The Virtual Financial Assets Act , 2018 (VFAA Bill) was tabled in parliament on Tuesday, 24 April 2018 by Parliamentary Secretary for Financial Services, Digital Economy & Innovation Hon. Silvio Schembri MP. The Bill is currently going through the parliamentary process. Procedurally, a bill is suppose to go through three readings in which members of parliament will debate and may proposal amendment before it is forwarded to the President for ascension and subsequent Gazette-ment by the responsible minister.
In response to my queries on the Bill, which I sent to the Communication Department of Office of the Prime Minister, Nigel Vella, a government spokesperson attached to the office aptly summarized the primary intention in presenting the bill regulating ICO was the protection of investors from possible abuse. In his words “the need for regulation and investor protection is an urgent necessity. The proposed law outlines the requirements when offering VFAs to the public, including obligations when presenting advertisements and ensuing liability should any statements used be misleading, inaccurate or inconsistent. The obligations that the Bill will be requiring in the Whitepaper will offer clarity to potential investors on the proposed project, while instilling trust and legitimacy in the minds of investors to fund it.”
It is thus important to read or analyse the bill in the wider context of the Maltese government intention of turning Malta as a digital innovation hub through training, investment, incentive and development of legal framework. This bill and two other related bills will thus provide the legal certainty that is advocate by the preponderant sections of the actors in the space.
Summary of the Act
Despite the breadth of the law, its various touchpoints can broadly be grouped under four target areas in terms of application. The Bill addresses regulation of virtual tokens in eleven parts, namely,
- Preliminary – This section provides definition of terms in relation to Distributed Ledger Technology, Assets and administration. As we are yet to have standardized definitions of terms in relations to the concepts, processes and technologies involved in the space, the Act’s definitions of terms will in effect be contributing to formalization of terms and will inform the efforts of standard bodies such as the British Standard Institution (BSI) who are reportedly in the consultative process of developing such definitions.
However, we expect critical review of the definitions provided as legal and technology experts study the Act in detail and as the technology continues to evolve and acquire wider applications and usage. Changes of definitions terms is pragmatically anticipated by the drafters as the Minister responsible is accorded powers to amend the definitions as and when required (38(1)(a).
- Part II Initial VFA Offerings – This section provides the Act’s requirement for the registration of virtual financial assets to trading on a DLT exchange. These requirements include the registration of a whitepaper which satisfies the Act’s provisions for a whitepaper; a website that is in compliance with rules to be set by a competent authority; advertisement of the offering to be consistent with the provision of the Act; Appointment of an independent Virtual Financial Asset Agent as outlined by the Act (Article 7); principles which the issuer has to abide with; civil liabilities of the issuer for misstatements in whitepaper, advertisement and website; and the powers of the competent authority.
- Part III Licensing Requirements – This section outlines the licensing and determination of application requirements including the powers of the competent authority in determining the nature of the token (if it is a virtual financial asset, a financial instrument, or a virtual token) and if the token is issued and or made in or from within Malta.
- Part IV Application, Grant, Cancellation, etc., of Licences – This section outlines who is allowed to make the application (VFA Agent only); the VFA Agent qualifications, applicable restrictions and their supervision; factors determining issuance and or refusal of license; designation of license as a revocable privilege which cannot be transferred without prior consent of the competent authority and the authority’s powers in granting refusing, varying, cancelling or suspending a licence.
- Part V Board of Administration and Obligations of Licence Holders – This section outlines the requirement of compliance with the Prevention of Money Laundering Act (AML Act) including compliance with prudential requirements as defined; the qualities, governing principles and responsibilities (including fiduciary obligation toward its customers) of the issuers Board of Administration; consent requirements for participation in a license holder, mergers, reconstructions, divisions and changes in capital or voting rights, and disposal of business.
- Part VI Prevention of Market Abuse – This section outlines the jurisdiction scope of prohibition of market abuse; details on various types of market abuse including insider trading, unlawful disclosure of inside information, market manipulation; the placement of systems, procedures and arrangements to monitor and detect abuse in the VFA Exchange which administer trading admission; to suspend and or discontinue VFA on VFA Exchange; the power of the competent authority to introduce test for issuers, VFA Agents and .
- Part VII Regulatory and Investigatory Powers – This section outlines the various powers of the responsible Minister; the powers of the competent authority which includes powers to require information, appoint inspector where required, issue directives, protect the interest of the public, right of entry, impose an Administrative Penalty of not more than €150,000 for each infringement of the provisions of the Act or rules established thereunder;
- Part VIII Duty of Auditors – This briefly sketch the duties of auditor appointed by the licence holder to report immediately fact or decision that may constitute material breach of applicable regulations; report annually to the competent authority on the licence holder’s systems and security access protocols; waiver of the duty of professional secrecy in relation to their reporting obligation.
- Part IX Appeals, Remedies, Sanctions and Confidentiality – This section provides right to an appeal to a Tribunal against directive, notices, decisions administrative penalties made under the Act as provided under article 21 of the Malta Financial Services Authority; it also defines the powers of the court in relations to applications made by competent authority, definition of offences and penalties under the Act.
- Part X Miscellaneous Provisions – This section briefly outlines applicable exclusion of liability of the competent authority; validity of notices; requirement of operating in other European Member States (EEA); cooperation of the competent authority with ESAs and other regulatory agencies.
- Part XI Transitory Provisions – Provide 6 months to those issuing VFA to prepare and register a whitepaper; one month to VFA to register; 12 months for those seeking to provide VFA services.
From the pronouncements of the Maltese officials, it is clear that their intention is to provide a safe, reliable and legally predictable environment for the emerging DLT technology to flourish. The impact of this comprehensive regulatory framework on the actual location of projects in Malta is yet to be established and more will depend on the position that will be taken in the EEA area and other competing jurisdictions.
The Act is not very clear on regulation of pre-ICO crowd funding for a proposed project (Presale Stage). This is either assumed to fall under the perimeter of existing regulations (different categorization of client under MiFID or a private matter between individuals contemplating a business not yet offered to the public hence outside the perimeter of existing and or the VFA Act.
What is however clear, is the fact that compliance with the regulation will require potential issuers of virtual assets to prepare better. From the preparation of the whitepapers, to diligent selection of principal actors in a project to the initial outlays to cover for all the required additional service providers (the Virtual Finance Asset Agent, Auditors) over and above the normal legal, technical and financial service providers, project founders have their homework cut.
One can argue that the Act will effectively remove from the space all fraudulent impostors and unqualified dreamers from the space and provide legal certainty for those interested to join the buzz but fearful of falling victim to fraudster.