Due to an overwhelming increase of suspected fraudulent activities and scams in relation to the cryptocurrency field, the MFSA is proposing additional regulation in relation to Initial VFA Offerings (commonly referred to as ICOs). Such additional regulation will complement the rules proposed in the Consultation Paper on the Virtual Financial Assets Rules for Issuers of Virtual Financial Assets (Chapter 2 of the proposed VFA Rulebook), with the scope of further safeguarding consumer protection and market integrity.
The MFSA is keen to further regulate on matters dealing with a) the appointment of a custodian, b) monitoring of milestones and c) having a maximum investment limit for retail customers.
1. The Appointment of a Custodian
Currently, Chapter 2 of the Rulebook already deals with the role of a custodian, whose main function is to safeguard the Issuers’ assets and investors’ funds. The MFSA is now proposing new methods under which the Issuer’s assets and investor’s funds are to be kept. The Consultation Paper caters for both Virtual Financial Assets and Fiat currencies whereby in the case of the former, an Issuer may formally appoint a custodian provided that such person is an independent 3rd party set up in Malta. If the custodian is not constituted in Malta, then it may be constituted in any recognised jurisdiction, provided that the Issuer shall outline within its whitepaper the arrangements that will be put in place to ensure adequate safekeeping of its assets and investors’ funds. On the other hand, with regards to fiat currencies, an issuer’s assets and investors’ funds must be kept within a central bank, credit institution, bank authorised in a third country or a qualified money market fund.
2. Monitoring of Milestones
Currently there is a general obligation on the VFA Agent to ensure that the Issuer, upon submitting the whitepaper, has provided investors with a roadmap setting out the milestones for the Initial VFA Offering and to check whether the Issuer has satisfied such requirements. The MFSA is now proposing to re-word certain provisions found within Chapter 1 and Chapter 2 of the Rulebook in order to better reflect point 7 of the First Schedule of the Act by inserting the words ‘to the extent it is applicable’. In addition to this, a disclosure regime is being proposed for Issuers whose business model necessitates the setting out of milestones within the whitepaper.
3. A Maximum Investment Limit for Retail Customers
Lastly, in order to limit exposure in case of failure, the MFSA is considering capping the investment amount by retail investors. In other words, a retail investor (as defined by MiFID) would only be permitted to invest €5000 per year in Initial VFA Offerings.
The Scope of this consultation is to obtain industry feedback in relation to the Authority’s proposals and interested parties are encouraged to send their feedback to the MFSA by no later than the 31st of August 2018.