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Blockchain - The Regulatory Framework

Event done at the Chamber of Commerce on the 26th July

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Blockchain The
new regulatory
framework
Thursday 26th July
Frank V. Farrugia
President
Malta Chamber of Commerce,
Enterprise and Industry
Silvio Schembri
Parliamentary Secretary
Financial Services, Digital
Economy and Innovation
Gerd Sapiano
Analyst
Securities & Markets Supervision
Unit, MFSA
THE REGULATORY
FRAMEWORK FOR VIRTUAL
FINANCIAL ASSETS
GERD SAPIANO
26 JULY 2018
THE MFSA’S REGULATORY APPROACH

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Blockchain - The Regulatory Framework

  • 2. Frank V. Farrugia President Malta Chamber of Commerce, Enterprise and Industry
  • 3. Silvio Schembri Parliamentary Secretary Financial Services, Digital Economy and Innovation
  • 4. Gerd Sapiano Analyst Securities & Markets Supervision Unit, MFSA
  • 5. THE REGULATORY FRAMEWORK FOR VIRTUAL FINANCIAL ASSETS GERD SAPIANO 26 JULY 2018
  • 7. VARYING APPROACHES IN DIFFERENT JURISDICTIONS UNREGULATED ENVIRONMENT E.G. CHINA BAN E.G. ABU DHABI, AUSTRALIA, CANADA, FRANCE, GERMANY, GIBRALTAR, HONG KONG, JAPAN, LITHUANIA, MALTA, RUSSIA, SINGAPORE, SOUTH KOREA, SWITZERLAND, UK & USA REGULATORY FRAMEWORKS
  • 8. …WHY REGULATE? “TO DEVISE A POLICY FRAMEWORK THAT SUPPORTS THE INNOVATION AND NEW TECHNOLOGIES FOR FINANCIAL SERVICES IN THE AREA OF VIRTUAL CURRENCIES WHILST ENSURING EFFECTIVE INVESTOR PROTECTION, FINANCIAL MARKET INTEGRITY AND FINANCIAL STABILITY.” MFSA DISCUSSION PAPER ON INITIAL COIN OFFERINGS, VIRTUAL CURRENCIES AND RELATED SERVICE PROVIDERS
  • 9. …REGULATORY OBJECTIVES? - ENSURING INVESTOR PROTECTION - PROMOTING MARKET INTEGRITY - SAFEGUARDING FINANCIAL STABILITY
  • 10. INVESTOR PROTECTION THE ABSENCE OF REGULATION MAY CREATE A DEFICIENCY IN INVESTOR PROTECTION, GIVEN THE INFORMATION ASYMMETRY BETWEEN PARTIES. THE LACK OF A STRONG REGULATORY FRAMEWORK BRINGS ABOUT A GREATER RISK OF FINANCIAL CRIME.
  • 11. ENSURING INVESTOR PROTECTION THE FRAMEWORK WHICH IS BEING PROPOSED AIMS TO ENSURE INVESTOR PROTECTION INTER ALIA BY: - SUBJECTING OPERATORS IN THE FIELD OF VIRTUAL CURRENCIES TO FITNESS AND PROPERNESS ASSESSMENTS; - PROVIDING REQUIREMENTS WHICH SAFEGUARD CLIENTS’ ASSETS; - SETTING OUT MINIMUM TRANSPARENCY REQUIREMENTS.
  • 12. MARKET INTEGRITY A LACK OF REGULATION ALSO CREATES THREATS TO MARKET INTEGRITY AND POTENTIAL MARKET ABUSE DUE TO POSSIBLE DEFICIENCIES IN GOVERNANCE STRUCTURES AS WELL AS RISK AND COMPLIANCE POLICIES AND PROCEDURES.
  • 13. PROMOTING MARKET INTEGRITY THE PROPOSED LEGAL FRAMEWORK WILL: - CATER FOR INCREASED TRANSPARENCY REQUIREMENTS; - REPLICATE THE HIGH LEVEL PRINCIPLES OF THE MARKET ABUSE REGULATION; AND - IMPOSE REQUIREMENTS WHICH EXTEND BEYOND THE FIFTH ANTI-MONEY LAUNDERING DIRECTIVE
  • 14. FINANCIAL STABILITY THE LACK OF REGULATION POTENTIALLY LEADS MARKET PARTICIPANTS TO REDUCE THEIR ECONOMIC CAPITAL WHILST SHIFTING TOWARDS RISKIER BALANCE SHEET PROFILES TO MAXIMISE SHAREHOLDER VALUE
  • 15. SAFEGUARDING FINANCIAL STABILITY THE REGULATORY FRAMEWORK BEING PUT FORWARD BY THE MFSA, INTER ALIA: - - - PROVIDES FOR A WATERTIGHT SEGREGATION OF VFA BUSINESS FROM TRADITIONAL FINANCIAL SERVICES BUSINESS IN ORDER TO MITIGATE ANY RISK; - ENSURES THAT OPERATORS FOLLOW PRUDENTIAL REQUIREMENTS WHICH ENSURE THAT MARKET PARTICIPANTS DO NOT REDUCE THEIR ECONOMIC CAPITAL OR SHIFT TOWARDS RISKIER BALANCE SHEET PROFILES IN ORDER TO MAXIMISE SHAREHOLDER VALUE: - ADEQUATE CAPITAL REQUIREMENTS - ROBUST RISK MEASUREMENT, MONITORING AND MITIGATION INCLUDING AN INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS - DEDICATED REPORTING AND DISCLOSURE REQUIREMENTS
  • 16. THE MALTESE APPROACH – A TIMELINE 23 OCT 2017 CONSULTATION ON THE PROPOSED REGULATION OF COLLECTIVE INVESTMENT SCHEMES INVESTING IN VIRTUAL CURRENCIES MFSA REF: 06-2017 EXPIRED: 17/11/2017 30 NOV 2017 DISCUSSION PAPER ON INITIAL COIN OFFERINGS, VIRTUAL CURRENCIES AND RELATED SERVICE PROVIDERS MFSA REF: 08-2017 EXPIRED: 11/01/2018 (EXTENDED TO 18/01/2018) 22 JAN 2018 FEEDBACK STATEMENT ON THE CONSULTATION ON THE PROPOSED REGULATION OF COLLECTIVE INVESTMENT SCHEMES INVESTING IN VIRTUAL CURRENCIES BILL ADOPTED BY PARLIAMENT - THE “VIRTUAL FINANCIAL ASSETS ACT” 13 APR 2018 CONSULTATION PAPER ON THE FINANCIAL INSTRUMENT TEST MFSA REF: 04-2018 EXPIRED: 04/05/2018 29 JAN 2018 SUPPLEMENTARY CONDITIONS APPLICABLE TO COLLECTIVE INVESTMENT SCHEMES INVESTING IN VIRTUAL CURRENCIES 04 JULY 2018 CONSULTATION PAPER ON THE VFA RULES FOR VFA AGENTS: MFSA REF: 08-2018 CLOSES: 31/07/2018 CONSULTATION PAPER ON THE REGULATIONS TO BE ISSUED UNDER THE VFA ACT MFSA REF: 07-2018 CLOSES: 20/07/2018 04 JULY 2018 12 JULY 2018 20 JULY 2018 PUBLLICATION OF THE VIRTUAL FINANCIAL ASSETS ACT
  • 17. THE VIRTUAL FINANCIAL ASSETS ACT
  • 18. THE VIRTUAL FINANCIAL ASSETS ACT AN ACT TO REGULATE THE FIELD OF INITIAL VIRTUAL FINANCIAL ASSET OFFERINGS AND VIRTUAL FINANCIAL ASSETS AND TO MAKE PROVISION FOR MATTERS ANCILLARY OR INCIDENTAL THERETO OR CONNECTED THEREWITH. DATE OF PARLIAMENTARY APPROVAL – 4TH JULY 2018 DATE OF PUBLICATION – 20TH JULY 2018 - ACT XXX OF 2018 DATE OF COMING INTO FORCE – ON SUCH DATE AS THE MINISTER FOR DIGITAL ECONOMY MAY BY NOTICE IN THE GAZETTE ESTABLISH
  • 20. WHAT IS A VIRTUAL FINANCIAL ASSET? "VIRTUAL FINANCIAL ASSET" OR "VFA" MEANS ANY FORM OF DIGITAL MEDIUM RECORDATION THAT IS USED AS A DIGITAL MEDIUM OF EXCHANGE, UNIT OF ACCOUNT, OR STORE OF VALUE AND THAT IS NOT - (A) ELECTRONIC MONEY; (B) A FINANCIAL INSTRUMENT; OR (C) A VIRTUAL TOKEN; VFA Act – Article 2(2)
  • 21. WHAT DOES THE VFA ACT REGULATE? - INITIAL VIRTUAL FINANCIAL ASSET OFFERINGS - VFA SERVICE PROVIDERS - VFA AGENTS
  • 22. INITIAL VFA OFFERINGS THE ACT SETS OUT THE HIGH-LEVEL PRINCIPLES APPLICABLE TO INITIAL PUBLIC OFFERINGS, THAT MUST BE ADHERED TO BY AN ISSUER OF VFAS, WHICH WOULD, INTER ALIA, INCLUDE:  MINIMUM TRANSPARENCY REQUIREMENTS;  OBLIGATIONS OF THE RELEVANT PARTIES INVOLVED;  INFORMATION WITHIN WHITEPAPER; AND  ADDITIONAL TRANSPARENCY REQUIREMENTS APPLICABLE TO VFAS TRADING ON AN EXCHANGE.
  • 23. VFA SERVICE PROVIDERS A VFA SERVICE IS ANY SERVICE (FALLING WITHIN THE SECOND SCHEDULE OF THE ACT) WHEN PROVIDED IN RELATION TO A VIRTUAL FINANCIAL ASSET. THE ACT INTER ALIA SETS OUT THE LICENSING REQUIREMENTS, ONGOING OBLIGATIONS APPLICABLE TO SUCH PERSONS, WHICH REFLECT THE HIGH-LEVEL PRINCIPLES ENSHRINED IN EXISTING EU FINANCIAL SERVICES LEGISLATION.
  • 24. VFA AGENTS WHAT IS A VFA AGENT? A PERSON REGISTERED WITH THE MFSA AND AUTHORISED TO CARRY ON THE PROFESSION OF:(A) ADVOCATE, ACCOUNTANT OR AUDITOR; OR (B) A FIRM OF ADVOCATES, ACCOUNTANTS OR AUDITORS, OR CORPORATE SERVICES PROVIDERS; OR (C) A LEGAL ORGANISATION WHICH IS WHOLLY OWNED AND CONTROLLED BY PERSONS REFERRED TO IN PARAGRAPHS (A) OR (B), WHETHER IN MALTA OR IN ANOTHER RECOGNISED JURISDICTION, OR ANY OTHERCLASS OF PERSONS HOLDING AUTHORISATIONS, QUALIFICATIONS AND, OR EXPERIENCE DEEMED BY THE COMPETENT AUTHORITY AS POSSESSING SUITABLE EXPERTISE TO EXERCISE THE FUNCTIONS LISTED UNDER ARTICLES 7 AND, OR 14 VFA ACT - ARTICLE 2(2)
  • 25. THE ROLE OF THE VFA AGENT THE VFA AGENT SHALL INTER ALIA: - GENERALLY ADVISE AND GUIDE HIS CLIENT; - PERFORM A FITNESS AND PROPERNESS ASSESSMENT PRIOR TO ONBOARDING A CLIENT; - ACT AS A POINT OF LIAISON BETWEEN THE MFSA AND HIS CLIENT; - COOPERATE WITH THE MFSA, WHERE REQUIRED; - BE CONSIDERED A SUBJECT PERSON UNDER THE PMLFTR
  • 26. FUNCTIONS AND POWERS OF THE AUTHORITY PROVISION OF THE NECESSARY REGULATORY AND INVESTIGATORY POWERS LARGELY REFLECTING THOSE UNDER OTHER NATIONAL FINANCIAL SERVICES LAWS, WHICH WOULD, INCLUDE THE POWER TO:  ISSUE DIRECTIVES;  ADOPT AND PUBLISH RULES;  REQUIRE INFORMATION;  INTRODUCE THE ‘FINANCIAL INSTRUMENT TEST’;  SUSPEND EITHER AN IVFAO OR THE TRADING OF A VFA ON AN EXCHANGE;  COOPERATE WITH OTHER NATIONAL, EUROPEAN AND INTERNATIONAL BODIES; AND  IMPOSE ADMINISTRATIVE PENALTIES
  • 27. TRANSITORY PROVISIONS ISSUERS OF VFAS ANY PERSON WHO, ON THE DATE OF THE COMING INTO FORCE OF THE ACT IS OFFERING A VFA TO THE PUBLIC OR APPLYING FOR A VFA’S ADMISSION TO TRADING ON A DLT EXCHANGE, SHALL, WITHIN THREE MONTHS FROM THE DATE OF COMING INTO FORCE OF THE ACT, DRAW UP A WHITEPAPER AND REGISTER IT WITH THE MFSA. THE TRANSITORY PROVISION APPLIES ONLY TO THOSE PERSONS WHO HAVE COMMENCED AN OFFERING OR HAVE APPLIED FOR ADMISSION TO TRADING IN TERMS OF ARTICLE 3 OF THE ACT BY NOT EARLIER THAN TWO WEEKS PRIOR TO THE COMING INTO FORCE OF THIS ACT;
  • 28. TRANSITORY PROVISIONS VFA SERVICE PROVIDERS ANY PERSON WHO, ON THE DATE OF THE COMING INTO FORCE OF THE ACT IS PROVIDING A VFA SERVICE SHALL, WITHIN TWELVE MONTHS FROM THE DATE OF COMING INTO FORCE OF THE ACT, APPLY TO THE MFSA FOR A LICENCE IN TERMS OF THE ACT. VFA AGENTS ANY PERSON WHO, ON THE DATE OF THE COMING INTO FORCE OF THE ACT IS PROVIDING THE SERVICES OF A VFA AGENT, SHALL, WITHIN ONE MONTH FROM THE DATE OF COMING INTO FORCE OF THE ACT, APPLY TO THE MFSA FOR REGISTRATION.
  • 29. TRANSITORY PROVISIONS NOTIFICATION REQUIREMENT A PERSON UNDER SUB-ARTICLE (1) MAY, SUBJECT TO A PRIOR NOTIFICATION TO THE COMPETENT AUTHORITY OF THE ACTIVITY IT IS UNDERTAKING AND, OR SERVICE OR SERVICES IT IS PROVIDING, IMMEDIATELY UPON THE COMING INTO FORCE OF THIS ACT, CONTINUE TO UNDERTAKE SUCH ACTIVITY OR PROVIDE SUCH SERVICE OR SERVICES IN OR FROM WITHIN MALTA UNTIL THE WHITEPAPER HAS BEEN REGISTERED WITH, OR THE APPLICATION HAS BEEN DETERMINED BY, THE COMPETENT AUTHORITY AND, IN SO DOING, IS NOT TO BE REGARDED AS CARRYING ON SUCH ACTIVITY OR PROVIDING SUCH SERVICE IN CONTRAVENTION OF THIS ACT.
  • 31. FINANCIAL INSTRUMENT TEST…WHY? ‘FIRMS INVOLVED IN ICOS MUST GIVE CAREFUL CONSIDERATION AS TO WHETHER THEIR ACTIVITIES CONSTITUTE REGULATED ACTIVITIES. IF THEIR ACTIVITIES CONSTITUTE A REGULATED ACTIVITY, FIRMS HAVE TO COMPLY WITH THE RELEVANT LEGISLATION AND ANY FAILURE TO COMPLY WITH THE APPLICABLE RULES WOULD CONSTITUTE A BREACH.’ EUROPEAN SECURITIES AND MARKETS AUTHORITY (ESMA50-157-828)
  • 32. FINANCIAL INSTRUMENT TEST… APPLICABILITY 1. MANDATORY REQUIREMENT UNDER THE VFAA 2. APPLICABLE TO:  POTENTIAL ISSUERS OF INITIAL VIRTUAL FINANCIAL ASSET OFFERINGS  VIRTUAL FINANCIAL ASSET LICENCE HOLDERS (INCLUDING EXCHANGES AND INVESTMENT INTERMEDIARIES  NON-LICENCED PERSONS PROVIDING A SERVICE OR PERFORMING AN ACTIVITY IN RELATION TO A DLT ASSET, IN OR FROM WITHIN MALTA
  • 33. FINANCIAL INSTRUMENT TEST… THREE STAGES 1. FIRSTSTAGE|VIRTUALTOKEN 2. SECONDSTAGE|FINANCIALINSTRUMENT 3. THIRDSTAGE |E-MONEY IF NOT: DLT ASSET WOULD QUALIFY AS A VIRTUAL FINANCIAL ASSET UNDER THE VFA ACT
  • 35. THE VFA REGULATIONS 1. EXEMPTIONS 2. FEES 3. CONTROLOFASSETS 4. ADMINISTRATIVEPENALTIESANDAPPEALS
  • 36. THE VIRTUAL FINANCIAL ASSETS RULEBOOK
  • 37. THE VIRTUAL FINANCIAL ASSETS RULEBOOK 1. CHAPTER1|VIRTUALFINANCIALASSETSRULESFORVFAAGENTS 2. CHAPTER2|VIRTUALFINANCIALASSETSRULESFORISSUERSOFVIRTUALFINANCIALASSETS 3. CHAPTER3|VIRTUALFINANCIALASSETSRULESFORVFASERVICEPROVIDERS THE RULES SHALL PROVIDE FOR THE RESPECTIVE AUTHORISATION PROCESSES, ONGOING OBLIGATIONS, AND ENFORCEMENT AND SANCTIONS IN THE CASE OF MISCONDUCT.
  • 39. NEXT STEPS - LEGISLATION – PUBLICATION OF FINAL REGULATIONS - RULES – ISSUANCE OF CHAPTER 2 AND 3 CONSULTATION AND SUBSEQUENT PUBLICATION OF THE FINAL RULEBOOK - FINANCIAL INSTRUMENT TEST – REVIEW FOLLOWING TESTING PERIOD - MFSA TO CONTINUE LIAISING WITH OTHER REGULATORY BODIES, BOTH ON A NATIONAL AND INTERNATIONAL LEVEL - FINALISATION OF APPLICATION PROCESSES
  • 40. INDUSTRY FEEDBACK & SENTIMENT NUMEROUS RESPONSES TO THE CONSULTATION & DISCUSSION PAPERS OVERALL POSITIVE FEEDBACK TO THE MFSA APPROACH 200+ MEETINGS WITH INTERESTED PARTIES
  • 43. Overview of theVirtual Financial Assets Act 26th July, 2018
  • 44. THE NEED FOR REGULATION Harvard Business Review- 17th July 2018- “How Regulation could help Cryptocurrencies Grow” “Without clear regulations, cryptocurrency innovation in the United States is being stifled. Entrepreneurs sit on the sidelines for fear of innocently running afoul of the law. Investors, meanwhile, hang back because of uncertainty regarding valuations. And the commonweal suffers, as other countries lure innovators away from the United States by creating rules that make their jurisdictions more hospitable to this growing asset class. Given the regulatory uncertainty, the United States also risks allowing fraudulent purveyors of cryptocurrencies to drive out the good. To be sure, federal and state enforcement officials have aggressively sought to stamp out fraudulent initial coin offerings (ICOs) and cryptocurrency trading platforms. But without clear and coherent guidelines to attract good actors to the U.S. market, fraudsters might push out the good actors. At least one estimate pegs the frequency of ICO scams to be as high as 80%. Although still nascent, cryptocurrencies worldwide are nevertheless on the rise, with money raised by issuers in the first half of 2018 already exceeding the amounts raised in all of 2017. Yet the growth of this 21st-century innovation is being hampered in the United States because our regulators are forced to use enforcement tools created decades ago, well before the internet took off, and in some cases even before World War II. Additionally, overlapping oversight by various agencies creates a structural barrier to change and drives up costs for creators of cryptocurrencies. This improvised approach needs to be improved.”
  • 45. OVERALL DLT REGULATORY FRAMEWORK Licensing of a DLT asset (excluding Virtual tokens) and of a VFA service provider under the VFA Act is mandatory, whilst licensing under the ITAS Act is optional.
  • 46. PROGRESSTIMELINE • October 2017 – MFSA launches consultation paper on Collective Investment Schemes investing inVirtual Currencies • January 2018 – MFSA issues rules for funds investing inVirtual Currencies • February 2018 – Government issued consultation document on the overall DLT legislation • March 2018 – MFSA issues consultation on Financial Instrument test • April 2018 – Bills are sent to parliament and Binance announce their relocation to Malta. Okex and Neufund follow in May 2018 • July 2018 – The 3 Bills are fully approved by parliament on the 4th July and the Acts are published on the 20th July • July 2018 – MFSA launches Consultation documents on VFA regulations and Rules forVFA Agents and Guidance Note on Financial Instrument test
  • 47. • No Act is yet effective.VFA Act is likely to be effective from 1st October 2017. • MFSA has to issue Rules on Issuers and VFA services providers (not just theVFA agents) • Issue of specific AML guidelines • Finalise application documents forVFA service providers • Setup and approval ofVFA agentsNo…but getting there!
  • 48. SO WHAT DOESTHEVFA ACT INCLUDE? • Definitions of what is aVirtualToken, a Financial Instrument, Electronic Money and aVirtual Financial Asset • The Financial Instrument test • The licensing and requirements and obligations of aVFA agent • Licensing Process of an InitialVFA Offering (ICO) with list of what a whitepaper needs to include in the First Schedule • The licensing of the variousVFA service providers
  • 49. DEFINITIONS DLT asset (a) a virtual token; (b) a virtual financial asset; (c) electronic money; or (d) a financial instrument, intrinsically dependent on, or utilises, Distributed Ledger Technology. VirtualToken A form of digital medium recordation whose utility, value or application is restricted solely to the acquisition of goods or services, either solely within the DLT platform on or in relation to which it was issued or within a limited network of DLT platforms: Provided that the term ''DLT platform'' referred to in this definition shall exclude DLT exchanges: Provided further that a virtual token which is or may be converted into another DLT asset type shall be treated as the DLT asset type into which it is or may be converted.
  • 50. DEFINITIONS Third Schedule of the Financial Institutions Act defines "Electronic Money" means electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions….. and which is accepted by a natural or legal person other than the financial institutions that issued the electronic money. "Virtual Financial Asset" or "VFA" means any form of digital medium recordation that is used as a digital medium of exchange, unit of account, or store of value and that is NOT: (a) electronic money (b) a financial instrument (c) a virtual token
  • 51. Financial InstrumentTest Does the DLT asset qualify as aVirtual token as per definition in theVFA Act? Does the DLT asset qualify as aTransferable Security under MiFID? Does the DLT asset qualify as a Money Market Instrument under MiFID? Does the DLT asset qualify as a unit in a Collective Investment Scheme? Does the DLT asset qualify as a Financial Derivative under MiFID? Does the DLT asset qualify as an Emissions Allowance under MiFID? If yes If yes If yes If yes If yes If yes Determination of FI (MifID) If No If No If No If No If No Determination ofVirtual Financial Asset (VFA Act) Exempt Does DLT asset have features of Instrument of Payment? If No Determination of Electronic Money if it fulfills Electronic Money Checklist (Financial Institutions Act) If yes If No
  • 52. EXAMPLE OF FINANCIAL INSTRUMENTTEST –VIRTUALTOKEN i. EXCHANGEABILITY Virtual Token should remain exchangeable either solely within the DLT platform on or in relation to which it was issued or within only a limited network of DLT platforms ii. PURPOSE VT should be a form of digital medium recordation whose utility, value or application is restricted solely to the acquisition of goods or services.
  • 53. EXAMPLE OF FINANCIAL INSTRUMENTTEST –TRANSFERABLE SECURITY i. EXCHANGEABILITY The first criterion to be assessed is the negotiability of a DLT asset on the capital markets. Therefore, it has been established that such a feature is a sine qua non for a DLT asset’s classification as a Transferable Security. In this respect, the Test also considers whether the transferability of the DLT asset is restricted solely to the issuer, given that only under such a scenario would the DLT asset be considered as non-transferable. For the purposes of this determination, the negotiability feature shall also apply to DLT assets which have not yet been issued, should such assets be designed to be negotiable on the capital market upon issuance. II. RIGHTS A DLT asset’s qualification as a Transferable Security is further subject to the assessment of the rights attached to it in order to determine whether these effectively render such DLT asset akin to a share in a company, partnership or other entity, and depository receipt in respect of share/s, or bond or other form of securitised debt or gives the right to acquire or sell any such Transferable Securities or gives rise to a cash settlement determined by reference to, inter alia,Transferable Securities.
  • 54. VFA AGENT UNDERTHEVFA ACT • Regulated by Article 7 (Issuing of ICO) andArticle 14 (Application of a service licence) of theVFA Act • The main role of the VFA agents is twofold i.e. to act as a guide to the VFA issuer or VFA service provider applicant, but also to act as a first filter for the regulator. Be also a point of liaison between MFSA and client • VFA agents have a pivotal role to play in the AML/KYC process being a subject person for PLMFTR • "VFA agent" means a person registered with the competent authority under this Act and authorised to carry on the profession of: (a) advocate, accountant or auditor; or (b) a firm of advocates, accountants or auditors, or corporate services providers; or (c) a legal organisation which is wholly owned and controlled by persons referred to in paragraphs (a) or (b), whether in Malta or in another recognised jurisdiction, or any other class of persons holding authorisations, qualifications and, or experience deemed by the competent authority as possessing suitable expertise to exercise the functions listed under articles 7 and, or 14; • Transitory provision “VFA agent within the meaning found under this Act, shall, within one month from the date of coming into force of this Act, apply to the competent authority for registration in terms of article 7”
  • 55. PROPOSED RULES –VFA AGENT • VFA agent shall propose 2 designate persons + Money Laundering reporting Officer • VFA Agent required to have an initial and on-going capital of 50,000 EUR • Obtain a Professional Indemnity Insurance (Optional) • Insurance policy that covers loss of money or loss or damage to any other asset or property belonging to the VFA Agent or which is in the care, custody or control of the VFA Agent or for which the VFA Agent is responsible. (Mandatory) Registration Process • Preparatory Phase: Notify Authority of its intention, in writing, of intention to offer VFA agent service. To include description of proposed structure and whether registration is needed as VFA agent under article 7 or article 14 or both. MFSA will then schedule a mandatory meeting with applicant and by not later than 60 days from this meeting, the applicant is to submit an application document with all supporting documents, plus pay the application fee when submitting this application. • Pre-registration Phase: After review of application by MFSA will issue an ‘in principle Registration’ valid for 3 months. During these 3 months, the applicant needs to settle any outstanding issues raised during application process.
  • 56. PROPOSED RULES –VFA AGENT • TheVFA Agent shall be required to prepare and submit to the MFSA, on an annual basis, a Compliance Certificate in relation to the Issuer. Provided that where there have been any breaches of the Act, the Regulations or these Rules, theVFA Agent is required to include a statement regarding such breaches in the Compliance Certificate.The Compliance Certificate should further include a confirmation that: (i) All the local AML/CFT requirements have been satisfied, which confirmation should be obtained from the Issuer’s MLRO ; and (ii) the Issuer’s Innovative Technology Arrangement complies with any qualitative standards set and guidelines issued by the Malta Digital Innovation Authority applicable to the particular type of arrangement (irrespective of whether the said arrangement holds a certification or a ruling of eligibility under the Innovative Technology Arrangements and Services Act), which confirmation should be obtained from the Issuer’s Systems Auditor .
  • 57. VFA AGENT - IMPORTANT • Fitness and Properness • Substance in Malta • Adequate Due Diligence Systems (higher level than for traditional finance) with a robust KYC and cyber security systems and controls. • Knowledge on different business models • Liable forAdministrative penalties of up to 150,000 EUR for each infringement • In case of a convicted criminal offence liable to 500,000 EUR fine and/or imprisonment of up to six months • Importance of record keeping, especially for annual certificate and backing of FI test, which has to be confirmed byVFA agent (signed) • VFA Agent as part of the AML/CFT obligations is to ensure that with regards the client there is proper identification and verification; ongoing monitoring; know well the source of funds/wealth (especially if this source is crypto currencies)
  • 58. INITIAL VFA OFFERING (ICO) It is mandatory to have any initial virtual financing offering (ICO) by a Maltese entity to be registered under theVFA Act by: - Drawing up a whitepaper and have it delivered to MFSA at least 10 working days before the intended publication date. This whitepaper needs to include the very extensive list of items included the First Schedule of the Act. (Very few I have seen for far comply with such a list) - Appoint a VFA Agent which will guide the issuer on drawing up this whitepaper and be the only point of contact between the issuer and the MFSA. Such VFA agent will also be responsible to do all KYC and due diligence procedures on the issuer. VFA agent also needs to submit to MFSA on an annual basis a certificate of compliance on behalf of the issuer. - Transitory Provision: Undertaking an activity in terms of article 3 (i.e Initial VFA offering), within three months from the date of coming into force of this Act, draw up a whitepaper and register it with the competent authority in terms of the said article, provided that this paragraph shall be applicable only to those persons who have commenced an offering or have applied for admission to trading in terms of article 3 by not earlier than two weeks prior to the coming into force of this Act - Minimum transparency requirement and additional transparency requirement if trading on a VFA exchange
  • 59. LICENSING OF SERVICE PROVIDERS TheVFA Act lists the following types of service providers: - Reception andTransmission of Orders - Execution of orders on behalf of other persons - Dealing on own account (Trading against proprietary capital) - Portfolio Management - Custodian and Nominee Services (Wallet Providers) - Investment Advice - Placing ofVFAs - Operation of aVFA Exchange Transitory Provision: is providing aVFA service within the meaning found under this Act shall, within twelve months from the date of coming into force of this Act, apply to the competent authority for licence in terms of article 14.
  • 60. SERVICE PROVIDERS – PROPOSED REGULATIONS UNDER THE VFA ACT Exemptions from needing any service licence under included in the proposed regulation. Some interesting exemptions include: • Persons dealing on own account in terms of the Act and not providing any other VFA services or performing any other activities in virtual financial assets unless such persons: i. are market makers; or ii. deal on own account when executing client orders; For purposes of this exemption, dealing on own account shall mean the trading by a person in its own name and transactions in one or more virtual financial assets. This exemption shall not be automatically operative but their applicability shall be subject to the determination in writing by the competent authority that the requested exemption applies. • Persons which provide VFA services exclusively for their parent companies, for their subsidiaries or for other subsidiaries of their parent undertakings. Any person who intends to apply this exemption shall notify the authority thereof, prior to the application of such an exemption. • Collective investment schemes licenced under the Investment Services Act or otherwise authorised by a European regulatory authority, providing services in Malta in exercise of a European right.
  • 61. SERVICE PROVIDERS – PROPOSED REGULATIONS UNDER THE VFA ACT TheVFA Service licences listed under the regulation are: VFAA Class 1 Licence holders authorised to receive and transmit orders and, or provide investment advice in relation to one or more virtual financial assets and, or the placing of virtual financial assets. VFAA Class 2 Licence holders authorised to provide any VFA service and to hold or control clients’ money, but not to operate aVFA exchange or deal for their own account. VFAA Class 3 Licence holders authorised to provide any VFA service and to hold or control clients’ money, but not to operate aVFA exchange. VFAA Class 4 Licence holders authorised to operate a VFA exchange and to hold or control clients’ money, virtual financial assets and, or private cryptographic keys and custodian or nominee services solely in relation to the operation and activities of suchVFA exchange.
  • 62. AML IN THE CRYPTO WORLD – 5TH AML DIRECTIVE DIRECTIVE (EU) 2018/843 OFTHE EUROPEAN PARLIAMENT AND OFTHE COUNCIL of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU (commonly known as the 5th AML directive) states: (8) Providers engaged in exchange services between virtual currencies and fiat currencies (that is to say coins and banknotes that are designated as legal tender and electronic money, of a country, accepted as a medium of exchange in the issuing country) as well as custodian wallet providers are under no Union obligation to identify suspicious activity. Therefore, terrorist groups may be able to transfer money into the Union financial system or within virtual currency networks by concealing transfers or by benefiting from a certain degree of anonymity on those platforms. It is therefore essential to extend the scope of Directive (EU) 2015/849 so as to include providers engaged in exchange services between virtual currencies and fiat currencies as well as custodian wallet providers. For the purposes of anti-money laundering and countering the financing of terrorism (AML/CFT), competent authorities should be able, through obliged entities, to monitor the use of virtual currencies. Such monitoring would provide a balanced and proportional approach, safeguarding technical advances and the high degree of transparency attained in the field of alternative finance and social entrepreneurship. • Reference is just for Crypto-to-Fiat and Fiat-to-Crypto exchanges, with no mention of any other VFA service providers
  • 63. 5TH AML DIRECTIVE – TRANSPOSITION IN MALTA • Understanding that the 5th AML did not capture the fast pace of this industry and thus did not go far enough in including all possible players (as already included in theVFA Act). • With Malta being a forerunner in this industry it would make sense to include VFA issuers,VFA agents andVFA service providers (exchanges, market makers dealing on own account) when transposing the 5th AML directive and thus go beyond what is included in the 5th AML directive. • Then FIAU would proceed to issue the corresponding implementing procedures.
  • 64. ULTIMATE AIM To have a robust regulatory framework that make sure that…… ……the bad apples do not make it into Malta’s fintech industry.
  • 65. EMCS Regional BusinessCentre Level 2 University Heights Msida MSD 1751 Malta Tel: +356 2777 2777 Mob: +356 79430077 Your Contact Silvan Mifsud Senior Manager silvan.mifsud@emcs.com.mt
  • 66. Panel Discussion - The interaction of the Banking World with Cryptocurrencies and ICOs
  • 70. OVERVIEW OF THE MDIA AND ITAS ACTS Malta Chamber of Commerce, Enterprise and Industry 26th July 2018 Advisory
  • 71. DLT Regulatory Framework The trident of laws • The Maltese Government has approved and enacted 3 acts to set up a regulatory framework for Distributed Ledger Technologies (DLT); which feature the regulation of merit, affiliation strategies and mandatory disclosure requirements. • Acts approved on the 20th July 2018 - The Innovative Technology Arrangements and Services Act (The ITAS Act) - The Virtual Financial Assets Act (The VFA Act) - The Malta Digital Innovation Authority Bill (The MDIA Act)
  • 72. DLT Regulatory Framework Offerings of VFAs, Service Providers in the VFA space, Licensing requirements and obligations of ICO issuers or those providing services to an ICO, Implementation of financial instrument tests, Minimum disclosure requirements for ICO whitepapers, Controls on marketing and advertisement of VFAs. Certification of Innovative Technology Arrangements, Registration of Innovative Technology Service Providers, Principles and requirements for certification and registration, Outsourcing of auditors, Appointment of resident agents, Guiding principles for the MDIA (Authority) to support the development of innovative technology arrangements in Malta, Establishment and composition of the Authority, Purposes, functions and powers of the Authority, Infringements & Fees, Granting or refusing innovative technology authorisation. VFA ACT ITAS ACT MDIA ACT
  • 74. DLT Regulatory Framework The ITAS Act Act No. XXXIII of 2018 Overview • The ITAS Act provides a regulatory framework for innovative technology arrangements and innovative technology services. • The Act takes into consideration the regulatory functions of the MDIA with regards to the said arrangements and services. • Primarily, the purpose of the Act is to lay grounds on which authorisation of an arrangement or service shall be granted by the MDIA. • The authorisation is on a voluntary basis.
  • 75. DLT Regulatory Framework The ITAS Act Scope • The ITAS Act focuses on the Innovative Technology Arrangements and Innovative Technology Service providers which seek authorisation by the MDIA. • The ITAS Act should be followed with special regard to the MDIA Act, especially in relation to grants or refusal of innovative technology authorisations.
  • 76. DLT Regulatory Framework The ITAS Act Part I Definitions Part II Principles of Recognition Part III Certification of Innovative Technology Arrangements Part IV Registration of Service Providers Part V Miscellaneous Provisions (with regards to the duties of applicants and application holders, the Power of the Minister, transparency obligations of the MDIA and the role of a resident agent) The First an Second Schedule Definition of Innovative Technology Arrangements and Innovative Technology Services The Third Schedule Definition of periods of validity for the authorisation of the aforementioned arrangements/services The Fourth Schedule Definition of terms specified in Article 8, 4(a) of the Act, which discusses requirements for authorisation of an innovative technology arrangement specific to legal organisations
  • 77. DLT Regulatory Framework The ITAS Act Grounds for Classification of an Innovative Technology Authorisation* First Schedule - Innovative Technology Arrangements Software/Architectures which are used in designing and delivering DLT, which may; a) Use a distributed, decentralized, shared and, or replicated ledger; b) Be public or private or hybrids thereof; c) Be permissioned or permission-less or hybrids thereof; d) Be immutable; e) Be protected with cryptography; and f) Be auditable; Smart Contracts and related applications, including decentralised autonomous organisations, as well as other similar arrangements; Any other innovative technology arrangement which may be designated by the Minister, on the recommendation of the Authority by notice from time to time. Type of Authorisation (Third Schedule) Certification of Innovative Technology Arrangement – Valid for 3 years
  • 78. DLT Regulatory Framework The ITAS Act Grounds for Classification of an Innovative Technology Authorisation* Second Schedule - Innovative Technology Services Review services by system auditors regarding arrangements referred to within this Act. Technical administration services provided by technical administrators with reference to arrangements within this Act. Type of Authorisation (Third Schedule) Registration of System Auditors – Valid for 2 years or, Registration of Technical Administrators – Valid for 3 years. *These are soft classifiers. The Act lists types of DLT platforms for which the Authority may make an exception and adapt around these classification grounds in cases of uncertainty.
  • 79. DLT Regulatory Framework The ITAS Act Part II – Principles of Recognition Eligibility of Recognition • No type or class of an arrangement or service shall be eligible for recognition if it does not meet the requirements in Schedules 1 & 2, unless the following hold true; - There is reasonable doubt as to whether an arrangement/service has the functions and/or characteristics or falls in a category defined in the Schedules, - Absolute certainty cannot be obtained as to whether the arrangement/service is sufficiently similar in scope and functionality to any of those defined in the Act, - The arrangement includes, but does not solely consist of an agreement or service. Procedures for Applicants • Applicants shall be able to apply through the forms provided by the MDIA, or, • If these are not available, through an application in writing to the Authority, • All information required by the Authority for the purpose of granting certification/registration should be provided with the application.
  • 80. DLT Regulatory Framework The ITAS Act Part II – Principles of Recognition Register of recognitions • An electronic Register of recognitions (hereinafter “the Register”) should be maintained by the Authority. • The Register should be divided into parts as necessary to represent the different types of recognition and populated with all recognitions issued under this Act and the MDIA Act. • The Register shall provide all information, that the Authority deems necessary, on the authorisation holder. • The Authority shall make the Register available to the public through its publication on the Authority’s website.
  • 81. DLT Regulatory Framework The ITAS Act Part III – Certification of Innovative Technology Arrangements & Part IV – Registration of Service Providers Principles of Authorisation Part III Part IV An arrangement may be granted for one or more specified purpose, and may be based on one or more of the below as determined by the Authority; a) qualities; b) features; c) attributes; d) behaviours; or e) aspects, A certification based on any of the above shall not serve as a certification or serve as a guarantee of certification, for any other quality/feature/attribute/behaviour/aspect. 1. The Authority may accept to register a person/organisation providing a multitude of services. 2. However, similar to specifications for certifications (left), the registration of one type of service shall not guarantee the registration of the same person/organisation to provide the same type of service.
  • 82. DLT Regulatory Framework The ITAS Act Part III – Certification of Innovative Technology Arrangements Part IV – Registration of Service Providers Requirements for Authorisation Part III Part IV An innovative technology arrangement shall be certified if; a) It is fit and proper for the purposes for which it declares to have been established.* b) The software (or parts of it) comprising the innovative technology arrangement has been reviewed by a registered systems auditor(s) who are in no way involved with the arrangement. An innovative technology service provider may be registered with the MDIA if; a) Is fit and proper for the provision of the services it is providing or intends to provide.* b) Has the qualifications and, or experience required by the Authority. *If the arrangement/service provider is an organised legal organisations, the Act specifies further restrictions on authorisation in the Article 8 (for certifications) and Article 10 (for registrations).
  • 83. DLT Regulatory Framework The ITAS Act Part III – Certification of Innovative Technology Arrangements Part IV – Registration of Service Providers Requirements for Authorisation Part III Part IV An innovative technology agreement shall be certified if; c) The arrangement has a registered technical administrator. d) The arrangement i. Complies with applicable innovative technology authorisation rules and regulations, ii. Carries out obligations imposed by applicable law, iii. Has the functionality to allow the technical administrator to intervene in cases of material cause of loss to any user or material breach of law. An innovative technology service provider may be registered with the MDIA if; c) Has sufficient technical resources to allow it to conform to any innovative technology authorisation rules and regulations, guidelines and conditions issued by the Authority. d) It does not fall within any of the cases specified in Article 29 of the MDIA Act (Cases where an authorisation may be refused).
  • 84. DLT Regulatory Framework The ITAS Act Part III – Certification of Innovative Technology Arrangements Part IV – Registration of Service Providers Further Guidelines and Specifications Part III Part IV The Authority may allow exceptions to the requirements for certification if any of these cannot be achieved within short time frames due to technical challenges. This is applicable only when; a) The arrangement is already in at a very advanced stage of development b) The arrangement is open, decentralised, public and permission-less. Irrespective of their registration service providers shall follow the below best practices; a) Conduct their business with honesty and integrity; b) Consider the rights, interests and needs of their customers and communicate with them in a way that is fair, clear and not misleading; c) Manage and control their business effectively, and conduct its business with due skill, care and diligence; d) Have effective arrangements in place to be able to meet operational and compliance obligations.
  • 85. DLT Regulatory Framework The ITAS Act Part III – Certification of Innovative Technology Arrangements & Part IV – Registration of Service Providers On Rules & Guidelines of Authorisation by the Authority Part III Part IV The Authority shall from time to time establish guidelines on specifications for which it will and, or will not issue certifications. Similarly for services, the Authority may establish guidelines to specify purposes for which services can be registered. The Authority may also create and publish standards of certification/registration it will rely on when enforcing this Act. Additionally, the Authority may review or appoint system auditors to review certifications and registrations to ensure proper conduct of and compliancy with the obligations of the authorisation holder.
  • 86. DLT Regulatory Framework The ITAS Act Part V – Miscellaneous Provisions Duties of the Authority • Transparency during the application progress – All necessary information should be provided during the review of an application, including reasons for the Authority’s proposal to refuse granting authorisation. • The right of appeal – If no feedback on an application is given by the Authority 3 months after its submission, the applicant may assume refusal and has the right to appeal to the Administrative Review Tribunal. Duties of the Authorisation Holder • Notification to the Authority of any material changes – This is required when the information initially provided to the Authority undergoes any material changes (which changes are defined in Article 12, sub-article 1) • Auditing and review of authorisation - The Act places a responsibility on the authorisation holder to schedule required audits and reviews to be able to renew a registration/ certification prior to 3 months of its expiration.
  • 87. DLT Regulatory Framework The ITAS Act Part V – Miscellaneous Provisions Resident Agents • Requirement of a resident agent - Organisations/persons who need a resident agent include those; – Which are not resident in Malta, – Who’s technical administrator is also not resident in Malta. In this case, a separate resident agent is also required for the technical administrator. • The role of a resident agent – A resident agent should; – Act as the channel of communication between the authorisation holder and the Authority & other governmental bodies/departments. – Sign and file any required declarations and forms required by Maltese law. – Act as the judicial representative of the authorisation holder. • The powers of a resident agent – If approved by the authorisation holder, these include the power to; – Sign and file any document required in terms of Maltese law; – Apply for an authorisation/revocation/cancellation under this Act; – Pay all relative fees and taxes payable in terms of Maltese law;
  • 88. DLT Regulatory Framework The ITAS Act Part V – Miscellaneous Provisions Resident Agents • The powers of a resident agent (continued) – Participate as required in the certification/registration/ other form of recognition under this Act or for the maintenance of such recognition; – Authenticate documents issued by the authorisation holder; and – Receive formal notification on behalf of the authorisation holder when notifications are required under the provisions of this Act or any other law or any agreement. • The rights and duties of the resident agent and the authorisation holder during removal of the resident agent - Article 18 lists notice periods and procedural steps to be taken by either the resident agent or the authorisation holder when resigning or removing the resident agent, respectively. The Minister • Article 20 of the ITAS Act lists the power of the Authority's Minister to create regulations or change regulations in this Act with respect to the authorisation of innovative technology arrangements and services.
  • 89. MALTA DIGITAL INNOVATION AUTHORITY ACT MDIA
  • 90. DLT Regulatory Framework The MDIA Act Act No. XXXI of 2018 Overview • The MDIA Act outlines guiding principles for the Authority in supporting the development of innovative technology arrangements and services in Malta. • As specified by the Act, the Authority will primarily be responsible for certifying and supervising voluntary applications managed by: – Innovative technology service providers, – Technical administrators, – Other individuals involved in innovative technology arrangements. • The Act aims to foster increased collaboration between this public authority and other relevant national authorities. It encourages the adoption of mutual recognition with regards to organisations/individuals who will review and audit innovative technology arrangements. • The Act shall be used to guide the Authority on ramifications and financial charges following infringements and misconduct with regards to recognised arrangements and services.
  • 91. DLT Regulatory Framework The MDIA Act Scope • The MDIA Act defines various economic and social sectors within its scope. Although not limited to just these sectors, these include; – Financial services, – Health and education, – Voluntary organisations, – Public administration and transport. • The Act primarily focuses on the MDIA’s recognition, review and supervision of the innovative technology arrangements and innovative technology services as defined in the ITAS Act, within the aforementioned sectors. It should be noted that standards to be used in the new legal framework are yet to be developed. The Authority will use standards to regulate in such a way that is protects against non-compliance with mandatory laws on the protection of consumers and investors, the integrity of the market and the public interest.
  • 92. DLT Regulatory Framework The MDIA Act Part I Definitions Part II Guiding Principles for the Authority Part III Establishment and Composition of the Authority Part IV Officers and Employees to act on behalf of the Authority Part V Financial Provisions, and the Authority’s power to impose fees, rates and payments Part VI Principles on granting and refusing recognition and additional powers of the Authority Part VII Regulatory Powers of the Authority related to rules on and suspensions/revocation of authorisations. Part VIII Enforcement and Sanctions allowed by the Act Part IX Relationship between the Authority and the Administrative Review Tribunal Part X Guidance for co-ordination between the Authority and national competent authorities Part XI Miscellaneous Provisions
  • 93. DLT Regulatory Framework The MDIA Act Part II – Guiding Principles 13 Main Policies and Objectives of the Authority • As part of the guiding principles, the Act defines the following set of 13 policies and objectives to guide the Authority in its operation. – Promote governmental policies that favour the deployment, within the public administration, of innovative technology arrangements, – Foster, promote and facilitate the advancement and utilisation of innovative technology arrangements and their design and uses; – Promote education on ethical standards and legitimate exploitation of innovative technology arrangements; – Safeguard, maintain and protect the reputation of Malta in the use of innovative technology arrangements; – Protect users of innovative technology arrangements, including consumers and the public in general and to ensure standards to meet their legitimate expectations and protect against misuse; – Provide a sound financial basis for the Authority to be able to achieve its functions;
  • 94. DLT Regulatory Framework The MDIA Act Part II – Guiding Principles 13 Main Policies and Objectives of the Authority (Continued) – Harmonise practices, and, where applicable, facilitate the adoption of standards, on innovative technology arrangements in Malta in line with international norms, standards, rules and, or laws and with those of the European Union in particular; – Assist the competent data protection authorities in safeguarding the data protection rights of data subjects and assist other competent authorities in the protection of vulnerable persons and the promotion of fair competition and consumer choice; – Promote, and if required enforce, ethical and legitimate criteria in the design and use of innovative technology arrangements and any application, software or derivative product from it or intrinsically part of or connected to it as well as to ensure quality of services and security therein;
  • 95. DLT Regulatory Framework The MDIA Act Part II – Guiding Principles 13 Main Policies and Objectives of the Authority (Continued) – Through collaboration with other regulatory bodies and competent authorities with responsibility for the prevention of money laundering and the financing of terrorism and crime in general; Support the prevention of money laundering, terrorist financing and the commission of any other crime in or through the use of innovative technology arrangements; – Promote transparency and auditability in the use of innovative technology arrangements, and any application, software, or derivative product from it or intrinsically part of or connected to it; – Promote ease of accessibility to the facilities provided by publicly available innovative technology arrangements and the recognition and implementation of the right of exit, withdrawal or termination of participation from any arrangement in the use of innovative technology arrangements; and – Promote legal certainty in the application of laws, in a national and cross-border context, and the development of appropriate legal principles for the effective application of law to innovative technology arrangements.
  • 96. DLT Regulatory Framework The MDIA Act Part III – Establishment, Functions and Conduct of Affairs of the Authority Establishment of the Authority • The Authority is a corporate body of members. • The conduct of the affairs of the Authority shall be the responsibility of the Board, which responsibility shall be exercised through the Chairman. • The Authority shall assume a distinct legal personality and can be represented by the Chairman or any appointed member of the Board on behalf of the Authority in any act/contract/instrument/other document. Composition of the Authority • A Chairman, • Minimum of 4 to a maximum of 8 members who are appointed for a term of minimum one year to a maximum of three years and who may be re-appointed on their term's expiration. Members of the Board • The Act lists members who are eligible to become members of the Board. Article 5 also lists list of individuals who cannot hold office as a member of the board due to their existing position/potential conflicts of interest
  • 97. DLT Regulatory Framework The MDIA Act Part III – Functions and Powers of the Authority Functions of the Authority Several commitments that the Authority must fulfil include, but are not limited to; • Regulate, monitor and supervise any innovative technology arrangements/services/applications regulated by the Act. • Provide facilities for the recognition, certification, registration for the carrying out of any lawful operation or activity which the Authority is entitled to administer. • Establish minimum quality, compliance and security standards for any innovative technology arrangements/services and regulate the respective sectors to protect the general public. • Establish minimum qualifications to be possessed by any person/organisation engaged in any activity related by the Act. Powers of the Authority The MDIA has the power to; • Gain access to information on an innovative technology arrangement strictly to regulate or enforce compliance.* • Hold any wallet, account or other facility in relation to digital assets to carry out regulatory compliance functions. *This does not include any source code unless required for regulatory purposes and accepted by the holder of the innovative technology arrangement/service.
  • 98. DLT Regulatory Framework The MDIA Act Part IV – Officers and Employees of the Authority • Part IV of the MDIA Act specifies that the Authority may appoint Officers and employees to perform functions on behalf of the Authority.
  • 99. DLT Regulatory Framework The MDIA Act Part V – Financial Provisions Expenditure “Expenditure required for the proper performance of [the Authority’s] functions shall, as far as practicable, be met out of its revenue". Any excess expenditure may be met by the use of reserve funds, and any excess funds may be invested, subject to the approval of the Minister responsible for finance. Account Keeping and Reporting The Authority shall keep proper accounts and other records in respect of its operations such that it can; • Prepare a statement of accounts covering each financial year, • Be audited by an auditor/auditors approved by the Minister, • Provide an Annual Report to the Minister of the Authority and the Minister of Finance, to cover the activities of the Authority during the financial year. Money Laundering • The Authority may impose regulations made under Article 12 of the Prevention of Money Laundering Act, • It may report any areas/arrangements/services vulnerable to money laundering to the National Coordinating Committee on Combating Money Laundering and the Funding of Terrorism under Article 12 A. • The Authority may disclose information to the Financial Intelligence Analysis Unit on transactions which are suspected/known to be related to criminal activity or the funding of terrorism.
  • 100. DLT Regulatory Framework The MDIA Act Part VI – Principles relating to Recognition, Powers of the Authority The Power to grant or refuse to issue an innovative technology authorisation Based on specific grounds defined in the MDIA Act, the Authority has the power to either grant or refuse any form of recognition voluntarily requested by the applicant. Documentation and evidence required by the Authority The Authority may request for any documentation and assurances as necessary or relevant for it to carry out its functions and grant authorisation. The Authority should publish documentation requirements in due time to allow applicants to prepare, however the burden to prove credibility is that of the applicants and not the Authority. The Establishment of rules by the Authority The Authority shall establish rules and requirements as a basis to guide on conditions and exceptions for the issue of authorisations and the different types of authorisations which may be given. Transferability of authorisation The Act does not allow the authority to approve transfer of an authorisation (which has already been granted); where the transfer to a subsidiary/legal organisation wholly owned and controlled by the applicant/persons shall not be considered a transfer.
  • 101. DLT Regulatory Framework The MDIA Act Part VII – Regulatory Powers Revocations, Cancellations, Suspensions of Authorisations The Act lists eight specific scenarios for both innovative technology arrangements and innovative technology services, under which the Authority is to revoke, cancel or suspend an authorisation. Procedural steps during revocations, cancellations and suspensions Article 35 lists procedural steps to be taken during the revocation, cancellation or suspension of an authorisation. Other guidelines in this article relate to interim measures, extension of rectification periods, notification and applicable interest rate on administrative fines. Publication and Notification obligations of the Authority The Act specifies obligations of the Authority to notify the applicant or authorisation holder of a refusal of authorisation, of a varying condition an existing authorisation is subject to, or of a suspension or revocation to that authorisation. Allowable Exemptions The Minister of the Authority shall, subject to the authorisation of the Minister of the relevant Authority, and subject to specific circumstances defined by the Act, allow several exemptions to the regulations, as specified in the Act.
  • 102. DLT Regulatory Framework The MDIA Act Part VIII – Enforcement and Sanctions Enforcement of the Provision of Information The Authority may enforce the provision of information from any person, which information may include any software codes, protocols and financial information that is considered as necessary for the Authority's supervisory and administrative functions. Unless required by other applicable law, this power excludes the request for source codes of software which is commercially sensitive or personally owned cryptographic keys. Administrative Fines The Act defines fines and penalties to be punished following misconduct or non-compliance with the Authority’s controls, such when confidential information is disclosed, or when the required information is not provided. 350,000 Euro Cap - This is enforced on any administrative fine for each infringement, or 12,000 Euro Daily Cap - For each day of infringement. Administrative fines are to be calculated with regard to the nature and extent of the infringement, its duration and its impact on the market and consumers.
  • 103. DLT Regulatory Framework The MDIA Act Part IX – Administrative Review Tribunal Appeals to the Administrative Review Tribunal The Administrative Review Tribunal shall be competent to hear and determine appeals from decisions of the Authority. The procedure to be followed for appeals of administrative fines is defined in Article 47. Appeals that the Tribunal reviews are not only related to the imposition of administrative fines but include appeals on any decision taken by the Government or any public authority in relation to innovative technology services or arrangements. Article 48 through 52 discuss the following in relation to any appeal: – Article 48 - How the Appeals Tribunal confirms or annuls the decision appealed from, – Article 49 - The Procedure to be performed by the Tribunal to arrive to a final decision, – Article 50 - The position to be assumed by either affected party with respect to the Authority's proposition, until the Tribunal or Court of Appeal determines the appeal. – Article 51 - Guides on the service of notices. – Article 52 - Specifies how debts due to the Authority may be declared, confirmed and recovered.
  • 104. DLT Regulatory Framework The MDIA Act Part X – Co-ordination with other Competent Authorities; Simplification Seeking co-ordination with national competent authorities Article 55 lists cases when the Authority may or should refer to other national competent authorities for the support, guidance and assistance on the provisions on the Act and of applicable laws enforced by said authorities. Avoiding duplication of controls and simplification of procedures Article 56 specifies that the Authority should not accept procedures and controls carried out by a competent authority if such procedures, controls or other measures do not provide equivalent safeguards to those provided under Maltese law or as established by the Authority. Joint Regulatory Efficiency Board Article 57 states that there should be a Joint Regulatory Efficiency Board to facilitate the co-ordination between the Authority and other competent authorities.
  • 105. DLT Regulatory Framework The MDIA Act Part XI – Miscellaneous Provisions The Power of the Minister and of the Authority to issue guidelines A comprehensive list of controls is provided to guide the Minister in relation to the implementation of the Act, such as; permissions s/he has to the creation of rules with respect to the Act, the enforcement of additional penalties for any breaches of the Act. Additionally, the Act gives the Authority the Power to create rules to ensure high standards of security and integrity in innovative technology arrangements.
  • 107. THANK YOU FOR YOUR TIME AND ATTENTION
  • 108. Kenneth Farrugia Chief Business Development Officer Bank of Valletta, plc
  • 109. Information Session on the Blockchain Legislation Distributed Ledger Technology in Banking - Opportunities & Challenges for the Industry Kenneth Farrugia Chief Business Development Officer Bank of Valletta plc The Exchange Buildings 26th July 2018
  • 110. BOV Start PlusAgenda 1. DLT and Banking – An Introduction 2. The strong case for DLT in the banking sector – Opportunity Set, Use Cases and Challenges to be managed 3. DLT and Virtual Financial Assets
  • 111. 1. DLT and Banking – Introduction European Banking Authority Report – July 2018 Opportunity Set “DLT enables a common and almost real-time view of a trade transaction stored in a shared ledger for all participants involved, creating a level playing field for all parties and eliminating their reliance on paper instruments exchanged among them. A shared view could rationalise the manual effort and reconciliation processes, with consequent savings in time, money and resources.” Risks/Challenges - Immaturity of DLT Technology – heightened Cyber Security Risk - Cross jurisdictional conflicts of laws and regulations when DLT nodes are in different jurisdictions. – recognition of a digitally signed smart contracts in one jurisdiction may differ from another. 111
  • 112. Why do Banks need to embrace DLT? 112 Threat of Disintermediation DLT technology enables a cryptographically secure way of sending digital assets, without the need for trusted third parties — such as banks • Payments: no need for intermediaries to approve transactions between consumers. DLT facilitates faster payments on a p2p basis at lower fees than banks • Clearance and Settlement Systems: DLT reduces operational costs and bring about real- time transactions between financial institutions and their clients. • Fundraising: Through DLT based platforms companies are provided with immediate access to liquidity through ICOs – unbundles access to capital from traditional financial services channels • Securities: use of tokenization in traditional securities such as stocks, bonds, and alternative assets, the blockchain is changing the structure of capital markets. • Loans and Credit: DLT removes the need for gatekeepers in the loan and credit industry, the blockchain can make it more secure to borrow money at lower interest rates through DLT based scorecard applications
  • 113. BOV Start Plus 4 Key Desired Outcomes 1. Improved Customer Experience and Engagement in terms of speed and quality of service leading to stronger revenue streams 2. Operational Efficiency through automation 3. Significant Cost Savings 4. Regulatory and Operational Risk Management 2. The Strong Case for DLT in the Banking Sector
  • 114. Use Case Applications of DLT Settlement of Payments - State of Play - Slow and costly process for the settlement of transactions - Current process costing the industry $65-$80 billion a year – Oliver Wyman Opportunity Set – a DLT based clearing and settlement process will bring about cost savings of $10 billion for Investment Banks - Thomson Reuters Use Case - UBS has developed a Utility Settlement Coin (USC) which is a digital cash equivalent of major fiat currencies backed by central banks enabling financial markets to make payments and settle transactions using DLT Challenge - Financial regulators acceptance on how DLT can meet technical, governance, legal and regulatory requirements
  • 115. BOV Start Plus How are Banks embracing DLT and their challenges? Customer Identification / KYC Solutions – State of Play - KYC requests causing significant delays to banking transactions ranging from days to sometimes weeks. - Duplication of KYC efforts by banks in the correspondent chain. - Cost of KYC obligations average $60 million pa - survey by Thompson Reuters (2016) Use case - BBVA, ING and UBS that have developed a proof-of-concept for a DLT shared KYC registry on a Cordoba Platform - Platform reduces duplication and costs by eliminating the need for multiple attestations and repetitive updating of KYC records – still present within different units of some Banks - Data Privacy and security issues may be addressed through user access rights Challenge - Financial regulators accepting the way DLT can meet AML and GDPR legal and regulatory requirements
  • 116. BOV Start Plus How are Banks embracing DLT and their challenges? Payment Solutions – State of Play - Banks currently engage with one another to transfer cross border payments using different systems either SEPA or SWIFT. - Payments take from 1–2 business days to be transferred passing through a number of intermediary banks which obviously increases the transaction cost Use Case - Santander, has implemented a fully functioning OnePay FX payment system running on Ripple DLT. - primary goal is to optimize payments between EU and South America using DLT - service aimed at accelerating international banking Transaction processing and reducing the costs Challenge - Banks facing scalability and privacy issues which have yet to be addressed through agreed to standards
  • 117. Trade Finance – State of Play 117
  • 118. BOV Start Plus How are Banks embracing DLT and their challenges? Trade Finance – State of Play - Business involves multiple trading partners - Huge amounts of manual records handling, checking and paperwork - System fraught with delays, duplication, fraud and high levels of inefficiency Use Case - IBM, UBS and several other international banks (including Caixa, CommerzBank and Bank of Montreal) have formed a trade finance consortium - Create a global trade finance platform, Batavia, based on blockchain - Blockchain will be used to digitise sales and other legal contracts, allow the location of goods to be monitored and facilitate settlement in close to real time. Challenges - Banks would have to internally digitize the trade itself - Requires the involvement of key stakeholders - shipping companies, freight providers, various agent and ports, along with customs and insurers - Industry is still highly reliant on significant paper based operations that drive these players - needs a culture change
  • 119. 119 Trade Finance – Desired State of Play Smart Contract on the Blockchain linking all operators in the Ecosystem
  • 120. BOV Start Plus How are Banks embracing DLT and their challenges? Syndicated Loans – State of Play - Daunting process driven by the lengthy discussions leading to the agreement to be reached between the banks’ legal and credit teams the various details governing the financing contracts and covenants Use Case - Credit Suisse Group formed a consortium that works hand-in-hand with R3 and other DLT start up companies to start issuing syndicated loans on the blockchain. This would provide an easy way to manage the whole lifecycle of loans and increase transaction processing. Challenge - Developers must find a way to make separate blockchains talk to each other in order to quickly reflect all changes that are made to a loan’s ownership across all systems.
  • 121. BOV Start Plus Addressing the Challenges Regulation - a clear regulatory environment in the DLT space - three legislative acts passed in the Maltese Parliament this month are a step in the right direction - absence of an international banking framework for DLT solutions and cryptocurrencies will hamper the adoption of DLT solutions into mainstream banking activities in the short - medium term Operational / Technology - Operational/technological barriers such as different DLTs not communicating with one another may fragment the market. - security integrity is required to ensure scalability and widespread take up. Culture - Regulatory cultural barriers are still present in the market - need to ease and facilitate the interaction between DLT / fintech players in the market and the traditional banking in the financial services industry
  • 122. Key Challenge – Cyber Security Risks/Threats to Exchanges 122Lorem Ipsum • Estimated Loss From Top Hacks and Scams (2011-2018 YTD): $2.3 Billion • Mt Gox: Bitcoin: Around 800,000 BTC, equivalent of $450 million USD at time of event was lost. • The DAO incident: Ethereum: About 3,600,000 ETH, equivalent of $60 million USD, was lost in this hack • Coincheck: reported loss of 500,000,000 NEMs equivalent of $400 million USD. • Bitcoinica 3 recorded hacks, resulting in a total reported loss of over 78,000 BTC 3. DLT and Virtual Financial Assets – Other Challenges for the Banking Sector
  • 123. DLT and Virtual Financial Assets – Other Challenges for the Banking Sector Key Issues with Crypto Exchanges and Virtual Financial Assets - Cybersecurity concerns around crypto exchanges - So far the sector is largely unregulated - AML/KYC/Due Diligence gaps when compared to mainstream standards - Derisking mindset of banks driven by hard coded and stringent regulations - Sector has attracted a lot of negative PR led by bankruptcies of exchange service firms, ICO Frauds, Ponzi Schemes amongst others. 123
  • 124. Bank of Valletta p.l.c. (BOV) is licensed to conduct investment services business by the Malta Financial Services Authority (MFSA). BOV is enrolled as a tied insurance intermediary of MSV Life p.l.c., regulated by the MFSA. BOV is authorised to act as a Trustee by the MFSA. The contents of this document are intended to provide general information only and cannot substitute legal, tax or any other relevant advice. Thank you

Editor's Notes

  1. https://hackernoon.com/global-cryptocurrency-regulation-update-march-2018-7a779733a407 https://www.cnbc.com/2018/03/27/a-complete-guide-to-cyprocurrency-regulations-around-the-world.html http://map.bitlegal.io/ http://forklog.consulting/bitcoin_regulation_en.pdf
  2. Admission to trading requirements for VFA exchanges: The technological experience, track record and reputation of the issuer and its development team; The issuer’s KYC and cybersecurity systems and controls; The availability of a reliable multi-signature hardware wallet solution; The Financial Instrument’s determination and endorsement thereof; The protocol and the underlying infrastructure, including inter alia whether it is (i) a separate blockchain with a new architecture system and network or it leverages an existing blockchain for synergies and network effects, (ii) scalable, (iii) new and/or innovative or (iv) the virtual financial asset has an innovative use case or application; The relevant consensus protocol; The systems auditor’s report on the issuer’s innovative technology, including any reservations that may have been expressed therein; Developments in markets in which the issuer operates; The geographic distribution of the virtual financial asset and the relevant trading pairs, if any; The completeness and reliability of information included in the project website and/or whitepaper, including inter alia whether an ethical or professional code of conduct exists; Whether the virtual financial asset has any in-built anonymization functions (e.g. in-built mixer like Monero); Whether the virtual financial asset has used or was used with any smurfing technology , mixers or has been traded or traded on any Darknet marketplace/s; Whether the virtual financial asset is or has been traded on any sidechains; Other DLT exchanges on which the virtual financial asset is traded, if any; and Social media information, including inter alia official website, Telegram, twitter account and Facebook page
  3. Segregation - exemption from vfa for custodians of ciss, ciss and fund managers – ref to pif regime (leave space and i will populate this section) Dedicated reporting and disclosure requirements – this would facilitate for both micro and macro financial stability monitoring.
  4. Segregation - exemption from vfa for custodians of ciss, ciss and fund managers – ref to pif regime (leave space and i will populate this section) Dedicated reporting and disclosure requirements – this would facilitate for both micro and macro financial stability monitoring.
  5. Challenge - The scalability problems of the most popular blockchain networks today, namely Bitcoin and Ethereum, are well known. The first issue is network capacity. At present Bitcoin can only do about seven transactions per second, with Ethereum doing about 15 to 20. Contrast this with Visa, which can do 40,000 to 50,000 transactions per second. The second issue is confirmation time. Right now, Bitcoin takes 22 minutes to confirm a single transaction, with that figure spiking to thousands of minutes (basically hours and even days) during times of network congestion. Ethereum is much faster, at about 2 minutes, but that’s still not good enough for its envisioned scale (although Ethereum developers are hard at work on this problem as you read this). What is the difference between The CREDITS platform sees itself as a superior version of Ethereum, although more specifically targeted for use by the financial industry. Just like Ethereum, it will be a smart contracts platform that other decentralized applications can build on. Unlike Ethereum, it will be a distributed ledger as opposed to a blockchain.
  6. We.Trade is another competing platform in which HSBC are involved and just finalised their first set of trades in July 2018 - https://www.we-trade.com/article/we-trade-blockchain-platform-completes-multiple-real-time-customer-transactions