The Malta Financial Services Authority will be investing millions of euros in supervisory technology to ensure risks associated with virtual currencies are kept to a minimum as Malta vies to become the ‘Blockchain Island’.

“We think this is mission-critical,” Christopher Buttigieg, head of the Malta Financial Services Authority’s securities and markets supervision unit, said.

Malta recently enacted three pieces of legislation covering blockchain and cryptocurrencies.

“Wherever you have large flows of money, it has to be expected that criminals, money-launderers and terrorists would take a keen interest to see if they can exploit any loopholes. This is why we embarked on such a comprehensive exercise before we enacted the regulation: to create as tight a system as possible,” he said.

This is delicate time for the MFSA, which has been smarting from criticism for eight years, when it was accused of not doing enough to protect the victims of the collapsed La Valette Property Fund. Things got worse for it following alleged breaches at Pilatus Bank and other financial institutions. It is facing increased pressure, along with the Financial Intelligence Analysis Unit, from the European Banking Authority, the European Parliament and the European Central Bank.

While not downplaying the impact of such issues, Dr Buttigieg said it was important to acknowledge how much had been done.

We think this is mission-critical

“We have learned from each case and we have even gone beyond what other regulators have done,” he said, noting that Malta adopted the Fifth Anti-Money Laundering Directive, well before the 2019 deadline.

 The financial services watchdog itself had also been restructured with one executive committee overseeing things, rather than the various committees previously in place. “This means there can be more focus on supervisory engagement without distraction,” he noted.

“Our remit is to protect consumers of financial products, not only by looking at the financial soundness of the individual operators but also by ensuring the soundness of the system as a whole,” he continued.

The MFSA has embraced FinTech as the island aims to become a leader in the so far unregulated area of virtual currencies. “Of course, there is a risk involved in becoming the front runner but that is why we have been doing so much preparation to ensure we have anticipated all the risks,” Dr Buttigieg said.

International experts from the US were brought over and the regulator is working with the FIAU on a new national risk assessment taking into account the anti-money laundering risks associated with cryptocurrencies.

The MFSA’s regulation regime of cryptocurrencies is based on three levels of scrutiny, covering everything from coins and tokens to exchanges, wallets and people.

Virtual financial asset agents will be the first level of defence. Like other operators involved in transactions they will have to submit reports to the FIAU on anything suspicious.

Initial coin offerings will be controlled, with the bulk being handled by a specific exchange for crypto assets.

“No one in the world can expect a regulator to guarantee a completely risk-free system. We would need an army of people on the ground. Regulatory work is a risk-based approach.

“What we can promise, however, is market integrity and robust regulation. And, more importantly, zero tolerance to any abuse found,” Dr Buttigieg pledged.

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