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Inexperienced investors in virtual financial assets to be limited to €5,000

MFSA takes cautious approach in latest rules

Inexperienced investors will only be able to buy €5,000 worth of virtual financial assets – such as initial coin offerings – over any 12-month period, according to the latest rules issued by the Malta Financial Services Authority.

Only those defined as experienced investors will be able to invest more, such as those who have already dabbled in ICOs, and whose funds invested do not exceed 1 per cent of their net worth – excluding their residential home.

The rules, which cover issuers of such assets, are the result of two consultation exercises conducted over the summer and have set the bar relatively high in view of their risky nature.

Failure, fraud and money-laundering through crypto-assets is a concern for financial services regulators internationally, the MFSA said, acknowledging that fraudsters have used unregulated environment around Initial Coin Offerings (ICOs) to exploit often uneducated and unprotected victims.

The rules lay down other investor protection mechanisms, including the need for an independent third party to act as custodian for the assets and investors’ funds.

During November 2017, European Securities and Markets Authority alerted investors to the high risks of ICOs highlighting that ICOs are vulnerable to illicit activities with several ICOs having been identified as frauds, that some ICOs may also be used for money laundering purposes, the high risk of losing all of the invested capital, as well as the lack of exit options and extreme price volatility.

Last week, Malta was included in a list of seven jurisdictions with an ‘evident proactive approach’ in regard to ICOs and digital currencies in recommendations drawn up for ESMA.

The report was drawn up for ESMA, an independent EU authority, by its Securities and Markets Stakeholders Group which facilitates consultation between ESMA, its Board of Supervisors and stakeholders.

The group mapped legislative developments and regulatory approaches taken by national securities supervisory authorities in the EU and EEA member states in regard to ICOs and digital currencies.

The goal of this report was to advise ESMA on ways to contain the risks of ICOs and virtual currencies, on top of existing regulation, mainly with regards to risks for investors.

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