Malta Extends Scope of Proposed Virtual Currency Regulations

The Malta Financial Services Authority (MFSA) has published a ”feedback statement” regarding its proposal for regulatory guidelines governing collective investment schemes involving virtual currencies (VCs) operating in the European archipelago nation. The statement has been issued following a consultation period from the 23rd of October 2017 to the 17th of November – in which the MFSA sought to gain feedback from Malta’s citizenry and private sector regarding the proposed regulations.

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Malta Provides Greater Clarity Regarding Proposed Cryptocurrency Regulations

The MFSA, Malta’s financial regulator, has published a “feedback statement”, following consultation regarding “proposed regulation[s]” for “collective investment schemes investing in virtual currencies.” Malta’s regulator states that “The main proposals introduced” sought to safeguard “the interest[s] of investors and the integrity of the financial market in the context of virtual currencies.”

The Malta Financial Services Authority

A number of respondents enquired as to whether collective investment schemes with a “limited exposure” to cryptocurrency instruments will be subject to the same regulatory requirements as collective investment schemes which invest solely in VCs.” The MFSA confirmed that all collective investment schemes that invest in virtual currencies will become subject to the full regulatory apparatus pertaining to virtual currencies, regardless of the scale of exposure.

The regulator also clarified that both “direct and “indirect’ investment into virtual currencies will require total adherence to the proposed regulations – with the MFSA defining indirect investment as occurring “through trading companies/special purpose vehicles.” The MFSA added that “Any other indirect investment including inter alia investment in units of a collective investment scheme which itself invests in VCs, shall be understood as falling outside the scope of the regulatory framework.”

Malta Publishes ‘Feedback Statement’ Regarding Proposed Cryptocurrency Regulations

The MFSA states that it has chosen to significantly extend the scope of the proposed regulations in light of the feedback it has received. The regulator states that it is now “inclined to extend the scope to further encompass [Alternative Investment Funds (AIFs)] and Notified AIFs,” in addition emphasizing that it had “updated the Consultation Document’s definition of VCs in order to further encompass tokens offered through ICOs.” The authority has also “established that limited partnerships and unit trust structures” provide adequate “governance oversights safeguards”, prompting the MSFA to “extend the regime to limited partnerships and unit trusts.”

The authority also sought to emphasize that “a classification between ‘trading’ and ‘infrastructure’ funds is not required,” stating that “Collective investment schemes investing in the underlying technologies of VCs would fall under the traditional definition of private equity funds.”

The feedback statement also mentioned that “the proposed regime” will be “available only to Qualifying Investors” – addressing criticisms that such “will significantly restrict investments in VCs.” The regulator also stated that it is still “considering whether credit and financial institutions should be allowed to deal in VCs, […] solely on behalf of their clients.”

Virtual Currency Technology Competence Requirements

The MFSA received considerable feedback regarding its specification “the service providers of a [Professional Investment Fund (PIF)]” must possess “sufficient knowledge and experience in the of Information Technology, [virtual currencies,] and their underlying technologies, including but not limited to [Distributed Ledger Technology]”. Emphasis was also placed on whether or not such requirements should be applicable “to the roles of Compliance Officer, Money Laundering Reporting Officer (MLRO) [,] and the auditor of a PIF investing in VCs” – with one respondent “arguing that their respective obligations are not correlated to the underlying assets of a scheme.”

Whilst the MFSA reaffirmed to need for technological competence pertaining to the assets managed by a collective investment scheme – including with regard to positions such as Compliance Officer or MLRO – the authority stated its intention to “adopt a holistic approach” when assessing such, “rather than base [said] determination on a particular metric.”

The MSFA added that “Interested applicants are required to attend a pre-application meeting with the Authority for initial feedback and guidance on the competence of the proposed parties forming the PIF’s structure and set-up.”

Security Requirements

The MFSA also gave further elaboration regarding the “safekeeping and custody” requirements for collective investment schemes with cryptocurrency exposure. The document states that “As a minimum, a PIF investing in VCs should opt for a combination of cold and hot storage. With regard to cold storage, such PIF is expected to use a multi-signature wallet whereby the input of two out of two signatories would be required in order to access the wallet and transact in VCs. The investment manager […] is expected to be the first signatory and the custodian the second signatory.”

Numerous respondents requested “further guidance in relation to the risk spreading requirement” presented in the proposed regulations. One respondent is reported to have argued that “in view of the limited number of VCs currently in circulation […] the respective requirement should be removed.” The MFSA has acted on the recommendation, stating that “conformity with the principle of risk spreading shall […] remain optional for PIFs investing in VCs.”

Lastly, the Malta’s financial regulator has “proposed a Financial Instrument Test to determine under which circumstances a VC would be classified as a financial instrument, in accordance with the general principles of a policy statement issued by the European Securities and Market Authority.”

What are your thoughts regarding the MFSA’s feedback statement on its proposed regulatory guidelines for collective investment schemes that are invested in virtual currencies? Share your thoughts in the comments section below!

Images courtesy of Shutterstock, https://www.mfsa.com.mt

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