LAUSR

This paper critically examines the regulation of crypto assets in Malta, which has become a jurisdiction of choice for operators in this field. It analyses the Virtual Financial Assets Act [VFAA] and the MFSA’s approach to the regulation of this new field of financial services. The paper examines the manner in which the VFAA achieves the high-level objectives of financial regulation set by international standard setters, such as International Organisation of Securities Commissions (IOSCO), being: [i] investor protection, [ii] market integrity and [iii] financial stability. The central argument of the paper is that the VFAA establishes a framework that supports the innovation and new technologies for financial services in the area of crypto assets, whilst ensuring the effective achievement of the mentioned objectives of regulation. An important development in the carrying out of transactions over the internet has been the emergence of a new type of cryptographically encrypted digital assets, commonly referred to as crypto assets. Depending on their embedded features, crypto assets may be broadly categorised as cryptocurrencies, security tokens or utility tokens. Cryptocurrencies are used as a means of payment for goods and services and countries, such as Japan, have legally recognised them as a form of payment. They are also used for investment in other crypto assets, including offers of security tokens, which are generally issued to raise funds for specific projects by start-ups. Indeed, such offers are a practical alternative funding source for new or innovative businesses that would generally not be in a position to raise capital through traditional funding channels, as they would be at an early stage of development or are considered excessively risky and/or too small. For example, the development of the Ethereum blockchain, which is an operating system that features smart contracts, was funded by an online public crowd-sale during July– August 2014, with the participants buying ether token. Crypto assets and their associated technologies, notably Distributed Ledger Technology (“DLT”), are rapidly evolving and becoming more prevalent. At the time of writing of this paper there were more than 1600 crypto assets available over the internet having a market capitalisation in excess of USD 275 billion and more than 400 exchanges in the world, with a number of them being based in the European Union. Internationally, the equivalent of around Euro fifteen billion in funding has been raised through seven hundred twenty seven initial coin offerings issued in the first eight months of 2018. However, various risks are associated with the trading therein, which have been identified by European and international bodies. The novelty of the pertinent sector, combined with a lack of clear understanding of its disruptive impact over the existent financial services cosmos, has generally prevented jurisdictions from reaching a consensus on whether, how and to what extent these should be regulated. However, the significant rate of failure of entities having issued an initial coin offering, is a clear justification for the establishment of a regulatory framework to achieve the public interest. In view of the absence of a harmonised approach, and in order to ensure effective investor protection, market integrity and financial stability, a number of jurisdictions, including Malta, have decided to address the aforementioned regulatory issues on a national level. The academic literature on blockchain and crypto assets has grown at a very fast pace during the last year. This paper complements the existing literature by examining the legislative and regulatory developments in Malta, which is the EU’s smallest member state by population. The point is made that Malta’s framework for the regulation of crypto assets achieves the aforementioned objectives of financial regulation through a predominantly principles-based approach, which ensures technology neutrality without stifling innovation. Since the market capitalisation of crypto assets has not reached such point to be classfied as systemically relevant, the objective of financial soundness is analysed in this paper only at micro level. This paper has been prepared after carrying out research and analysis of information from various reports, articles, websites and other sources referenced throughout the body of the paper. It has benefited from the experience of the authors in Law and Financial Markets Review, 2019 Vol. 13, No. 1, 30–40, https://doi.org/10.1080/17521440.2018.1524687