Updated Monday 8.12am with Chamber of Commerce reply
Some €60 billion in cryptocurrency and other virtual assets moved through Malta after it first announced itself as the ‘blockchain island’, when controls were still considered lax.
Malta has since shored up its regulatory framework for cryptocurrency but that large volume of transactions during the country’s initial push for crypto business was flagged as “problematic” by global experts reviewing Malta’s anti-money laundering regime.
On Tuesday, evaluators from the Financial Action Task Force met in Paris and discussed whether Malta should be put on a list of countries that are not doing enough to stop major financial crime.
It is understood that Malta’s act-fast approach to attracting digital currency platforms to the island before the necessary laws were in place was among the red flags facing the country.
Sources said the Maltese authorities insisted that the sector is now robustly regulated, while defending its case. They also argued with the FATF that the figure is just two per cent of global annual transactions.
Government sources said key members of Tuesday’s FATF meeting were critical of Malta, highlighting structural deficiencies particularly in the island’s law enforcement regime.
While the number of criminal prosecutions for financial crime had increased, not enough of these were considered major cases, sources privy to the confidential FATF meeting said.
A number of other members of the meeting, the sources added, had acknowledged that Malta had indeed enacted a large body of reforms in a bid to stub out major money laundering.
The first year of Malta’s blockchain dreams had quickly turned into the wild west
The sources said that one of the issues repeatedly raised during the meeting was that Malta had facilitated a large volume of cryptocurrency and other virtual assets to be exchanged without enough oversight.
Cryptocurrency is a digital payment system that does not rely on banks to verify transactions.
Instead, it uses a peer-to-peer system to verify authenticity. This poses transparency concerns as the system could potentially be used by those seeking to obscure financial holdings and transactions from regulators or tax authorities.
Malta’s crypto craze
Virtual assets and cryptocurrency were all relatively alien terms in Malta until Joseph Muscat’s Labour administration announced in early 2017 that it intended to take the crypto-world by storm.
In 2018, at the height of Malta’s ‘blockchain island’ hype, several big names in the cryptocurrency exchange world announced they would be setting up shop here in anticipation of a new set of laws.
Many of those companies started operating in a limited away, without a licence, as a generous “transitory period” of up to one year was allowed by Malta.
At the time, industry sources had told Times of Malta that the first year of Malta’s blockchain dreams had quickly turned into the “wild west”. A senior regulator had said authorities were faced with an explosion of high-risk transactions carried out by cryptocurrency exchanges in an unlicensed environment.
Some international surveys had even put Malta at the top of cryptocurrency trade volumes during this regulatory vacuum.
Malta’s headlong dive into risky cryptocurrency has drawn a warning from the European Commission about the need for proper regulatory and law enforcement controls.
By July 2018, the government passed laws providing a regulatory framework for businesses operating in the cryptocurrency and blockchain industry.
The three bills establish a regulatory framework for cryptocurrencies, blockchain and distributing ledger technology.
That same month, the MFSA warned blockchain-based companies that they had to wait before they can apply for approvals and authorisations in the country.
In the months that followed, major operators that had helped generate much of the hype by announcing they would be moving to Malta, quietly slipped away.
Transitory period of 12 months
In a reaction, the VFA Agents Business Unit within the Malta Chamber of Commerce said:
"Malta enacted the DLT Regulatory Framework in 2018, with one of the primary legislative acts being the Virtual Financial Assets (VFAs) Act. The VFA Act was the first law of its kind to be enacted within the European Union; it went beyond high-level principles and vague obligations, and laid out the base for a detailed framework that would go on to regulate service providers such as cryptocurrency exchanges, and issuers of cryptocurrencies.
"The VFA Framework is largely based on the EU Markets in Financial Instruments Directive and has been heralded as a robust framework by foreign regulatory authorities. Testament to this is the fact that the draft Markets in Crypto Assets Regulation (MiCAR) proposed by the European Commission is modelled on the Maltese VFA Framework.
"When the VFA Act entered into force on the 1st of November 2018, a transitory period of 12 months was granted to companies set up in Malta that were carrying out services licensable under the same Act. It is common practice, even at EU level, to set a transitory period when new regulatory requirements are rolled out and imposed on an industry. The purpose for such transitory period was to allow companies to familiarise themselves with the framework and to shape up their operations in line with the same.
"With such an innovative sector, it is counter-intuitive to set a hard-line approach. One needs to keep in mind that up until 2018, the crypto industry was largely unregulated, with Malta being the first EU Member State to step forward and regulate it at a high standard. Regulators worldwide are to this day contemplating, designing or fine-tuning their national frameworks to address the fast-changing crypto sector.
"Regulation was deemed to be required due to the pseudonymous nature of crypto transactions, as such transactions are all transparently recorded onto a publicly available ledger, with the caveat that the identifiers of those transacting are published as strings of letters and numbers, ergo ‘wallet addresses’. However, Malta’s laws, along with those of most countries nowadays, require service providers such as cryptocurrency exchanges to identify the persons behind such wallet addresses, both at the time of deposit with such crypto exchanges, as well as at the time of withdrawal. In fact, the imposition of such an obligation upon crypto exchanges and other similar service providers has been recommended by the Financial Action Task Force in order to combat the threat of money laundering imposed by cryptocurrencies, and most crypto exchanges have implemented robust AML rules within their operations on par with traditional financial institutions.
"Speaking of the threat of money laundering, it has long been established that cryptocurrencies such as Bitcoin, which utilise a publicly-accessible ledger of transactions, are “a highly effective crime fighting and intelligence gathering tool”, as opined in a report written by Michael Morell, an ex-Deputy Director at the Central Intelligence Agency.
"The fact that all crypto transactions are permanently recorded and publicly accessible means that once crypto exchanges collect Know-Your-Customer documentation from their users, they possess the data required to track and trace all the users’ transactions associated with their crypto wallet addresses. Such effective tracking has proven to be successful time and time again. While anonymous cryptocurrencies do exist, the Malta Financial Services Authority banned locally-licensed service providers from dealing with such cryptocurrencies from the very start.
"It must be reiterated that the VFA Framework, which falls under the responsibility of the MFSA as competent authority in terms of the VFA Act, regulates the crypto industry at a very high standard. The licensing process, which is managed by the MFSA, is very rigorous, with a double-layered approval system consisting of licensed VFA Agents and the MFSA itself ensuring that only legal entities operating at a highly qualitative level are approved by the MFSA and allowed to operate in Malta. Every VFA service provider and issuer of VFAs is required by the VFA Act to engage a licensed VFA Agent to screen and assess the fit and proper status of the proposed VFA Service provider prior to the submission of the application for authorisation to the MFSA.
"This process is even more onerous than the one applied to operators in the traditional financial services sector wishing to seek regulation by the MFSA – as these operators are not subject to the scrutiny of a licensed entity prior to applying for authorisation.
"Works are currently underway to align the local VFA framework with the proposed MiCAR, as the VFA framework had actually over-regulated in quite a few aspects – reflecting the conservative approach adopted by the MFSA when setting the regulatory requirements – making the Maltese framework one of the most stringent in the world. It is absolutely incorrect, both in fact and in substance, to infer that Malta has ‘lax oversight’, when the MFSA and the industry have constantly, over the past three years, sought to ensure that in seizing the enormous opportunity at hand in partaking in the greatest financial revolution of this era, priority would be given to building and securing a safe, regulated environment for operators and users alike.
"The MFSA carries out extensive oversight over operators in this sector with regular compliance visits and other oversight mechanisms in place to ensure proper supervision of this sector. Portraying this sector as one which is not subject to adequate supervision is not a reflection of reality and does not do justice to the work and efforts of the MFSA and VFA Agents."