Malta is indeed at the forefront of the block chain and crypto currencies revolutions and it is one of the first countries worldwide to work on introducing a body of laws to regulate the area with legislation expected to come into force before the end of the year. In fact, last month, three Bills were approved by Parliament and are now in process of being brought into effect once the Minister for Digital Economy may establish by notice in the Government Gazette.
The Bills concerned are the following:
A. Virtual Financial Assets Bill;
B. Malta Digital Innovation Authority Bill;
C. Innovative Technology Arrangements & Services Bill.
In addition, a Financial Instrument Test has also been introduced. This test is intended to determine whether a Digital Ledger Technology asset qualifies as
[i] Electronic Money as defined under the Third Schedule to the Financial Institutions Act (Chapter 376 of the Laws of Malta);
[ii] a Financial Instrument as defined under the Second Schedule to the Investment Services Act (Chapter 370 of the Laws of Malta), whether issued in Malta or otherwise;
[iii] a Virtual Financial Asset; or
[iv] a Virtual Token as defined under the Virtual Financial Assets Act.
The Financial Instrument Test is applicable to
[i] issuers offering Digital Ledger Technology assets to the public in or from within Malta; and
[ii] persons providing any service and/or performing any activity, within the context of either the Virtual Financial Assets Act or traditional financial services legislation.
By taking this test, an interested applicant would have a clearer idea of what type of license would be more appropriate for the type of activity intended to be carried out.
A copy of the said test workbook is being attached herewith for you ease of reference.
The Malta Digital Innovation Authority Bill is intended to set up the Malta Digital Innovation Authority as the authority that will provide for the regulation of designated innovative technology arrangements, as well as of designated innovative technology services as defined in the Innovative Technology Arrangements and Services Bill; and for the exercise by or on behalf of the Malta Digital Innovation Authority of regulatory functions with regard thereto.
Designated innovative technology arrangements are defined as the intrinsic elements including software, codes, computer protocols and other architectures which are used in the context of Digital Ledger Technologies (‘DLT’), smart contracts and related applications as well as other arrangements consisting of the following:
(1) software and architectures which are used in designing and delivering DLT which ordinarily, but not necessarily:
(a) uses a distributed, decentralized, shared and, or replicated ledger;
(b) may be public or private or hybrids thereof;
(c) is permissioned or permissionless or hybrids thereof;
(d) is immutable;
(e) is protected with cryptography; and
(f) is auditable;
2. smart contracts and related applications, including decentralized autonomous organisations, as well as other similar arrangements;
3. any other innovative technology arrangement which may be designated by the Minister, on the recommendation of the Authority, by notice from time to time.
On the other hand, designated innovative technology services are defined as the following services in relation to innovative technology arrangements:
1. the review services with reference to innovative technology arrangements provided by system auditors;
2. the technical administration services with reference to innovative technology arrangements provided by technical administrators.
It shall therefore be possible to eventually apply for and obtain recognition of the above defined arrangements and services from the Malta Digital Innovation Authority. Whilst such recognition may not necessarily be obligatory, yet it would definitely enhance the value of the arrangement / service being offered.
Meanwhile and perhaps more related to your enquiry, the Maltese Legislator is also in process of regulating persons (including bodies of persons) carrying out activities of crypto currency exchanges in or from Malta in terms of the Virtual Financial Assets Act (hereinafter the ‘Act’). Such persons shall be required to be licensed by the Malta Financial Services Authority (‘MFSA’) and applications for license will only be accepted if the proposed company’s activity is exclusively restricted to the operation of the crypto currency exchange and a Virtual Financial Asset Agent (‘VFA Agent’) is appointed by the said company. The Act is proposing four different licences and the MFSA will determine which licence would be most relevant for the applicant depending on the list of activities that the applicant intends to carry out.
The said VFA Agent must be a person registered as such with the MFSA and authorized to carry on the profession of an advocate, accountant or auditor; or a firm of advocates, accountants or auditors or corporate service providers; or a legal organization which is wholly owned and controlled by persons occupying these professions, whether in Malta or in another recognized jurisdiction; or any other person or class of persons who demonstrate to the satisfaction of the MFSA that they possess suitable expertise and knowledge to exercise the functions of a VFA Agent as set out in the Act and ensure compliance by the license holder with the rules and requirements set out in the Act.
In terms of requirements for the application, a template of the application form to be completed should be launched by the MFSA over the coming months (before the end of the year) which form as completed can only be submitted by the VFA Agent on behalf of the company and must contain/ be accompanied by the following:
(a) such information and documentation, as the MFSA may require or as may be prescribed in the said form;
(b) contain the address in Malta for service on the applicant of any notice or other document required or authorised to be served on it by or under this Act;
(c) be accompanied by a programme of operations setting out the systems, security access protocols and any other matters as may be required to be set out by the competent authority from time to time; and
(d) be accompanied by such fee as may be prescribed in respect of the license applied for, which fee shall not be refundable. In terms of fees, whereas final confirmation is still awaited from the MFSA, there shall be an application fee which shall be in the region of €4,000 as well as a licence fee. The licence fee will vary depending on the type of licence to be granted but which shall in any case range between €3,000 and €12,000. Additionally, besides these one time fees, there shall also be an annual supervisory fee which shall be payable annually by the licence holder upon submission of its annual audited financial statements to the authority. The Annual Supervisory fee shall be calculated by the authority anually based on the revenue of the licence holder and can range from as low as €2750 for revenue up to €50,000 and continue upwards to €25,000 plus €2,500 for each additional €1,000,000 and over in revenue up to a maximum of €100,000,000.
From a tax perspective then, it is expected that such companies would be taxed along the same lines as normal trading companies hence the same tax treatment is expected to apply. However given that the subject is still very fluid, for the time being we would kindly ask you to treat the above by way of very broad initial guidance for purposes of considering Malta as a jurisdiction where to domicile the exchange owner and on our part, we undertake to provide you with more concrete information as the subject develops.
In terms of the type of company/vehicle that one would be looking to establish for purposes of setting up such exchange, generally the vehicle to be used would be a private limited liability company structured as a trading company unless of course one would also be looking towards public listing on a stock exchange when a public limited liability company would then be considered.
We also confirm that such an entity would need to have an address in Malta and to this effect, the Malta Stock Exchange is also offering incentive start up packages to companies looking towards setting up as cryptocurrency exchanges in Malta. Should any of your clients be interested in obtaining further information on this point, please advise.
Having said the above, whereas the Registry of Companies is currently already accepting to register companies intended to carry out cryptocurrency exchange activities subject to the presentation of a legal opinion confirming that the company will eventually apply for the relevant licence upon the coming into effect of the applicable body of laws, we would not recommend this practice but would rather advise clients to wait for the laws to come into effect before proceeding to apply for the licence and then when the in principle approval is obtained, to register the company. In this way, the clients would not run the risk of having incurred expenses to form a company to then face problems with the licensing thereof.
Once the licensing frame work is up and running, it is expected that the licensing process will take a number of weeks however it is very hard at this point in time to indicate how much exactly it will take. It is expected however that the process with be faster than the standard license processing time of 6 months.
We also confirm that there is no requirement for any of the shareholders and/or directors to be Maltese or for any of them to come to Malta for company incorporate purposes. However, drawing from our experience with other types of licensing processes, a visit by the promoters to Malta at the commencement of the application process to meet with the authority officials and to present and explain the business plan may prove beneficial.
In terms of share capital, the Bills do not establish any particular share capital amount specific or entities wishing to apply for any of the licenses in question hence, unless the competent authorities shall in the license conditions stipulate any particular share capital amounts to be satisfied by applicants, it is expected that the standard minimum share capital requirements established by the Companies Act will apply which in the case of private limited liability companies is of €1165 whilst for public limited liability companies this is raised to €46,588.