workshops on marketing, investment and business development, and a hackathon.
Dr Karl Schranz was a panellist speaking on, “Post ICO: With Millions in the Bank, What’s Next?”, joined by distinguished speakers to include Joseph Muscat, Prime Minister of Malta, John McAfee, Founder of McAfee Crypto Team, John Matonis, Founder of Bitcoin Foundation, and Justin Sun, Founder and CEO of TRON.
What the future holds
Despite a promising start to 2018, the last two quarters have seen a decrease in the amount of ICO projects being launched locally, not just in Malta. This slow-down is due to a number of factors, notably a lack of understanding from the general public, and a lack of confidence from those that entered the market without undertaking proper due diligence and treading carefully. But E&S Group are positive that this is just a lull and that another boom, albeit a much more measured and mature one, is imminent.
As Malta’s new legislation begins to take root in the industry and other jurisdictions begin to introduce copycat legislation, it is expected that those that were previously doubtful about the industries potential will begin to view it with more legitimacy. Whilst banks (both locally and abroad) may still need some convincing, through education and a gentler approach to adoption and development, it is anticipated that 2019 will be a much smoother year.
Malta’s Blockchain Laws
The Virtual Financial Assets Act (VFA)
The introduction of the VFA will be instrumental in the fight against illicit activities such as fraud and money laundering.
The VFA specifically pertains to the regulation and monitoring of Virtual Financial Asset Offerings (ICOs) and Virtual Financial Assets (tokens, cryptocurrencies etc.). It also makes provision for ancillary matters or any connected entities or business activities. Under the definition of the Act, a cryptocurrency can be classed as a VFA and the Act lays down a specific set of rules that protect consumers and support industry growth and all stakeholders. It mentions strict requirements for those that are launching a cryptocurrency, as well as for other service providers such as brokerages, custodians, portfolio managers, eWallet providers, investment professionals, and cryptocurrency exchanges.
Under the VFA, an ICO is defined as ‘a method of raising funds whereby an issuer is issuing virtual financial assets and is offering them in exchange for funds’. The Act provides clear details on the applicable license requirements and conditions which must be adhered to by those entities that are either issuing VFAs, or who provide specific activities as stipulated within the Act.
The VFA also makes clear demands in terms of what a whitepaper should include, the fact that it should be registered, how collected funds may be used, and the required due diligence that should be carried out on all individuals behind the fund-seeking entity. It also clearly stipulates principles that apply to advertisements, virtual tokens, licensing requirements and a financial instrument test that determines whether a service falls under financial services legislation or the scope of the VFA.
For any entity to apply for a VFA License, they must do so via an accredited agent that has been approved by the MFSA. E&S Group qualify for the role and are therefore able to apply for the role on behalf of their clients as well as advise them through every step of the process and other related matters.
The Innovative Technology Arrangements and Services Act (TAS)
The TAS Act is designed to provide regulation for innovative technology arrangements (ITAs), innovative technology services (ITSs), and to exercise regulatory functions on behalf for the MDIA (Malta Digital Innovation Authority Act).
ITAs are defined as software and architectures that are utilised to design and deliver DLT platforms. They can include smart contracts and any related applications such as decentralised autonomous organisations and similar. The government has stated that the definition of what is categorised as an ITA can be extended in the future to include other arrangements. Under the Act, a technology service is described as review services that are provided by system auditors, and technical administration services that are provided by technical administrators.
The MDIA will keep a register that will be available to the public and will include all the different kinds of recognition that can be granted to applicants as well as any applicable information that is needed to identify applicants and their activities. Any individual that wants to obtain ITA or ITS recognition can apply on a voluntary basis to the Authority including all information, documentation and assurances that are required by the MDIA. Certification is then awarded based on how a range of predefined criteria is satisfied.
The Malta Digital Innovation Authority Act (MDIA)
The Malta Digital Innovation Authority will promote and develop an innovative technology industry in Malta consisting of elements including code, software, hardware, protocols, and other architectures that are used in Distributed Ledger Technology- in other words, the services that are specified by the Innovative Technology Arrangements and Services Act.
The Act will seek to promote and enforce ethical and legitimate criteria for the design and use of innovative technology arrangements and it will also harmonise practices and facilitate the adoption of standards in Malta that are in line with international norms, standards, and laws. Furthermore, it will promote transparency and auditability, an integral part of the future success of the industry.
The MDIA within its role as a regulator will be responsible for the granting, issuance, refusal, review, revocation, suspension, or cancellation of authorisations when it comes to innovative technology arrangements and services that are provided in, or from Malta.
E&S Group believe that the pursuit of these objectives will lead to increased integrity in the Maltese DLT market as well as ensuring that any measures implemented in Malta will not differ from international policies and rules. This means that both consumers and providers can benefit from increased legal certainty, especially when it comes to operations and transactions originating in or from Malta.
Blockchain and iGaming
Before the blockchain and cryptocurrency boom, Malta was well known for its online gaming industry. Over the last 14 years, the country worked hard along with the Malta Gaming Authority (MGA) to create a jurisdiction of excellence with a sterling reputation for compliance. Businesses that received a Malta gaming license could wear it like a badge of honour that demonstrated their business met the highest regulatory and legal standards. Whilst the iGaming industry is still going strong and accounts for around 12% of the country’s annual GDP, blockchain and its associated industries is set to cause quite a stir. Rather than blockchain and crypto pushing iGaming to the bottom of the pile, it is anticipated that the two industries will find a point of convergence and synchronicity.
“I think blockchain is usable for everyone in the world, including gaming that tends to lend well to blockchain. So we have certain ICOs that are funding, for example, a gaming company. We have other gaming companies that want to start using crypto currencies and basically the MGA is issuing this sandbox regulatory framework, so they really do link in well”, stated Dr. Ellul.
iGaming, eSports, and online casinos are finding that cryptocurrency and blockchain-based transactions have a wealth of benefits for their existing business models, and many are looking to integrate the technology into their operations. Rather than existing in competition with each other, it is expected that both industries will support the other and increasing levels of collaboration will be seen as both sectors continue to develop. In terms of Malta’s reputation as a jurisdiction of excellence, blockchain and crypto is just another string