The Maltese government has, over the past 18 months, been actively involved in developing a comprehensive regulatory framework addressed at the issuance of virtual financial assets, the provision of certain services relating to virtual financial assets, including the operation of exchanges, and the certification of certain innovative technology arrangements. The ultimate aim being that of providing legal and regulatory certainty over a largely unregulated sector and ensuring investor protection.

Malta has been one of the first jurisdictions to identify the opportunities associated with this new sector and has spearheaded the way in adopting a regulatory framework.

The Maltese Commissioner for Revenue has also issued guidelines, published on November 1, on the interpretation of income tax, duty on documents and VAT in connection with activities involving distributed ledger technology assets. These guidelines further add certainty and stability to investors and operators in the sector in Malta. Tax-related incentives afforded may help offset costs of operating and keep Malta attractive.

Malta has however not been the only jurisdiction to regulate this sector, and although the government has pitched the country as ‘Blockchain Island’, the challenges which lie ahead will be in retaining industry players who have or intend to relocate to Malta for purposes of making use of Malta’s regulatory framework.

The MFSA recently published a feedback statement issued on October 24. The feedback statement was issued further to industry responses to a consultation paper on the virtual financial assets regulations to be issued under the Virtual Financial Assets Act.

However, despite respondents addressing the fact that the licence and supervisory fees proposed by the MFSA were complex and somewhat on the high side for issuers of virtual financial assets, service providers and VFA agents, MFSA’s response to such feedback was that it would in fact consider raising the respective application and supervisory fees almost two-fold what was initially proposed, due to the risk and compliance involved. Raising application fees and annual supervisory costs, not to mention the organisational requirements, will undoubtedly result in barriers to entry for the smaller operators, particularly start-ups, and might force those entities who are actively operating in the local industry to re-evaluate their position in Malta.

The local banking sector has also steered clear from servicing this industry. Access to US dollar correspondent banks remains a critical banking component which may be placed at risk if local banks jumped on the crypto bandwagon which sheds doubt as to whether this sector will be able to access local banks for purposes of opening bank accounts. We will need to see local banks understand the business models and mitigate the risks of this sector, which is crucial for Malta to stand out from the crowd and be a competitive player.

Estonia’s approach to regulating this sector is similar to Malta’s, with the regulator adopting an open and friendly attitude with the industry and have also initiated digitisation of its services through the use of blockchain technologies. Banks here also adopt a very conservative approach in on-boarding crypto companies.

The Assemblée Nationale – which is the French Parliament’s lower house – has also initiated the process to update its legislation to regulate crypto assets, blockchain technology and the ICO sector, introducing a definition of tokens and ICOs (“a public offer for tokens subscription, in whatever form”) which will grant entities operating in this sector the possibility of obtaining a licence issued by the Autorité des Marchés Financiers (AMF, Financial Market Authority, the French regulator).

Such a licence will be a voluntary process and not a legal requirement for such entities. Monitoring of the implementation procedure which will guarantee the token security and transparency will be directly handled by the AMF.

Switzerland has also embraced the cryptocurrency culture and aims to become the first “crypto nation” as declared by the Swiss Economics Minister, Johann Schneider-Ammann back in January 2018. One of the major benefits is the possibility of receiving individual pre-rulings issued by Swiss financial authority FINMA, which ruling will advise whether regulatory provisions are applicable. Switzerland’s approach was different to the one adopted by Malta in that rather than adopting a new legislation to regulate the crypto sphere, Switzerland applies existing frameworks with a flexible and principle-based approach.

Entities operating in the crypto sector in Switzerland have however also encountered difficulty with opening bank accounts.

Japan is one of the few jurisdictions where Bitcoin is recognised as an official means of payment, although the Japanese central bank recognises that the elimination of fiat money is far from being an option. The Financial Services Agency (FSA), Japan’s financial regulator has also recently confirmed that a number of crypto exchanges will be allowed to operate while their licence applications were in the process of being reviewed.

The Financial Services Commission commissioner of South Korea, a well-known crypto jurisdiction with an estimated two million digital currency investors has just announced that Korea’s banks have been authorised to work with crypto exchanges, opening the gate for fiat-crypto deposits and withdrawals. This is a significant development which further strengthens the Asian sphere over crypto adoption.

Singapore is also positioning itself strongly as a crypto friendly jurisdiction. In June 2017 the Monetary Authority of Singapore (MAS) published a report indicating its intention to put together a plan to tokenise the Singapore dollar on a private Ethereum blockchain, which will involve collaboration between the Singapore central bank and blockchain consortium to possibly facilitate cross border payments.

Malta’s aim in attaining ‘Blockchain Island’ status should focus on creating an environment where innovation can flourish without conservative bias. Regulation is a necessary part of innovation and progress, which is appreciated by many players in the industry as this provides trust, certainty, and security to investors.

With the regulation becoming effective as from November 1, it is still early days to determine whether Malta will prove itself and claim its position as a blockchain leader – this shall become evident in the next few months. The direction the regulatory framework seems to be taking may lead to a sector which will only allow the bigger players to flourish, while smaller operators may seek alternative options.

Christina Scicluna is a senior associate in the corporate and fintech department, Mamo TCV Advocates. She started her legal career with one of the Big Four firms in the personal tax department specialising in personal tax compliance and personal tax advisory services including advising high-net-worth individuals on matters relating to taxation and immigration. Dr Scicluna advises a variety of multinational clients on international corporate structures. She has also formed part of the internal Blockchain Committee at the firm which was set up in September 2017 and which today is known as the fintech department. She handles all legal matters related to blockchain, fintech, cryptocurrency, Initial Coin Offerings (ICOs), exchanges and distributed ledger technology projects.