In memory of ‘Blockchain Malta’

The announcement in Bloomberg almost three years ago that a top Cryptocurrency Exchange company was heading to Malta sent many practitioners to join the band wagon for new business opportunities in the DLT sector.

With hindsight, we recall that Minister Silvio Schembri called a press conference in February 2018 to announce the publication of a consultation document entitled “The Establishment of the Malta Digital Innovation Authority; the Framework for the Certification of Distributed Ledger Technology Platforms and Related Service Providers; and a Virtual Currency Act”. This document outlines three separate but linked bills: The Malta Digital Innovation Authority Act (MDIA), Innovation Technology Arrangements and Services Act (ITAS), and the Virtual Financial Assets Act (VFA).

These bills outlined the plan to create the supervisory authority, as well as the world’s first comprehensive legal framework to govern crypto, blockchain and ICOs. In a much hyped Malta

Blockchain conference, in 2018, the government remarked that after successfully positioning Malta as the ‘Blockchain Island’ by being the first in the world to regulate DLT (distributed ledger technology) products and services, we now would like to position Malta amongst the top 10 countries in the world with an artificial intelligence policy. This was matched with a website for the national AI strategy.

According to official statements, AI projects will be monitored by the Malta Digital Innovation Authority — the same organization that monitors DLT. Then, the good news was announced about a collaboration with SingularityNET, a decentralized marketplace for AI services, in a pilot project to “explore a citizenship test for robots in the process of drafting new regulation for AI”. SingularityNET, is working with renowned robot Sonia (see picture) built by Hanson Robotics.

Malta’s own legislation matches the European Parliament resolution of October 2018 which launched directives on distributed ledger technologies and blockchains. Critics pointed out that Malta must be careful not to gold plate its own laws in an overzealous approach to safeguard its reputation. Another essential ingredient is access to local banks which so far have not endeared themselves to the sector.

As can be expected, the EU directive aims to protect SME’s 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. The directive lauds the potential of Initial Coin Offerings (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. Needless to say, there is an overriding scope to identify criteria that enhance investor protection and obligations for the initiators of ICOs. Having briefly discussed the EU directive on the DLT sector, let us comment on the three Malta 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) and obligations to invest substantial paid-up capital. This test, is exclusively administered and signed by accredited VFA agents, of which so far there are about two dozen authorised and fully licensed. It is not clear three years down the line why Malta has not caught up with Estonia which registered over 1200 active crypto companies. Back to the FIT, this 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 recognition can proceed. The next target for MFSA is how to attract issuers of virtual financial assets seeking to provide such activity in or from within Malta. Specifically, one notes that issuers must be legal persons who must adhere to high-level principles when carrying out their function.

Their business must be managed in satisfaction of the dual control principle when offering Virtual Financial Assets to the public or admit them to trade on a DLT exchange. More onerous compliance tasks are heaped on Issuers, who are obliged to draw up an annual compliance certificate in relation to business. It is not 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 requisites 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 “White paper” signed by the Issuer which makes adequate disclosures including any deployment of smart contracts.

Certainly, the Government sponsored a number of local conferences which served as a foundation stone but we cannot rest on our laurels. Considering the bearish mood in the Bitcoin market due to a mild recession resulting from the pandemic - the question next year is - will the sector rally? Answers to these questions will determine if the seed sown in 2018 will germinate and grass shots 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. Realistically, reading the 2021 budget, one laments that not enough capital was allocated on innovation and research. Substantial resource is needed to train our workforce in future DLT entities aided with adequate capital and transfer of technology.

Kudos was showered on the government which pledged to turn Malta as the next “Blockchain Mecca” in the Med, but one may ask - what is keeping the flow of foreign capital to gate crash MFSA with bona fide applications. Perhaps boosted with the attraction of “Sonia” the female robot, next year she can charm a host of top DLT evangelists to revive the dream.

George Mangion is a senior partner of an audit and consultancy firm, and has over twentyfive years’ experience in accounting, taxation, financial and consultancy services. His efforts have seen that PKF has been instrumental in establishing many companies in Malta and placed PKF in the forefront as professional financial service providers on the Island.

Editor’s note: George Mangion’s article last Sunday erroneously included a photo Joe Gasan and Mark Gasan. While the article did refer to the Electrogas consortium, of which the Gasans form part, there was no specific reference to them. The error is regretted.