Ahead of the Malta Financial Services Authority’s MiCA conference on Thursday, Herman Ciappara, MFSA’s head of fintech supervision, discusses the potential of the new Markets in Crypto Assets (MiCA) regulation, how Malta is preparing to attract applicants of good quality, as well as the challenges expected in its initial phase of implementation.

With the coming into force of the MiCA regulation, the industry is moving towards greater legitimacy. How do you perceive this change impacting investor confidence and overall market dynamics, especially in terms of perception and corporate governance within the crypto industry?

HC: The crypto space has transitioned from what was once deemed the ‘Wild West’ to a more legitimate and regulated industry.

In the past, the lack of regulatory clarity when it comes to crypto assets created challenges for entrepreneurs and operators to comply with ever-evolving requirements.

MiCA institutes uniform market rules for crypto assets across the European Union. This harmonisation is key to ensuring a level playing field that will continue driving the industry forward.

MiCA sets a robust foundation, brings about more clarity, fosters transparency and promotes market integrity. It covers assets that were not regulated before. As a result, it offers investors greater confidence in participating in this evolving market. MiCA can also potentially draw in new entrants and encourage existing players to diversify their service offerings.

As the crypto landscape evolves, regulators must adapt to ensure both investor protection and a vibrant ecosystem. Striking the right balance is crucial − overregulation might stifle innovation.

What are the main opportunities that you see arising out of MiCA for the Maltese jurisdiction?

HC: Malta is well-placed as one of the pioneering jurisdictions that introduced a framework that is very similar to MiCA – the Virtual Financial Assets (VFA) Framework – in November 2018.

Cognisant of the fact that VFA is a high-risk sector, the MFSA has adopted very high expectations for new market entrants.

During the authorisation stage, persons or entities wanting to offer services in this sector are subject to fit and proper checks against specific criteria, such as reputation, competence, conflicts of interest and independence of mind, as well as time commitment. The standards imposed by the current Virtual Financial Assets Act (VFAA) have proven to be effective in acting as a filter, ensuring that only serious market players with a strong compliance framework are present in Malta.

Throughout these past five years, we have learned a lot, continuously challenging our knowledge and understanding of the industry. I would say that right now, we are an experienced crypto regulator. We also have an AML regulator − the FIAU that understands crypto. It’s an exciting time to be in this space locally because we truly have the opportunity to become leaders.

In this industry, the prevalent demographic is that of a start-up – we have to keep in mind that this demographic is not as familiar with mature industry practices such as corporate governance, risk management and internal audit

What challenges are you expecting to face during the initial months of implementation?

HC: In this industry, the prevalent demographic is that of a start-up – we have to keep in mind that this demographic is not as familiar with mature industry practices such as corporate governance, risk management and internal audit.

Another major challenge is potential bottlenecks and delays. An estimated 1,000 Virtual Asset Service Providers (VASPs) that qualify as Crypto Asset Service Providers (CASPs) in the EU must secure authorisation within 18 months. This would mean approximately 50 CASPs per jurisdiction. Based on past experiences with the VFA Act, authorising these operators is not a rapid process so this timeframe is notably tight.

There’s also ambiguity around whether the transitory period allows CASPs to continue operations in different member states, which almost mirrors the principle of passporting.

What can stakeholders expect in terms of support and outreach in the coming days?

HC: We have been actively engaging with stakeholders in the crypto industry through outreach initiatives and working groups to ensure they are well informed and prepared for the upcoming changes. Recently, the MFSA published a report with a detailed account of the authority’s progress in regulating the virtual financial assets sector.

The publication offers insights into the licensing process, including the number of authorisations issued so far, as well as the evolution of the VFASP landscape in Malta, showcasing the authority’s commitment not only to fostering a safe and compliant crypto ecosystem but also to ensuring transparency in the way it operates.

This publication, which is the latest volume from the MFSA series The Nature and Art of Supervision, also details the supervisory interactions and enforcement actions carried out by the authority since 2020.

Moving onto imminent plans, on Thursday, we are going to bring international stakeholders together for a conference during which we will showcase and share our experience so far in regulating crypto assets.

This will probably be one of the largest events that the MFSA has organised to date.

The authority’s training arm, the Financial Supervisors Academy, is behind this large-scale initiative, securing an impressive line-up of over 25 field experts and distinguished speakers; among them, Verena Ross, chair of the European Securities and Markets Authority.

In parallel, we are also launching a consumer education campaign, which marks a significant step in addressing the imperative need to educate the public about crypto assets. This initiative aims to provide comprehensive information, ensuring consumers are well-informed about the risks and advantages linked to investing in crypto assets.

This aligns with the broader commitment of the authority, emphasising not only regulatory compliance but also ensuring a well-informed and protected consumer base.

Ultimately, empowering consumers with the necessary knowledge and guidance is key to the health of the ecosystem.