The MFSA has, for the past months, been actively working on a framework that supports innovation and new technologies in the field of virtual currencies.
It is the MFSA’s policy that the regulatory framework in this field should be robust and one which safeguards financial stability, promotes market integrity and ensures investor protection. Following the issuance of a discussion paper in November 2017, and having received a lot of positive feedback with respect to the proposed introduction of a new legislative framework, the MFSA proceeded to draft the Virtual Financial Assets Act and submitted the draft bill to the Government for the initiation of the respective parliamentary procedures in line with the legislative process. The Act has Parliamentary approval but is not yet in force. A notice to this effect has to be published in the Government Gazette, by the minister responsible for the regulation of Financial Services for the Act to take effect.
Ensuring Investor Protection - it is generally understood that the absence of regulation may create a deficiency in investor protection, given the information asymmetry between parties. The lack of a strong regulatory framework brings about a greater risk of financial crime. The framework which is being proposed aims to address this by, amongst other things, subjecting operators in the field of virtual currencies to fitness and properness assessments, requirements which safeguard assets pertaining to clients.
Promoting Market Integrity - a lack of regulation also creates threats to market integrity and potential market abuse due to possible deficiencies in governance structures as well as risk and compliance policies and procedures. The proposed legal framework will: cater for increased transparency requirements; replicate the high level principles of the market abuse regulation; and impose requirements which extend beyond the fifth anti-money laundering directive.
Safeguarding Financial Stability - The regulatory framework being put forward by the MFSA inter alia provides for a watertight segregation of VFA business from traditional financial services business in order to mitigate any risk and ensures that operators follow prudential requirements which ensure that market participants do not reduce their economic capital or shift towards riskier balance sheet profiles in order to maximise shareholder value.
The aim of the regulations and rules is akin to that of the act – i.e. to safeguard financial stability, promote market integrity and ensure investor protection.
The MFSA has recently published two consultation documents with regards to: [i] the draft Virtual Financial Assets Regulations; and [ii] the Virtual Financial Assets Rules for VFA Agents. While the Act sets out the high level principles for the regulatory framework, the regulations are aimed at providing more detail and granularity, particularly with respect to: exemptions from the regulatory framework, such as the exemption from the requirement of a licence for an individual who manages virtual financial assets for his spouse, descendants and ascendants; application and supervisory fees; safeguarding of clients’ assets, for example by ensuring segregation of assets belonging to the client and those belonging to the company; as well as administrative penalties and appeals.
The Virtual Financial Assets Rules for VFA Agents will form the first chapter of the ‘Virtual Financial Assets Rulebook’ – the other two chapters setting out rules for issuers of virtual financial assets and VFA service providers respectively. The rules will provide for the respective authorisation processes, ongoing obligations, and enforcement and sanctions in the case of misconduct. The aim of the regulations and rules is akin to that of the act – i.e. to safeguard financial stability, promote market integrity and ensure investor protection.
Once the consultation period closes, the MFSA will analyse, evaluate and consider all feedback received and make any amendments to the proposed regulations and rules as it may deem necessary. A feedback statement will be issued - the finalised proposed regulations will be passed on to government in order to enter into force; and the finalised rules will be approved by the MFSA and will be published. In the meantime, the authority is drafting the remaining two chapters of the Rulebook referred to above. These will be issued for consultation in the coming weeks.
The MFSA will be in a position to start receiving requests for approvals/applications under the Virtual Financial Assets Act once the Virtual Financial Assets Act is in force and corresponding framework is in place. In this light, the authority is also working hard on the preparation of the required application documents and templates.
The consultation documents on the draft Virtual Financial Assets Regulations to be issued under the Virtual Financial Assets Act and the VFA Rules for VFA Agents, are publically available on the MFSA website. A dedicated section for the VFA framework has been set up on therein and may be accessed by the public through the following link - (link).
The relevant press releases are available: https://www.mfsa.com.mt/pages/viewcontent.aspx?id=674