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MFSA issues discussion paper on Initial Coin Offerings, Virtual Currencies and Related Service Providers.

The 30th November 2017 marks the next step taken by the Malta Financial Services Authority (‘MFSA’) in regulating the cryptosphere and positioning Malta at the forefront of digital asset regulatory integration. The consultation period is open until the 11 January 2018 and through it, the MFSA aims at obtaining the feedback of interested parties in order to devise policies which seek to strike a balance between fostering evolving technologies and ensuring a high level of investor protection, market integrity and financial stability.

Salient Features of the discussion paper.

The discussion paper draws from the ESMA Statement of November 2017 and describes Initial Coin Offerings (‘ICOs’) as innovative fund-raising methods through the issuance of proprietary coins or tokens in exchange for fiat currencies or virtual currencies (‘VC’). The discussion paper then distinguishes utility tokens from those providing voting rights or a share in the future revenues of the issuing venture.

A universally accepted definition of VCs is more daunting. However, the discussion paper refers to the FATF definition of both VCs and digital currency while concluding that digital currencies encompass both e-money and VCs (cryptocurrencies being a sub-category of same). Most importantly, the paper acknowledges that a ‘one-size-fits-all’ definition approach is both challenging and impractical for both market participants as well as regulators. In this regard, the MFSA proposes to adopt a technology-neutral classification in order to capture the industry as presently formed as well as future developments. To this end, the discussion paper categorises VCs into coins and tokens with the latter being subdivided into securitized and utility tokens.

Policy Guidance.

The policy guidelines proposed by the discussion paper follow the principles outlined in the ESMA Statement of November 2017 and as such, the MFSA is proposing that should a VC be categorized as a financial instrument, the activities of the firm involved in such VC would constitute a regulated activity in terms of MiFID. The MFSA is therefore, proposing that in order to achieve the objectives of financial regulation, a new legislative act entitled the ‘Virtual Currencies Act’ would need to be enacted in order to licence and regulated certain VCs and the activities pertaining to them.

Financial Instrument Test.

In light of the above, the MFSA proposed to introduce a test which would determine whether the VC’s features constitute a financial instrument in terms of MiFID and other European legislation. The test is being currently devised by the MFSA and will form part of the proposed Virtual Currencies Act.

Persons involved in Virtual Currency Activity.

The discussion paper proposes that persons involved in VC activity should be fit and proper, have the necessary competence, sufficient knowledge and expertise, experience, business organization and systems necessary in the field of IT, VCs and related underlying technologies.

Initial Coin Offerings.

The discussion paper posits that ICO issuers must determine whether their activities constitute regulated activities in which case, they must comply with all relevant existing financial services legislation. Should the ICO not be deemed to qualify as a financial instrument, the provisions of the Virtual Currencies Act would apply which would subject the issue to high level regulatory principles on transparency and merit-based regulation similar to those applicable to securities seeking listing on a regulated market.

Collective Investment Schemes.

The MFSA is currently considering issuing similar rules applicable to AIFs and NAIFs investing in VCs as those proposed in the consultation document proposing a framework for PIFS published by the MFSA on 23 October 2017.

Investment Services Licence Holders.

The discussion paper proposes that Investment services licence holders wishing to provide investment services in relation to VCs would be required to undertake the proposed Financial Instrument Test on the relevant VC and any services in relation to VCs qualifying as financial instruments would be provided in terms of the Investment Services Act. Should, however, the VC not qualify as a financial instrument, a separate licence under the Virtual Currencies Act would be required. The MFSA is also proposing that VCs that do not qualify as financial instruments would automatically be classified as complex instruments in terms of MiFID.


The MFSA is proposing that whenever a VC which qualifies as a financial instrument seeks admission to trading on the secondary market, the Prospectus Directive (inter alia) would apply. On the other hand, where the VC does not qualify as a financial instrument, they would fall within the remit of the Virtual Currencies Act which will provide for a framework for the regulation of the issuer and the exchange platform.

Credit Institution.

The MFSA is currently considering whether it should revise its position thereby allowing credit institutions to deal in VCs that do not qualify as financial instruments solely on behalf of their clients.

Financial Institutions.

The MFSA is proposing that financial institutions would only be allowed to provide payment services in relation to VCs solely on behalf of their clients.

[Re]insurance Companies and Retirement Pension Schemes.

The MFSA is proposing that [re]insurance companies and retirement pension schemes would still be prohibited from dealing in VCs both for their clients and on own account.


The MFSA is proposing that existing licence holders wishing to provide services in relation to VCs which do not qualify as financial instruments would need to set up a subsidiary solely for the purpose of providing such services in order to ring-fence the ordinary business of the licence holder thereby mitigating contagion risk in case of failures in the VC business.

AML Provisions.

The discussion paper proposes that any person carrying out any activity or providing any service in relation to or involving VCs would be considered as subject persons and would therefore, have to comply with the PMLFTR.

For further details on ICOs, virtual currencies, Blockchain technology applications, and other related matters, please contact us on info@dfadvocates.com or telephone +356 21313930/ 21340401.