The new legal and regulatory dimension of initial virtual financial asset offerings (VFAOs) which is shaping up in Malta seeks to unveil the legal uncertainty clouding the crypto market while safeguarding investors’ interests by mitigating the legal and platform risks therein.
To attain a sound benchmark of quality in the field, the new statutory office of the VFA agent has been set up under the recently-enacted Virtual Financial Assets Act, Chapter 590 of the laws of Malta. It is a new regulatory go-between whose main role is to act as an intermediary between the VFAO issuers or service providers, and the regulator and certify that such issuer is acting according to the Act, and the MFSA rules and regulations.
The weight of this role is evident through the fact that the Act mandates on each VFAO issuer the obligation to appoint and have in place at all times a VFA agent, who may be legal or natural persons, registered with the MFSA. Authorisation must be obtained from the authority, if and when the latter is satisfied that applicants are: ‘fit and proper’ and of good standing and repute; have sufficient financial resources; and their board of administration must collectively have, sufficient knowledge, experience and expertise in the field of IT, DLT and DLT assets.
An Agent must be a person resident in Malta, or if a body corporate, a Maltese company. Non-Maltese companies may qualify if they operate through a branch in Malta.
Acting as an independent gatekeeper, with the MFSA assuming a back-seat role of a general watchdog, the sentry-role of the agent entails inter alia: vetting of prospective white papers so as to guarantee completeness and accuracy of all the information therein; ensuring that the issuer is a fit and proper person to offer a virtual financial asset to the public in or from within Malta or shall apply for a virtual financial asset’s admission to trading on a DLT exchange; advising and guiding the issuer as to its responsibilities and obligations to ensure compliance with the provisions of the Act; and submitting to the MFSA all required information and documents required under the Act.
One of the agent’s initial responsibilities in a VFAO cycle will be to perform the two-layered financial instrument test under the Act, to determine whether the prospective DLT asset classifies as a virtual financial asset, a virtual token, electronic money or financial instrument.
Once ascertained that the token is a virtual financial asset, the rules under the Act kick in, including the registration of the white paper which must be made through the VFA agent.
As a port of call and liaison between the issuer and regulator, the agent must be involved in the application prior to any trading of virtual financial assets on a VFA exchange. On an ongoing basis it must also disclose any necessary information to the MFSA and independently carry out compliance monitoring on VFAO issuers. It must submit on an annual basis, a compliance certificate to the authority on the issuers confirming conformity with local AML/CFT requirements and qualitative standards and guidelines issued by the Malta Digital Innovation Authority.
The agents will also be one of the instruments that will help the regulator safeguard the interest of investors and the general public
Agents shall also hold the reins with respect to the licence applications mandated in relation to the provision of VFA services as defined therein. The Act stipulates that no person shall provide, or hold itself out as providing, a VFA service in or from within Malta unless such person is in possession of a valid licence granted under this Act by the MFSA. In this regard, besides being instrumental in the classification of DLT assets as virtual financial assets, the VFA agent shall be the point-of-entry to the regulator with respect to the application for such a licence.
The MFSA has recently launched two-of-three consultation papers on the regulation applicable to operators in this field of crypto-financial services while proposing the introduction of a rulebook. Besides supplementing the agent’s aforementioned duties and obligations under the Act, the rulebook specifies that a VFA agent must make every effort to take out and maintain: a full professional indemnity insurance cover; and an insurance policy that covers loss of money, loss of or damage to any other asset it owns or which is in its care, custody, control or responsibility.
It further outlines the possibility of VFA agents to rely on third parties to perform operational functions. Nevertheless, outsourcing should not come at the cost of increasing operational risks. The agent must take reasonable steps to avoid adding undue exposures either undermining the satisfactory performance of its services, or the quality of its internal control, or the MFSA’s ability to monitor compliance. Ultimately, it is the VFA agent who shall remain fully responsible for discharging all of its obligations.
In terms of sanctioning and enforcement, the rulebook, reflecting Article 48 of the Act, specifies that the MFSA, while upholding the principle of proportionality, may impose administrative penalties up to €150,000 for any breach by an agent of any rule therein, which penalty may be contested through an appeal to the Financial Services Tribunal.
Article 54(2) states that a VFA agent guilty of an offence under the provisions of article 53 of the Act shall be liable on conviction to a fine up to €500,000 and/or to imprisonment for a term not exceeding six months.
To serve as a regulatory buffer and a safety net, the VFA agent must hold some sort of initial and on-going capital while maintaining: a full professional indemnity insurance cover; and an insurance policy that covers loss of money, loss of or damage to any other asset it owns or which is in its care, custody, control or responsibility.
In its latest consultation paper, which revises its earlier proposal, the MFSA is now suggesting three options of mandatory regulatory capital, ranging from €75,000 together with a PII (be it on a mandatory or best efforts basis) to €150,000, depending on the responsibilities to be undertaken by the specific applicant.
The MFSA is also imposing a rigorous competence assessment which is based on three pillars: experience and educational background; written assessment; and viva voce assessment. Licensed agents may also be obliged to obtain 40 hours of continuous professional education on an annual basis. The application or licensing fees for VFA agents have also been increased and now range from €10,000 to €15,000, depending on the specific appointment of prospective VFA agent.
The VFA agent’s filtering role is intended to enhance inter alia Malta’s market efficiency by reducing the MFSA’s processing backlog, which in this space may be potentially rife with frivolous submissions and applications.
The agent will be the regulator’s second pair of eyes, serving as an added layer of merit-regulatory intervention. As an independent third-party it will assist the MFSA in ensuring that this niche market is run by fit and reliable market participants, upholding the highest level of standard.
In the end, the agents will also be one of the instruments that will help the regulator safeguard the interest of investors and the general public, ultimately boosting the reputability and marketing of Malta as the Blockchain Island.
Leonard Bonello is a partner and James Debono is an advocate at Ganado Advocates.
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