PKF welcomes the launch of a Security Tokens Trading Platform by Binance

Bloomberg’s announcement in March last year that Binance, the top global cryptocurrency exchange, was heading to Malta motivated practitioners to assess the possibilities of new business opportunities in the DLT sector. Binance, founded in 2017 in Hong Ko

All eyes are on us to see if we can pull it off and secure a banking partnership with Binance. One may ask why Binance is targeting Malta when there are a number of alternative jurisdictions offering a DLT shelter. The answer is that Malta is racing ahead to become one of the first EU countries to fully regulate the sector. Others such as Gibraltar, Zurich and Estonia are building up a strong competition so the trophy goes to the country which offers a secure legal environment that is user-friendly and efficient. Malta’s own legislation matches the European Parliament resolution of 3 October 2018, which launched directives on distributed ledger technologies and Blockchains. Its slogan – building trust with disintermediation of course means that Malta must be careful not to gold plate its own laws in an overzealous approach to safeguard its reputation.

As can be expected, the EU directive aims to protect SMEs by making access to funds via ICO a friendly step and assures that the cost of registration for DLT structures is proportionate to their size and complexity. One augurs that the MOU signed with Binance starts functioning so it can trail blaze an avenue for better access to start-ups via the use of Initial Coin Offerings (ICOs) rather than having to submit a full blown IPO. The directive lauds the potential of ICOs as an alternative investment instrument in funding SMEs and innovative start-ups. It aims to accelerate technology transfer. It also calls on the Commission to provide guidelines, standards and disclosure requirements, especially in the case of utility tokens that qualify more as a distinct asset class and less as a security. There is an overriding scope to identify criteria that enhance investor protection and obligations for the initiators of ICOs. It is understood, that regulations do not hamper SMEs from unleashing the potential of ICOs once checks and balances are in place to prevent fraud.

Essentially, the Commission is expected to explore the legal requirements that will allow this asset class to be blended with other financial vehicles in strengthening SMEs’ funding and innovation projects. Having briefly discussed the EU directive on the DLT sector, let us comment on the three Maltese laws promulgated last year to regulate operation of VFA agents, issuers, system providers and IT auditors. Applicants are faced with a stiff finance instrument test (FIT) as an essential prerequisite to clas- sify their VFA asset class. This test is exclusively administered and signed by accredited VFA agents, of which so far there are none yet authorised but rumours abound that over 30 have applied to MFSA and are currently being subjected to tests and interviews.

FIT is the starting point, as it is only in the event that the token in question qualifies as a Virtual Financial Asset that subsequent steps for its recognition can proceed. Next target is how to attract issuers of virtual financial assets seeking to provide such activity in or from within Malta. In this context, last year the government had sponsored a mega conference where over 7,000 participants were introduced to the blockchain infrastructure that was about to unfold this year. MFSA, being the competent regulator, was very busy answering questions from ICO issuers and other prospective VFA agents on how the various categories of licensees will be granted. Specifically, one notes that issuers must be legal persons who will adhere to high-level principles when carrying out their function.

Their business must be managed to satisfaction of the dual control principle when offering Virtual Financial Assets to the public or admit them to trade on a DLT exchange. This must proceed within six months from the date of registration of the Whitepaper with the MFSA. More compliance tasks are heaped on Issuers, who are obliged to draw up an annual compliance certificate in relation to business. It will not be a walk in the park for any foreign investor who decides to set up an ICO in Malta.

The ICO management has to engage a number of functionaries who are experienced professionals in the field of information technology, DLT assets and have a good understanding of the Issuer’s business. These include a system IT auditor, a certified VFA agent, a custodian, a statutory auditor and a money laundering reporting officer. Finally, there must be approval of the Whitepaper signed by the Issuer which makes adequate disclosures including any deployment of smart contracts.

So now that the government pledged to turn Malta into the next “Blockchain Mecca” in the Med, what is the next step to populate the island with DLT business? Certainly, the conferences held last year served as a foundation stone but we cannot rest on our laurels. Will the romance which started with the CEO of Binance flourish? Con- sidering the bearish mood in the Bitcoin market this year, will the sector rally? These factors are crucial pointers that will determine if the seed sown last year will germinate and grass shoots appear on our rocky terrain.

Can Malta succeed in championing disruptive technologies and associated VFA business apart from embracing Artificial Intelligence, Big Data, machine learning, biotechnics and Fintech in the financial services among others? These are the building blocks of a thriving economy where proactive businesses compete to provide cutting-edge services and products having access to research and innovation facilities coupled with proficient management. Realistically, Malta needs to spend more on innovation and research and train its workforce in entities aided with adequate capital and transfer of technology. Perhaps the Development bank will come to the rescue.

The antidote involves reinventing the way things are done, collaborating more widely with ecosystems of organisations, cutting dead wood in bloated bureaucracies and having the political will to inculcate meritocracy in public offices. Inexorably, Binance and others will thus be attracted to weigh anchor in our safe haven.