With the enactment of the Virtual Financial Assets Act (“VFAA”) on the 20th July 2018, and along with the publication of the draft Virtual Financial Assets Regulations and the Virtual Financial Assets Rules for VFA Agents, legislation has been put in place to provide a comprehensive and detailed framework for the regulation of virtual financial assets in Malta.
In this respect, Malta is at the global forefront at ensuring that new and innovative technologies are regulated in a manner so as to ensure quality in the cryptocurrency and blockchain industries for the benefit of investors, issuers and service providers alike.
Such legislation is supported in turn by both the enactment of the Malta Digital Innovation Act, which enables the creation of the Malta Digital Innovation Authority (“MDIA”) to foster, promote and facilitate governmental policies in line with the advancement and utilisation of innovative technology arrangements, and the Innovative Technological Arrangements and Services Act, which governs the certification of such arrangements and services by the MDIA.
Furthermore, Malta, as a jurisdiction, has proved itself as a leading jurisdiction within financial services and gaming and shall be able to utilise an efficient and flexible regulatory authority, government support, a well-educated and technologically proficient workforce, relatively low set-up and maintenance costs, an attractive taxation regime and status as an EU-member country to ensure that Malta is and remains the leading global blockchain hub.
Cryptocurrency & Blockchain: The Intrinsic Relationship
What is a cryptocurrency and how does it work?
A cryptocurrency is a virtual currency secured by cryptography. Through Initial Coin Offerings (“ICOs”), start-ups raise capital when they issue crypto tokens on a blockchain. They then sell such tokens to investors or contributors. These tokens can be traded, but their value is often derived from company equity or access to a service.
Equity tokens represent ownership of an asset whereby shares and voting rights are issued through blockchain technology.
On the other hand, utility tokens are issued during ICOs and serve to grant future access to a product or service. Albeit the fact that the latter are not intended to be a mode of investment, the value of these tokens may nonetheless increase proportionately as the demand for the product or service in question grows.
What is Blockchain technology and what is it used for?
Blockchain technology was initially developed in order to record Bitcoin transactions, however other uses are now surfacing.
Around 700 crypto-currencies of a similar nature are currently deemed to exist, and the number is constantly on the increase.
This digital ledger of transactions is seen as incorruptible and can maintain records of financial transactions and anything else of value. A blockchain can be concisely defined as a shared public database.
An Initial Coin Offering (“ICO”) is a fundraising mechanism whereby a company sells tokens to investors. Such tokens are determined to be one of a Virtual Token, a Security Token or a Virtual Financial Asset in Malta – with each treated and regulated in a different manner.
What are Virtual Tokens?
Virtual tokens have no utility, value or application outside of the blockchain under which they were issued. They must thus be used solely for services offered by the blockchain.
Should the token be classified as a Virtual Token under the VFAA, it will be exempt from regulation.
What are Security Tokens?
Should the DLT (Digital Ledger Technology) asset not classify as a virtual token under the aforementioned legislation, it must be determined whether it falls under one of the eleven Markets in Financial Instruments Directive (“MIFID”) categories. If it does, it will be licensed under the Investment Services Act.
Should it not, it will be regulated under the VFAA.
Investor confidence in security tokens is hence boosted by the fact that they are regulated under MIFID.
Would a crypto-currency be considered a security and thus be included when calculating the chargeable income in Malta?
Should a transaction of a capital nature fall outside the scope of Article 5 of the Income Tax Act, it shall not be considered for tax purposes in Malta.
To determine whether the disposal of a cryptocurrency investment is taxable, a distinction must be made between transactions of a capital nature and transactions for purposes of trade as solely the latter are taxable in Malta.
In order to make this distinction, reference to the Badges of Trade must be made. These are as listed below:
- Profit seeking motive
- Quantity and nature of goods
- Incidence of transactions
- Time between purchase
- Sale Affinity with trader’s activity
Persons resident and domiciled in Malta are taxable in the latter state on a worldwide basis irrespective of the source of the income.
On the other hand, if one in either resident or domiciled in Malta, taxation is on remittance basis, hence only locally sourced income is taxed unless income with a foreign source is remitted here.
Trading income made on an exchange established abroad must be analysed to determine whether it is taxable in Malta. Should the trading activity be carried out in Malta, it will nonetheless be taxable.
What is a VFA?
A Virtual Financial Asset (“VFA”) can be described as a digital medium used for exchange, account or store of value.
Albeit serving as a virtual currency, the latter fails to have legal tender status in any jurisdiction. This however excludes virtual tokens, electronic money and financial instruments such as shares. For investor confidence, VFAs must be properly registered under the VFAA.
How is a VFA issued?
The procedure involves the drafting of a whitepaper which is to be approved by and registered with the Malta Financial Services Authority (“MFSA”).
English is the language required for drafting, however additional languages are also allowed.
This is also needed to admit the VFA to a Digital Ledger Technology (“DLT”) Exchange.
Ten days before circulation, such whitepaper must also be signed by all directors of the issuer and by the VFA Agent and delivered to the MFSA.
Should the format and content deviate from that stipulated in the Regulations, the whitepaper will automatically be disqualified from registration/ approval.
Who is the VFA Agent?
A VFA Agent authorised by the MFSA must also be appointed, and has a key role to play in the application process.
The VFA Agent acts as the primary liaison between the issuer and competent authority, ensuring that the issuer satisfies the requirements set out by law, advises the latter with regards to trading on a blockchain and applying for a VFA to be admitted to trade on a VFA exchange.
The VFA Agent’s role is also salient in passing on information deemed necessary to verify any information needed to register a whitepaper.
The Agent shall nonetheless remain independent from the issuer and must annually submit a certificate of compliance on behalf of the issuer.
Are there restrictions as to advertisement?
Websites must contain the information required in the format stipulated by the MFSA.
Adverts regarding an initial VFA offering or trading on a DLT Exchange, must be clear, consistent with the whitepaper and mention the fact that the whitepaper had either been or is soon to be published.
How can WDM International help?
As a starting point for assisting with an ICO, a Malta limited company would need to be incorporated, from which the tokens would later be offered.
In this regard, WDM International can assist with Malta company formation, offering directorship and company secretary services amongst others.
Our Firm holds a Corporate Service Provider licence and has an accounting and audit team which can readily assist in matters regarding Limited Liability Companies.
Our Firm is be best placed to provide integral assistance with the application process, including preparation of the application pack for submission to the MFSA, acting as the key liaison with the MFSA, legal review of any and all applicable documents, reviewing the whitepaper in line with the relevant legislation/regulations, and drafting the relevant required agreements, such as Sale of Future Token Agreements (“SAFT Agreements”).