‘Spring Cleaning’ Part 6: Considering Malta VFA?

How to register your exchange under the Malta Virtual Financial Assets (VFA) Act.

by Edwin Lee

Malta has earned its name as one of the most digitally innovative, forward-thinking countries by being the 1st country to have put in place regulatory framework for blockchain technology and cryptocurrencies. For more than a decade, this little island has attracted a large number of electronic money institutions and payment service providers from all over the world to set up their base in Malta, mainly due to its friendly and progressive regulatory approach and attractive corporate tax rates (5%-10%, the lowest across the EU).

On 4th July 2018, the Maltese Parliament passed three Bills of Parliament into law, namely:

  • Malta Digital Innovation Authority Act – sets up the Malta Digital Innovation Authority (MDIA)
  • Innovative Technological Arrangement and Services Act – provides for registration of technology service providers and the certification of technology arrangements by MDIA (e.g. distributed ledger technologies, smart contracts)
  • Virtual Financial Asset Act (VFAA) – regulates initial coin offerings (ICOs), VFA service providers and VFA agents by Malta Financial Services Authority (MFSA).

Binance, the world’s largest crypto exchange by trading value has moved its base of operations to Malta. Several crypto exchanges also follow suit and have relocated to Malta. In this article, we explore the main requirements to apply for a crypto exchange licence in Malta.

Any person who intends to operate a crypto exchange in or from Malta must first apply for a VFA licence from MFSA.

The main requirements to apply for a crypto exchange licence are as follows:

  • if the applicant is a natural person, he has to be physically based in Malta. If the applicant is a legal person, it can be an entity either incorporated in Malta, or established as a branch in Malta (if it is a foreign entity);
  • there is no restriction on the nationality of the ultimate beneficial owners of the applicant;
  • the designated persons, directors, senior management, qualifying shareholders and ultimate beneficial owners must undertake a fit and proper test;
  • the applicant must appoint a licensed VFA Agent to file the application with the MFSA and act as liaison between the applicant and the MFSA;
  • the applicant must undertake, through the VFA Agent, a Financial Instrument Test (FIT) to ensure that the virtual financial asset in relation to which the applicant will be providing the VFA Service falls within the meaning of a virtual financial instrument as per the VFAA;
  • the board of administrators/directors must effectively be directed by at least two individuals. The applicant needs also to appoint a compliance officer, a money laundering reporting officer and a risk manager; and
  • minimum share capital: €730,000 (approximately USD 827,700)

The VFAA regulates a whole range of service providers and services provided in relation to VFAs are classified in four classes. A crypto exchange falls under Class 4 licence – which allows licence holder to: operate a VFA exchange and to hold or control clients’ money, virtual financial assets and, or private cryptographic keys and custodian or nominee services solely in relation to the operation and activities of such VFA exchange. Crypto exchange will only be allowed to deal with tokens or coins that are categorized as virtual financial assets via the FIT. Tokens or coins that are deemed as financial instruments falling under the MiFID II directive, cannot be traded on such exchange.

The review of application by the MFSA will take about 60 days and if the MFSA issues an approval in principle, the applicant will be given up to 6 months to fulfil all pre-licensing conditions. Once all conditions are fulfilled, a VFA licence will be issued.

The crypto exchange operator will need to maintain the following on-going obligations:

  • setting up of a board of administrators/directors, having in place governance policies, risk management and compliance measures, and methods to safeguard clients’ assets;
  • having in place prudential requirements covering initial share capital and ongoing capital, own funds, liquidity and fixed overhead requirements;
  • ensuring proper conduct of business obligations regulating conflicts of interest, sales processes and selling practices and execution of clients’ orders;
  • maintaining record keeping, appointment of auditor, reporting and disclosure requirements (an annual report has to be submitted);
  • observing guidelines on VFAs listing criteria, order matching, settlement, custody and suspension/removal from trading of any VFA by the crypto exchange;
  • using a combination of hot and cold wallet; and
  • maintaining adequate insurance coverage to mitigate the risks associated with hot wallet.

In terms of custody service, where the business model involves the custody of assets and investors’ funds, a custodian needs to be appointed for the safe keeping of VFAs. Any FIAT currencies must be held by an authorized bank/licensed financial institution.

The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional advice. You are advised to seek proper advice for your specific situation.

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