By means of three (3) bills dated 22nd May, 2018, the Government of Malta has published the legislative framework that is being proposed to regulate, amongst others, initial coin offerings, cryptocurrency exchanges and other related activities. The three bills have now been unanimously approved by the Maltese Parliament, however have not yet been published and therefore do not yet have legal effect.
In order to determine whether a DLT asset falls within the definition of a Virtual Financial Asset (VFA), Article 47 of the said Act, provides that the Malta Financial Services Authority (MFSA), as the competent authority in terms of the Virtual Financial assets Act (VFAA) will introduce a test which will be applicable to issuers, VFA agents and licence holders for the purpose of determining whether a DLT asset qualifies as electronic money, a financial instrument, virtual financial asset or a virtual token.
The VFAA provides that a VFA can be “any form of digital medium recordation that is used as a digital medium of exchange, unit of account, or store of value and that is not electronic money, a financial instrument or a virtual token.
A virtual token is defined by the VFAA as a form of digital medium recordation that has no utility, value or application outside of the DLT platform on which it was issued and may only be redeemed for funds on such platform directly by the issuer of such DLT asset.
The financial instrument test represents a two-layered set of mandatory tests set out under the VFAA which determine the regulatory regime to which a DLT asset is subject. The first layer of the test focuses on virtual tokens while the second layer of tests focus on the various financial instruments under MiFID.
If after the first layer of tests, it is determined that a DLT asset qualifies as a virtual token under the VFAA, then it will be out of scope of the VFAA, since virtual tokens fall outside the definition of a VFA. If, on the other hand, a DLT asset does not qualify as a virtual token, then the asset will be subject to the second layer of tests, in order to determine the appropriate regulatory regime applicable to that particular asset.
In terms of the MiFID tests, a DLT asset will be deemed to be a financial instrument, falling within the scope of MIFID if it qualifies as a transferable security, a money market instrument, a unit in a collective investment scheme, a financial derivative, or an emissions allowance under MiFID. If, on the other hand, the DLT asset is not deemed to be a financial instrument and is not electronic money, then that asset will qualify as a VFA in terms of the VFAA.
