Malta has always been on the forefront of technology and innovation. In the past months, a number of initiatives have been launched, aimed at establishing an innovative and attractive regulatory framework for entities operating in blockchain (and distributed ledger technologies), virtual currencies, cryptocurrencies, and for those entities interested in raising finance through an ‘Initial Coin Offering’ (ICO).
An Initial Coin Offering (ICO) is an innovative way of raising finance from the public by issuing ‘coins’ or ‘tokens’, usually in exchange for other digital tokens such as Bitcoin or Ethereum’s Ether.
Whereas the different types of ‘tokens’ are infinite – tokens can, especially for regulatory purposes, be broadly classified in the following two (2) categories:
- Utility tokens – these tokens grant the holder clearly defined use (utility) within a network or decentralized application. Typically, since finance is being sought for the creation and development of a service/product, the utility token-owner is essentially purchasing future access to such service/product;
- Security/equity tokens – these tokens have characteristics which closely resemble those of securities, shares and bonds – such as the right to vote or the right to participate in the distribution of a dividend/profit.
In the wake of the surge in the number and popularity of ICOs, the Maltese regulator is proposing an efficient regulatory framework which provides investor protection and market integrity without stifling technological innovation.
The procedure that is to be undertaken depends on whether the token is considered to be a financial instrument or not.
1.Financial Instruments Tokens
In order to determine whether a token is a financial instrument, the so-called “Financial-Instrument Test” must be carried out, which essentially assesses the characteristics of the tokens and the ICO, in terms of principles and criteria that are already well established under EU law. Typically, security/equity tokens have characteristics which closely resemble shares/securities in companies, and accordingly, such security tokens will typically be considered as financial instruments.
There are two (2) major consequences if a token is deemed to be a financial instrument, specifically:
- Prospectus – In all probability, and considering that ICOs typically target a large audience, the issuer of an ICO of Financial Instrument Tokens will be considered as making an ‘offer to the public’. Accordingly, the issuer of Financial Instrument Tokens will be required to prepare a prospectus in terms of the Prospectus Directive. The prospectus must be approved by the Malta Financial Services Authority (“MFSA”)in its capacity as the regulator of financial services in Malta;
- Approval – Firms providing investment services/activities in terms of MiFID must be properly authorized by the MFSA and must furthermore comply with a number of requirements. Since the process by which a coin or token is created, distributed or traded is likely to involve some activities/services which are considered to be investment services, such as placing, dealing in or advising on financial instruments, entities involved in an ICO must ensure due compliance with these regulatory requirements.
2.Tokens which are not Financial Instruments
In order to provide more certainty in relation to tokens which are not financial instruments, the Maltese legislator is, in terms of the VC Bill, proposing the following:
- White Paper – Information about the proposed business model, the project that will be undertaken, the token creation process and the team behind the business are typically included in a document referred to as the ‘white paper.’ There are currently no universal standards, structure or best practice as to the contents of such white paper. The VC Bill will establish common standards and establish the minimum information requirements that must be included in a white paper for an ICO;
- Approval of White Paper – The White Paper must be submitted to MFSA for review and approval. The White Paper cannot be published until MFSA grants its approval and the technical development has been approved as per (c) hereunder;
- Technical Development – Independent and accredited system auditors will review the IT development carried out to ensure that it satisfies any regulatory requirements and furthermore that it corresponds to the contents of the white paper and the technical documentation prepared;
- Service Providers – Service providers carrying out certain activities in respect to tokens which are not financial instruments, such as cryptocurrency exchanges, wallets and brokers must be duly licensed by MFSA in terms of the VC Bill.