Blog: A virtual space with real regulation – Times of Malta

Bitcoin, Ethereum, DLT – in the past few years, the number of newly-minted terms and acronyms surrounding crypto assets has fuelled curiosity about the potential of easy money, as well as created a huge amount of scepticism. 

“The simplest definition of crypto assets, or Virtual Financial Assets (VFAs) as they are referred to in Malta – is as a digital representation of value that is stored on Distributed Ledger Technology, or the blockchain, whose access is based on cryptographic keys,” said Herman Ciappara, MFSA’s Head of VFA Function.

“VFAs are relatively new – although some of them have been around for a few years, with Bitcoin being the most widely known of such assets. But this is just one VFA out of the estimated 4,000 other crypto assets in existence. 

“The technological backbone of VFAs – the blockchain – is brilliant and the principles on which this is built are quite amazing. However, like all other technologies it is not risk free.”

VFAs transactions are stored on a decentralised infrastructure which does not involve a central authority responsible for its governance. Most coins are not even issued by known persons, unlike legacy currencies which are issued by Central Banks. Moreover, all transactions are encrypted, which translates into a relatively high level of anonymity. 

“It is these main characteristics that make VFAs such an innovative – yet risky – asset class,” added Ciappara. 

Crypto assets will not destroy legacy currency – however they are not just a fad either, and we are seeing an increased degree of institutional acceptance, which augurs well for further growth of this phenomena in the near future. 

“VFAs are attracting greater interest from both service providers and institutional investors,” added Ciappara. 

“Global players are jumping on board, including the likes of Tesla and Paypal which have recently started accepting VFAs as payment for their goods and services. Central Banks are also conducting their own pilot projects on digital currencies, and the European Commission in September last year has issued its own proposal for a EU regulatory framework on crypto-assets (MiCA).” 

Indeed, some believe that VFAs and blockchain will revolutionise financial services of the future – and all the activity surrounding the sector showcases the opportunities that VFAs hold. That said, this also emphasises the urgent need for regulating the space.

Malta was one of the first movers to start regulating this sector. In 2018, the Virtual Financial Assets Act was enacted, with the aim of regulating entities providing services in relation to VFAs in Malta. The legal framework was specifically designed to protect investors, ensure market integrity (including the prevention of money laundering and the financing of terrorism) and safeguard financial soundness. The MFSA’s strategy with regard to VFAs is that of contributing to the establishment of a sector made up of serious operators that are properly regulated and supervised at the highest level.

This is important for the integrity of Malta as a financial centre and in line with the expectations of international institutions such as the International Monetary Fund (IMF) and the Financial Action Task Force (FATF). To date the MFSA has 10 VFA Service Providers licensed under the Act operating and offering services related to VFAs from and within Malta.

Since the field of VFAs is considered as high risk, not least from an anti-money laundering and financing of terrorism perspective, the MFSA has been applying very high standards of due diligence with regard to the review of applications for a VFA licence. The MFSA verifies that applicants are fit and proper, have the necessary policies, procedures and systems in place to comply with AML/CFT standards and have strong levels of governance to ensure proper conduct of business. In this regard the MFSA works very closely with the Financial Intelligence Analysis Unit (FIAU). 

“The FIAU looks at service providers operating in crypto from an anti-money laundering and terrorism financing perspective,” said Dr Jonathan Phyall, Head of Legal Affairs at the FIAU. 

“Legislation imposes certain obligations on VFA operators – and together with the MFSA, we are present from the licence application stage onwards to regulate, supervise and guide operators, each Authority within its respective remit but always acting as much as possible in tandem with one another.” By way of example, the FIAU conducts mandatory interviews of the persons nominated as Money Laundering Reporting Officers of such entities to establish their competency as part of the MFSA’s licensing process. 

“Knowledge is also key. Having been there from the outset means that Malta has gained a lot of experience – and therefore we can share valuable insights with our counterparts. We also conduct an analytical function – we analyse suspicions of money laundering or funding of terrorism flagged to us by operators to see if the case merits being forwarded to the Police for further investigation. We also analyse trends and have an open line of communication with the MFSA and the Malta Digital Innovation Authority (MDIA) which oversees the technological aspect. This helps us keep abreast of a space that is constantly changing and growing.”

“Like any other financial assets, VFAs can be used for illicit purposes, and investors can easily become victims of scams especially when they interact with VFA service providers which are not licensed by the MFSA or any other reputable financial services regulator. It is for this reason that the MFSA has invested a lot of time and resources to regulate this space. It is an ongoing effort, with the ultimate scope of safeguarding the financial services sector and protecting the consumer,” concluded Ciappara.

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