Malta becomes the first country to regulate cryptocurrency
Where do acquirers fit in?
I. Executive summary
The Maltese government has passed three sets of legislation that will make Malta the first country to officially regulate cryptocurrencies. A cryptocurrency is a digital or virtual currency designed to work as a medium of exchange, using cryptography to secure and verify transactions as well as control the creation of new units of a particular cryptocurrency. Essentially, cryptocurrencies are entries on a digital ledger that represent either a physical asset or a notional digital value in the form of an electronically exchangeable currency. The addition or subtraction of balances is verified by consensus on the network, and is facilitated by algorithms, typically representing proof of work (POW) or proof of stake (POS) mining, depending on the blockchain in question. Once a set of transactions is written to a block, they are effectively immutable. Cryptocurrency values are market-derivative. Therefore, like other traditional or fiat forms of currency, cryptocurrency values are based on what the market thinks they are worth.
Today there are over 2000 cryptocurrencies in existence, with a market capitalisation of over $200 billion.[i] Whilst substantially down from the ‘bubble peak’ of almost $800 billion in January 2018, the market value is indicative of sentiment regarding the importance of blockchain to a developing global digital economy. Yet involvement with cryptocurrencies has not been without risk due to their volatile nature and lack of regulation, as well as associations with nefarious activities. Bitcoin alone has been linked to countless unregulated transactions on the so-called ‘dark web’.[ii]
The blanket refusal to regulate cryptocurrencies, however, is no more. In September 2018, Malta, a country known for the development of payments innovation, became the first country to officially legalise cryptocurrencies through a series of laws passed earlier in the year. The laws and forthcoming regulations will provide cryptocurrency companies with a safe place to create and process cryptocurrencies, and will take the first steps in wiping away some of the skepticism so widely associated with the industry.
Malta’s new cryptocurrency regulations will undoubtedly excite an already eager cryptocurrency industry, although caution must be exercised. As tempting as it may be to believe, cryptocurrency will not suddenly usurp existing payment methods or forms of fiat currency. The regulations will provide overdue transparency and credibility to the cryptocurrency industry, but fiat currency is not suddenly going to disappear.
For now, and for the foreseeable future, established payments and other FinTech companies that are prepared to facilitate fiat currency in coordination with newly regulated cryptocurrency will be more vital than ever, especially as Malta’s new cryptocurrency regulations are implemented and continue to evolve. Growth and implementation will require collaboration with parties who can nurture a deep understanding of Maltese regulatory frameworks and combine this with an innovative outlook that embraces change.
II. Malta becomes the first country to regulate cryptocurrency
In July 2018, Malta became the first country to adopt legislation governing cryptocurrencies. Specifically, Malta passed three laws that will regulate how cryptocurrencies are innovated, initially offered to the public, and how blockchain-based enterprises are recognised.
What are the new laws?
The first law is the Malta Digital Innovation Authority Act (MDIA Act), which establishes the Malta Digital Innovation Authority and certifies the LT platforms. The law provides internal governance arrangements while outlining the duties and responsibilities of the Authority to certify DLT platforms and ensure credibility and provide legal certainty to users wishing to make use of a DLT platform. The MDIA Act “seek(s) the development of the innovative technology sector in Malta through proper recognition and regulation of relevant innovative technology arrangements and related services.” The Authority is granted great powers to: (1) recognize applicants that use “innovative technology arrangements” and (2) investigate applicants that they suspect of not meeting the “quality and integrity standards required … for purposes of recognition or compliance” with the law.[iii]
The second law is the Innovative Technology Arrangement and Services Act (ITAS Act). This Act deals with DLT arrangements and certifications of DLT platforms. This Act primarily focusses on setting up cryptocurrency exchanges and other companies operating in the cryptocurrency market. The ITAS Act outlines the different methods by which the Authority can recognize “innovative technology arrangements and innovative technology services.” The Authority can certify the qualities, features, attributes, behaviors, or aspects of a particular arrangement as fit for a particular purpose. The Authority then issues a certificate that “shall state the details of how the innovative technology arrangement is identified, including any public key or a brand name, and the Certificate shall be given a unique number for purposes of identification.” There are further safeguards regarding the quality of the service provided by the particular arrangements, including a requirement to have a registered technical administrator at all times, who can prove to the Authority that the arrangements can satisfy the service listed on the certificate.[iv]
The third law is the Virtual Financial Assets Act (VFA Act), and it establishes the regulatory regime governing ICOs, cryptocurrency exchanges, wallet providers, etc. The VFA Act regulates what have become known in wider circles as Initial Coin Offerings (ICOs). The VFA Act requires all cryptocurrency issuers to first publish a white paper before making an ICO. The white paper must be signed by every member of the issuer’s Board of Administration, and the paper must contain “information which, according to the particular nature of the issuer and of the virtual financial assets offered to the public, is necessary to enable investors to make an informed assessment of the prospects of the issuer, the proposed project and of the features of the virtual financial asset.” That information must be presented in “an easily analyzable and comprehensible form.” The white paper must also include a warning that the “offering of virtual financial assets does not constitute an offer or solicitation to sell financial instruments.” The white paper must also be approved by the registered VFA agent, who must be appointed and be “at all times in place” with the issuer in order to ensure compliance with the law. [v]
When do the laws go into effect?
The passage of the three laws has created a lot of excitement within the crypto sphere. Currently, following recent approval by the country’s Parliament, the Maltese Government has announced that the Virtual Financial Assets Act (VFA) and the Innovative Technology Arrangement and Services Act (ITAS) become effective on November 1, 2018. This effective date coincides perfectly with the launch date of the first edition of the Malta Blockchain Summit. The Malta Blockchain Summit will be held November 1 & 2, 2018.
The Malta Financial Services Authority (MFSA) will begin accepting and processing applications under the VFA beginning on November 1, 2018. The following activities will be regulated by the Act when conducted in or from within Malta: (1) The offering of a Virtual Financial Asset (‘VFA’) to the public by an Issuer; (2) the application, by an Issuer, for a VFA’s admission to trading on a DLT Exchange; (3) the activity of a VFA Agent; and (4) the provision of VFA services.[vi]
Aside from the VFA and ITAS, the MDIA Act will need a proper regulatory framework put in place before the law becomes effective. In fact, Silvio Schembri – Junior Minister for Financial Services, Digital Economy, and Innovation within the office of the Prime Minister of Malta – indicated that the laws might not all be effective until the end of 2018, and the laws may not become effective simultaneously. According to Schembri, “The Acts will have different effective dates, but we are envisaging them to be fully operational by end of this year.”[vii] The care with which the MFSA is taking to ensure that the proper regulatory environment is in place further shows Malta’s commitment to not only becoming the world’s first Blockchain Island, but to having a stable and sustainable set of laws and regulations in place to stay that way. The diligent legislative approach is illustrative of Malta’s commitment to creating an environment that enhances the growth and maturity of the sector.
Why is Malta doing this?
Malta has a reputation for being on the forefront of payments and technology. Despite other countries’ blanket refusal to regulate certain payments-related activities, Malta has shown a propensity to, rather, embrace and regulate payments. This attitude has enabled the country to successfully provide safe payments-related regulatory environments, whilst also fostering innovation.
According to Joseph Muscat, Malta’s Prime Minister, “I think that blockchain technology, DLT and cryptocurrency is where innovation is happening right now, and we are very glad that Malta can offer the first jurisdiction in the world to regulate this sector. We are excited about what this will lead to in the future.”[viii]
Also, according to Silvio Schembri, the new laws are an important step towards maturity for a booming industry. “When we started looking into what was needed for the blockchain industry to flourish, we understood early on that the serious operators wanted legal certainty. As of now, operators are functioning in jurisdictions of legal uncertainty. Operators fear that one day a government in that particular legislation will tell them they aren’t within the law – even though there are currently very few laws in place. This is creating legal uncertainty and we wanted to change this.”[ix] Schembri continued, “The high-level principles of the European Union (EU) are reflected onto our laws. We have also based these laws upon 3 basic principles – market integrity, consumer protection and industry protection.”[x] Ultimately, the aim “is to bring legal certainty to an environment that is currently unregulated.”[xi]
Malta understands that regulating cryptocurrencies, however, must be flexible enough to allow for innovation to grow. To do this, it must first have a way to understand the technology it seeks to regulate.
“We are not looking at short term gains here, but rather at the long-term evolution of blockchain and DLT technology. For example, if we think about an issuance of an ICO, operators typically present a white paper with the ICO details. While other jurisdictions are looking at the white paper to see if it’s certified, it’s the technology behind that white paper that implements what is written. Currently, no one is looking at the technology. That is something that we are doing differently,” said Schembri.[xii]
Furthermore, “Regulation will be done without stifling innovation, which is the main driver for economic growth,” said Dr. Abdalla Kablan, fintech expert and advisor on blockchain and AI for the Maltese government, who is helping organize Malta’s upcoming DELTA Summit. “Think about it as a regulation of engineers by engineers. However, if the DLT technology has financial applications built or deployed on top of it, then these actions will fall under the current financial regulator who has launched the VFA act to govern and regulate virtual financial assets.” [xiii] “We believe that we have found the right formula that will allow us to enact a solid regulatory framework that will protect consumers, safeguard investors and will allow for more transparency and visibility,” said Kablan.[xiv]
III. Where do acquirers fit in?
Payments acquiring could be a big part of cryptocurrency use and sustained regulation in Malta. Cryptocurrency credit cards are already gaining popularity, and there is no doubt their use will explode within Malta’s crypto-regulated environment.
In Europe, many banks issuing cards also have their own merchant acquirer licenses granted by the card schemes. They run their own merchant acquirer operations in-house or use third-party acquirer processors. The majority of acquirers are banks and therefore have a bank license. In addition, non-bank acquirers licensed as payment institutions (PIs) and some of them with added e-money license, all with European passport licenses.
Many acquirers are subsidiaries of bank groups, but more and more non-bank players (e.g. processors, new internet players, prepaid product service providers, and FinTechs) have started their own acquirer operations. In cases where their payment acceptance services are based on cards, they have applied for acquirer licenses from the respective card schemes.
Having the right Malta-based acquirer to partner with in this brave new world of regulated cryptocurrency payments will be critical to provide customers with safe and experienced acquiring. By using licensed Malta-based acquirers, cryptocurrency companies will not only meet customer demand for convenient and quick payment methods, but they will also be assured of proper processing from their acquirer’s experience to begin processing payments in Malta’s newly regulated cryptocurrency regulated market.
As a licensed Malta-based acquirer, Acquiring.com welcomes Malta’s passing of its three new cryptocurrency laws. Being on the cutting edge of payments for the past 20 years, Acquiring.com has seen and experienced countless different payment types and technologies to emerge during that time. Nothing, however, has more potential to reshape the entire payments industry than cryptocurrency—an entirely different form of currency that has vastly increased in value, use, and public and merchant acceptance.
The cryptocurrency industry has had its share of skepticism due to extreme asset volatility and links to inappropriate use. A regulated environment, however, can be exactly what the industry needs to thwart such skepticism. The Malta Digital Innovation Authority Act should ensure that the proper technological safeguards are in place at all times. The Innovative Technology Arrangement and Services Act, dealing with DLT arrangements and certifications of DLT platforms, should also ensure proper cryptocurrency exchange establishment and operations. Publishing Authority-approved white papers under the Virtual Financial Assets Act should provide adequate public information regarding a given cryptocurrency exchange at the time of ICO. Malta’s care in implementing regulatory frameworks around all three acts shows its commitment to becoming the world’s first Blockchain Island and its commitment to stay in the cryptocurrency business for the long-term.
As the cryptocurrency industry eagerly awaits Malta’s new cryptocurrency laws to take effect, experienced and licensed Malta-based acquirers like Acquiring.com are also monitoring the regulatory framework developments and are ready to use its experience to facilitate cryptocurrency payments and use now and into the future.
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 New York and other US states regulate cryptocurrencies by awarding licenses in relation to money transfers, but the United States government and its banking system does not regulate cryptocurrency as an official currency.
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