On Thursday, 26^th July 2018, The Malta Chamber of Commerce Enterprise and Industry hosted an event Blockchain – The new regulatory framework. The President of the Malta Chamber of Commerce, Enterprise and Industry, Frank V. Farrugia, introduced the event by thanking the main sponsors of the event; Bank of Valletta, EMCS, and RSM Malta. There has been no doubt in Malta’s participation in welcoming Blockchain technology into the country. Mr. Farrugia points this out whilst also stating the potential impact of Blockchain on the Maltese islands, even stating that Blockchain can ‘change the future landscape of how we have been doing things in the past decade’.

 

What has Malta done to embrace Blockchain Technology?

On 4^th July 2018, the parliament has approved three legislations in regards to Blockchain; The Virtual Financial Assets Act, the Malta Digital Innovation Authority Act and Innovative Arrangement and Services Act.  Hon. Silvio Schembri is the Parliamentary Secretary for the Financial Services, Digital Economy, and Innovation who has been heavily involved in Blockchain technology. Stephen McCarthy has taken the title as the first CEO of Malta Digital Innovation Authority and will have a special focus on Blockchain technology.

Hon. Silvio Schembri has been an active member of the Blockchain community and has been actively working on ensuring that Malta becomes the Blockchain Island. He gave a great introduction to the three legislation Acts. The Acts passed through parliament on 4^th July 2018 and were published on 20^th July 2018. In his introductory speech he discussed the work that has been going on in the background to get the legislation in place and stated that with this legislation in place, Malta Financial Services Authority (MFSA) will soon be opening their doors to receiving requests.

Malta is the first country in the world to approve Blockchain legislation and it hopes that many other countries follow Malta’s example and will start formulating and approving legislation. Silvan Mifsud, who is a senior manager in Advisory Services at EMCS, pointed out that the importance of regulation for cryptocurrencies was addressed in an article from the Harvard Business Review which was published on 17^th July 2018. One may find this article under the name How Regulation could help cryptocurrencies grow of great interest on how regulatory progress can aid in supporting cryptocurrencies future. (Obie & Rasmussen, 2018)

 

 

The Virtual Financial Assets Act

Both Silvan Mifsud and Dr. Gerd Sapiano, an analyst in the Securities and Markets Supervision Unit at MFSA discussed the Virtual Financial Assets Act (VFA bill). This Act defines Virtual Financial Assets, such as cryptocurrencies and provides a set of rules which are in the interest of all parties involved. (Malta’s Virtual Financial Assets Act: a step ahead of the rest, 2018) The VFA Act delves into the reasons for setting up such an Act. Protecting the investor, market integrity and financial stability are the pinpoints close to the heart of the VFA Act and the reason it was created in the first place.

It is interesting to note that although this legislation has only been mentioned frequently after being approved in parliament, the first document as part of the works of developing this Act was actually published on 23^rd October 2017. It is known as the Consultation of the Proposed Regulation (MFSA, 2017). This Act will be supported by new roles, known as VFA Agents. These VFA agents must be registered and approved by the MFSA and act as the first line of defense. The Act provides details on the licensing details of a VFA Agent and the process of licensing an ICO (Initial Coin Offering).

 

Tools for VFA Agents

In accordance to this new Act and as a mandatory guide for VFA agents, a Financial Instrument Test has been set up. The Financial Instrument Test, as described in the Press Release published by the MFSA on 24^th July 2018 (MFSA, Press Release – Publication of the Financial Instrument Test, 2018), was set up so that it may be used to identify whether a DLT asset falls under this VFA Act. The main components of this test questions whether the asset is an electronic monetary asset, a financial instrument or a virtual token. If it does not fall in either of these categories, it passes as a VFA asset and thus falls under the Virtual Financial Assets Act. The MFSA encourages the general public to view the Financial Instrument Test and input their feedback by 13^th August 2018. It is important to note that offenders of the Financial Instrument Test are liable to penalties of up to 150,000 euros for each individual breach.

Silvan Mifsud continues on Dr. Gerd Sapiano’s overview and delves into more detail regarding the different licensing classes of the Virtual Financial Assets Act, each succeeding class granting more rights than that preceding it. VFAA class 1 is for receiving and sending VFAs. Class 2 allows VFA services whilst not allowing VFA exchange or using own account whilst Class 3 allows any VFA service except for VFA exchange. Finally, VFAA class 4 allows for any VFA service including VFA exchange. (WH Partners, 2018)

 

Malta Digital Innovation Authority Act

Gordon Micallef, a Partner from RSM Malta, gave an overview of the Malta Digital Innovation Authority Act. The Malta Digital Innovation Authority Act’s purpose is to serve as a guide for the Malta Digital Innovation Authority (MDIA) to define the roles of Technology Administrators and Service Auditors. The MDIA defines these key people with the responsibility of ensuring the Blockchain DLT platform’s integrity by checking whether regulation is adhered to.

The MDIA approves a list of Service Auditors and Technology Administrators. For complete transparency, this list will be published. The registration of the System Auditor will be valid for two years whilst the registration of the Technology Administrator will be valid for three years. The roles within the MDIA will be expected to take their responsibilities in ensuring complete platform integrity. Fines of a maximum of 350,000 euros and a maximum daily infringement of 12,000 euros may be issued.

 

Innovative Technology Arrangement and Services Act

Listening to Gordon Micallef’s presentation, there was no doubt that Mr. Micallef does not only have a financially sound background but also is knowledgeable in Information Technology aspects. Mr. Micallef gave us an overview of the Malta Digital Innovation Authority Act and the Innovative Technology Arrangement and Services Act in great detail.

The Innovative Technology Arrangement and Services Act’s main scope is to regulate how Innovative technology is set up. It will define certain criteria such as whether it will be of distributed, decentralized, shared or replicated nature (how the data is shared within a network). This Act will note whether the innovative technology will be public, private or a hybrid of the two. It is essential that this Act ensures that the Innovative technology will be immutable (cannot be changed) and auditable – an essential need to protect the consumers and investors. (The Malta Digital Innovation Authority Act, 2018)

Together, these three acts will act as pillars towards creating a new future for Malta and Blockchain in general. Given a proper foundation to regulate and ensure the integrity of a blockchain will enhance future development, allowing the consumers and investors the comfort of safety and protectiveness, whilst maintaining a high level of trust, which is the heart of Blockchain itself.

 

If Blockchain is so safe, why aren’t banks embracing this technology?

The final presentation of the information session was given by Mr. Kenneth Farrugia, the Chief Business Development Officer from Bank of Valletta plc. It is common knowledge that banks have not been too forthcoming with embracing the new technology that Blockchain has to offer. Mr. Farrugia pointed out that banks are not anti-blockchain but rather taking a cautious standpoint. With the proper regulation in place, banks may be more open to accepting Blockchain and other innovative technology. Obviously, Mr. Farrugia can only speak on behalf of Bank of Valletta, but the concerns of BOV are a shared concern for all banks.

One of the main reasons that Bank of Valletta is taking a cautious stand to DLT is the cybersecurity risks and the threats to exchange. We cannot deny that there have been several threats which do not provide the bank or the clients a level of safety. Bank of Valletta, as with all banks, function on a level of trust as expected by their clients. Without taking charge of the cybersecurity risks, the level of trust would be severely compromised.

Another concern is that banks require ownership of transactions which have taken place. Since blockchains have previously been highly unregulated, it would not be easy to check for ownership of transactions (finding the transaction origin/source and the transaction target). When a client requests understanding the flow of transactions, the banks need to be able to provide this information in an easy manner.

However, given that Malta has taken a step forward in providing the proper foundation for Blockchain legislation, we might be seeing BOV embracing this technology in the near future. However, one may ask why a bank would even need DLT. If banks resist embracing DLT, they may face the threat of disintermediation where clients might avoid banks altogether. We are already seeing this in the use of Revolut, where people are avoiding banking systems by using Revolut cards for their financial transactions. Making use of DLT in a banking environment might stem from a business decision to keep clientele high.

 

How will a bank use DLT?

There are many cases where a bank may make use of Distributed Ledger Technology. One of the examples given was to increase user experience which can be heightened given the high level of trust which DLT promises. Another benefit of using DLT in a banking environment would be operations efficiency and cost savings. The final benefit mentioned was the regulatory aspect. By securing blockchain, banks can find it easier to keep abreast to regulations and issuing of fines.

Apart from the best-case scenarios from the use of DLT, Mr. Farrugia also offered some use cases where DLT could be used in the banking environment. These use cases include settlement of payments, which could amount to some very large cost savings. Another use case example is for customer identification and KYC solutions. Opening a bank account can be a lengthy and daunting process. With the use of DLTs, opening bank accounts would take far less time and the estimated savings would be $60 million per year. The third use case provided was for payments solutions. When money is transferred from one bank to another, payments generally takes 1-2 business days. DLTs have the potential in minimizing this time wasted. The fourth use case is trade finance. Finally, the fifth use case provided is for syndicated loans (loans which have more than one lender) where Blockchain can facilitate the costs (both in terms of finances and time).

It is interesting to note that one bank is already welcoming blockchain. Mr. Roderick Psaila was available during the discussion panel and answered many queries regarding ArgiBank’s acceptance of Blockchain and stated that he is looking forward to seeing other banks also taking the leap.

Overall, this information session was a fruitful session where the speakers were well-versed in the new legislative process and what it entails, and the impact of DLT’s on banking environments.

 

References

Malta’s Virtual Financial Assets Act: a step ahead of the rest. (2018, June 14). Retrieved from BDO Malta: https://www.bdo.com.mt/en-gb/news/2018/malta%E2%80%99s-virtual-financial-assets-act-a-step-ahead-of-the-rest

MFSA. (2017, October 23). Consultation on the Proposed Regulation of Collective Investment Schemes investing in Virtual Currencies. Retrieved from MFSA: https://www.mfsa.com.mt/pages/readfile.aspx?f=/files/Announcements/Consultation/2017/20171023_VCFunds_PIFs_ConsDoc.pdf

MFSA. (2018, July 24). Press Release – Publication of the Financial Instrument Test. Retrieved from Ganado Advocates: http://www.ganadoadvocates.com/wp-content/uploads/2018/07/20180724_PressRelease_FITest.pdf

Obie, S. J., & Rasmussen, M. W. (2018, July 17). How Regulation Could Help Cryptocurrencies. Retrieved from Harvard Business Review: https://hbr.org/2018/07/how-regulation-could-help-cryptocurrencies-grow

The Malta Digital Innovation Authority Act. (2018, May 28). Retrieved from Chambers and Partners: https://www.chambersandpartners.com/article/3696/the-malta-digital-innovation-authority-act

Thomson Reuters 2016 Know Your Customer Surveys Reveal Escalating Costs and Complexity. (2016, May 9). Retrieved from Thomson Reuters: https://www.thomsonreuters.com/en/press-releases/2016/may/thomson-reuters-2016-know-your-customer-surveys.html

WH Partners. (2018, July). Retrieved from MFSA issues consultation document on The Virtual Financial Assets Regulations: http://whpartners.eu/news/mfsa-issues-consultation-document-on-the-virtual-financial-assets-regulations/