The saga of a Blockchain island

Three years ago, Bloomberg announced that Binance, the top global cryptocurrency exchange was heading to Malta. This news sent many practitioners to assess the possibilities of new business opportunities in the DLT sector. Binance, founded in 2017 in Hong Kong, however, as China began to crack down on crypto, decided to move to Japan.

Not long after getting set up in its new headquarters, Binance suffered an attack on the Exchange, leading Japan’s Financial Services Authority (FSA) to require Binance to apply for a license. That apparently wasn’t within the scope of the Exchange’s business model and it left to find a new home, reportedly landing it in Malta.

Its CEO Zhao Changpeng (aka CZ) said it will soon start a “fiatto-crypto exchange” and hoped negotiations with Malta banks will culminate in a partnership. So far, it signed an MoU with the Malta Stock Exchange (see picture with Joe Portelli, CEO Stock Exchange signing with CZ) and one hopes that brisk trading will follow.

With hindsight, facts show us a different story, as Binance never proceeded to apply for a local license. Other jurisdictions 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 which is user-friendly and efficient.

In fact, Estonia has won the trophy with accolades since it hosts over 800 crypto and blockchain companies. What went so wrong with Malta’s own gold-plated legislation? Local legislation, heralded at breakneck speed by the MFSA, was keen to attract Initial Coin Offerings (ICOs) as an alternative investment instrument in funding SMEs and innovative start-ups. It aims to accelerate technology transfer. It also provides 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. It goes without saying, that regulations should not unduly hamper SMEs from unleashing the potential of ICOs, once checks and balances are in place to prevent fraud. In Malta this facility has never taken ground.

Essentially, the regulator is expected to explore legal requirements that will allow this asset class to be blended with other financial vehicles in strengthening SMEs’ funding and innovation projects. Having seen how the ICO experiment failed to germinate in our fertile soil, let us comment on the three Malta laws promulgated to regulate operations of Virtual Financial Asset (VFA) agents, issuers, system providers and IT auditors.

Applicants are faced with a stiff Finance Instrument Test (Fit) as an essential prerequisite to classify their VFA asset class. This test is exclusively administered and signed by accredited VFA agents, of which so far there are over 30, who successfully sat for MFSA tests and were licensed.

The sector sadly can be compared to the pub with no beer as only one foreign entity has successfully registered to operate from Malta. Back to the Fit, this is the starting point, as it is only in the event that the token in question qualifies as a VFA that subsequent steps for recognition can proceed. Next target is how to attract issuers of VFAs seeking to provide such activity in or from Malta. In this context, three years ago government sponsored a mega conference where over 7,000 participants were introduced to the blockchain infrastructure that was about to unfold with much fanfare.

MFSA at the conference was very busy answering questions from potential ICO issuers and other prospective VFA agents on how will the various categories of licensees be granted. 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 VFAs 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 secured 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 include, a system IT auditor, a certified VFA agent, a custodian, a statutory auditor and a money laundering reporting officer. Many ask now that government pledged to turn Malta into the next “Blockchain Mecca” in the Med., what is holding us from taking the next step to populate the island with DLT business.

Certainly, government-sponsored conferences served as a foundation stone but we cannot rest on our laurels. Sadly the romance which started with the CEO of Binance withered and died. Others ask… considering the bullish mood in the Bitcoin market this year, will the sector continue to rally? These factors are crucial pointers that will determine if in the near future, the seed sown to set up the rules of a Blockchain regime will die a natural death.

On a related theme, 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?

Post Covid 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 to train its workforce in entities aided with adequate capital and transfer of technology.

George Mangion is a senior partner of an audit and consultancy firm and has over 25 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