The Maltese Government has today unveiled a public consultation on the establishment of the Malta Digital Innovation Authority (MDIA) and the Framework for the Certification of Distributed Ledger Technology Platforms and Related Service Providers. This is in tandem with the MFSA’s recent consultation process on the proposed Virtual Currencies Act (“the VC Act”). The VC Act is expected to regulate brokers, crypto exchanges, wallet providers, asset managers, investment advisors and market makers dealing in VCs.
With the proliferation of Distributed Ledger Technologies (DLT), the Maltese Government is seeking to set up a regulatory authority to oversee these innovative technologies. DLT has applications across every kind of digital record and transaction, and its use is not limited to cryptocurrencies; it can be used to share contracts, records and other kinds of data.
The issued document presents a conceptual framework through which DLT Platforms can be subject to certification in Malta. This framework also takes into account the need to oversee the principal services providers to DLT Platforms. Separately through the MFSA, the framework extends to issuers of ICOs and certain service providers dealing in virtual currencies.
The Malta Digital Innovation Authority (MDIA) Bill
The MDIA Bill will provide for the establishment of the Malta Digital Innovation Authority, including the introduction of a regime for registration of Technology Service Providers and the certification of Technology Arrangements.
The MDIA’s Board of Governors will be composed of a Chairman and a maximum of eight other members, who will be selected by the Minister responsible for Digital Economy.
The MDIA will have following objectives and policies:
a. to promote governmental policies that favour the development of Malta as a centre of excellence for technological innovation and in particular deployment of DLT, including its adoption in systems of public administration by the Government;
b. to foster, promote and facilitate the advancement and utilisation of DLT and its design and uses;
c. to promote education on ethical standards and legitimate exploitation, use and creation of technology in particular DLT;
d. to safeguard, maintain and protect the reputation of Malta taking into account Malta’s international commitments and to collaborate with other states and international organisations in implementing the best standards in the sector;
e. to protect users and consumers, in particular when either directly or indirectly they will interface or use DLT to ensure adequate standards aimed at meeting their legitimate expectations;
f. to harmonise practices and where applicable facilitate the adoption of standards in the DLT sector in Malta in line with international norms and with those of the EU in particular;
g. to assist the competent data protection authorities in safeguarding the data protection rights of data subjects and assist other competent authorities for the protection of vulnerable persons and the promotion of competition and choice;
h. to promote, and if required, enforce ethical and legitimate criteria in the design and use of DLT, and any application, software or derivative nascent from it or intrinsically part of it or connected to it, as well as quality of service and security;
i. to promote transparency and auditability in the use of DLT, and any application, software or derivative nascent from it or intrinsically part of it or connected to it;
j. to promote legal certainty in the application of laws, in a national and cross-border context, and legal principles.
The MDIA shall be responsible for the certification of Technology Arrangements and the registration of Technology Service Providers, as the “competent authority” in terms of the proposed TAS Bill. The MDIA may certify or refuse to certify a Technology Arrangement and may register or refuse to register a Technology Service Provider. It may also cancel, suspend or vary the certification issued in favour of a Technology Arrangement or the registration of a Technology Service Provider.
The MDIA Bill will also set out in detail the powers granted to the authority and the dispute resolution mechanisms to be implemented through the Administrative Review Board.
The Bill will also set up the new “Joint Co-Ordination Board” (JCB) which will be responsible to foster effective cooperation between the MDIA and other National Competent Authorities(NCAs) in areas of technology uses.
The JCB shall have the following functions:
i. to give advice about whether and how an NCA or public institution should act in respect of a Technology Arrangement, where the issue appears to the JCB to be relevant to the development of technology uses and related services and arrangements in Malta;
ii. to act as the medium to establish national standards when asked to do so by any NCA with reference to Technology Arrangements and their uses, and in particular to adopt codes of best practices for NCAs to benchmark their requirements against in carrying out its functions.
The MDIA Bill will also establish the National Technology Ethics Committee (NTEC). The NTEC shall ensure that the proper standards of ethics are reflected in the use of relevant Technology Arrangements and to guide other NCAs in Malta. The NTEC will be mandated to develop guidance on the ethical standards which could be adopted in relation to the design and use of technology and innovation. It shall also assess and establish ethical standards for the purposes and uses of Technology Arrangements to ensure that they may not be designed to undermine the ethical standards expected to operate within a democratic state.
Framework Applicable to Technology Arrangements and Technology Service Providers (“The TAS Bill”)
The TAS Bill will set out the regime for the MDIA to be responsible for the registration of Technology Service Providers and the certification of Technology Arrangements.
The Bill will set out the framework applicable to:
Auditors of Technology Arrangements related to smart contracts (this refers to the person who reviews and assesses the Technology Arrangement against a number of pre-determined criteria)
Administrators of Technology Arrangements (this refers to the person, under whatever name designated, who assumes responsibility to manage or otherwise control the operation of the whole or part of any Technology Arrangement)
The Bill is proposed to initially capture DLT Platforms and related smart contracts only. In the future this may be extended to include other platforms and arrangements, such as those relating to artificial intelligence.
It is being proposed that the following Technology Service Providers may seek registration with the MDIA:
in relation to any DLT Platform which is certificated by the MDIA;
in or from Malta; or
through Maltese legal persons; or
in such other cases as the Minister responsible for Digital Economy may prescribe,
It is being proposed that any person will be able, on a voluntary basis, to request the MDIA to certify a Technology Arrangement. One of the conditions that the MDIA will require, in order to be able to consider this request, is that the Technology Arrangement has an Administrator that is registered with the MDIA. It is anticipated that the MDIA will undertake a principle-based review and will assess the proposed Technology Arrangements from various perspectives such as compliance with applicable laws, integrity and security. It is expected that the list of qualities that Technology Arrangements applying for certification will be required to possess and which will be assessed as part of the certification process will be formulated by the MDIA once this is constituted. It will also specify certain private law issues relating to Technology Arrangements.
The proposed Bill will also try to cater for a scenario where Technology Arrangements are not owned by a corporate structure, by proposing that these Technology Arrangements may register with the Registrar for Legal Persons in Malta and acquire legal personality.
The proposed changes will also be particularly relevant when seeking to issue an ICO. The Issuer will be required to appoint a systems auditor to undertake a review and assessment of the IT development undertaken by the developer. In turn the auditor must provide assurance to the relevant authority reviewing the ICO, which is intrinsically linked with the approval of the White Paper.
The Proposed Virtual Currencies Act
Following the consultation period in January 2018, the MFSA has received positive feedback on the proposed framework for ICOs and the provision of certain services in relation to VCs. The proposed framework will introduce a “Financial Instruments Test” consisting of two stages:
The first stage would effectively determine whether a particular VC qualifies as a financial instrument in terms of existing legislation.
The second stage would determine whether the VC qualifies as an asset under the proposed VC Bill.
In case of an affirmative determination during the first stage, the person undertaking the “Financial Instruments Test” would not be required to proceed to the second stage. It is being proposed that the respective determination resulting from this test will need to be verified by an external independent professional reviewer.
The proposed Act will encompass the following:
ICOs which relate to those VCs not qualifying as financial instruments under European and national investment services legislation. It shall set out the minimum transparency requirements applicable to such offerings as well as the obligations of the relevant parties involved. More specifically, the Act is set to integrate the high-level principles of the legislation applicable to initial public offerings (IPOs), that must be adhered to by an issuer of VCs. In particular, it shall cover the information that needs to be communicated to the investors in the whitepaper and the additional transparency requirements applicable where the issuer intends to have a VC admitted to trading on an exchange;
The licensing requirements, procedure and ongoing obligations, which shall reflect the high-level principles enshrined in the existing EU financial services legislation in relation to the provision of investment services, financial markets and market abuse;
The functions and powers of the MFSA as the regulator responsible for this field of financial services.
The exact categories of VCs and services falling within the proposed Act, shall be determined further to the MFSA’s comprehensive review of the industry’s respective feedback on the Discussion Paper. This notwithstanding, the MFSA is inclined towards excluding utility tokens, in their purest form, as well as certain services from the proposed framework’s sphere. The classification of VCs will also be reviewed to include hybrid VCs whose features may create issues vis-à-vis their classification.
In the case of existing operators falling under the proposed VC Act, it is proposed to have a transitory period of 6 months to ensure a seamless transition to prevent any disruptions.
The MFSA is expected to issue a response and position on these matters in due course.
Interested parties are encouraged to send their feedback to the Parliamentary Secretary for Financial Services, Digital Economy and Innovation within the Office of the Prime Minister by no later than 9th March 2018.
For more information on Cryptocurrencies, Blockchain, Smart Contracts and related areas please contact Dr Ian Gauci on firstname.lastname@example.org or Dr Cherise Abela Grech on email@example.com