Malta plans to make waves in the cryptocurrency and blockchain sphere with the introduction of the world’s first holistic regulatory framework for Distributed Ledger Technologies (DLTs). The island’s vision is to create a thriving blockchain economy by providing a high level of regulatory certainty to a space that thus far is mostly unregulated. The ambition is that the sector will account for 10% of GDP by 2027. A new regulatory authority is set to be established which will be responsible for the certification of DLT platforms and smart contracts, while handling the voluntary registration of technology service providers. The proposed framework also includes a regime for the approval of Initial Coin Offerings (ICOs), as well as the regulation of cryptocurrency service providers. Activity around blockchain technology is already ramping up significantly. Crypto Exchanges Binance and OKEx has opened offices, cryptocurrency entrepreneurs are preparing to launch the first ICOs from the island, and blockchain-related start-ups are putting their applications and products on the market, intent on pushing the boundaries of technology into new markets.
During the past two years, blockchain technology has rapidly gained popularity with businesses, both big and small, and primarily in industries concerned with cybersecurity and payments. Two of Malta’s main industries are financial services and gaming, and hence, blockchain moved early to the top of Malta’s growth agenda. Initially, the sector’s regulatory authorities – the Malta Gaming Authority (MGA) and the Malta Financial Services Authority (MFSA) – were reluctant to allow the use of cryptocurrencies and blockchain technology. Both had concerns regarding the anonymity and stability of these systems. Yet there was the belief that DLT could be Malta’s golden opportunity, and that there should be a critical analysis of the technology. A working group was set up to make recommendations on how Malta can make the most of the opportunities offered by distributed ledger technology, including cryptocurrencies and ICOs. Meanwhile, the MFSA has given the green light and classified virtual currencies as an investable asset for the investment funds industry, and the gaming regulator recently approved a sandbox launch of a mock virtual currency, which is aimed to test whether cryptocurrencies would affect the island’s economy negatively.
Malta's ambition is that the blockchain sector will account for 10% of GDP by 2027
Pioneer of Blockchain Law
Prime Minister Joseph Muscat said last year he wants Malta to become a global pioneer in fully embracing blockchain – both across the public sector and from a regulatory aspect. The uses of this technology are wide ranging; and the network’s decentralised nature is usually regarded as one of the technologies biggest pros given that there is no single point of failure from which records or digital assets can be corrupted. Many predict the technology will radically change supply chains, and proof of blockchain’s popularity is evident: almost two billion US-Dollar had been invested in blockchain start-ups as of early 2017. Many believe that by 2025, blockchain adoption is considered mainstream and integral to the financial markets ecosystem. However, it’s early days for this industry, and many believe regulating this industry would help it grow and add credibility to it. While Malta is not the first country in the world working on, or implementing, bills accepting or promoting the use of cryptocurrencies and blockchain technologies, the island is among the first countries to introduce legislation for the so called second generation of blockchain technologies, such as Ethereum which took the concept of recording transactions a step further and introduced decentralised computation, which supports more complex functions such as smart contracts. Ethereum is mostly used by developers building applications on top of it. Those in favour of regulation believe that there are many companies who are interested in having a proper licence under which to operate, and Malta aims to be the first in Europe to provide exactly that.
Silvio Schembri (second from right to left), Parliamentary Secretary for Financial Services, Digital Economy and Innovation at the presentation of Malta's DLT Framework.
A New Regulator
Malta seeks to introduce a regulatory authority, the Malta Digital Innovation Authority (MDIA), dedicated towards the supervision and certification of DLT platforms and smart contracts. The MDIA would be the first regulator of its kind in the world. However, Malta made the conscious decision that certification with this authority would be voluntary and not mandatory in order to ensure that innovation will not be stifled. Nevertheless, the expectation is that some DLT-based platforms would wish to obtain regulatory approval since regulated products would imply a certain level of security, which the market will likely prefer. The proposed law will initially capture DLT platforms and smart contracts only, but could be extended to include other platforms and technologies, such as Artificial Intelligence and Internet of Things technologies, at a later stage. When it comes to virtual currencies and ICOs, Malta proposes a financial instruments test, which will enable entities to determine whether their virtual currency, token or activity falls within the scope of existing financial services legislation. The proposed law will also set out the licensing requirements, procedures and obligations for ICOs and service providers, which fall outside the scope of existing legislation. The law will satisfy Anti-Money Laundering and Know Your Client regulations, without stifling technological innovation.
A New Age of Finance
Many believe blockchain has potential in almost any context where information needs to be agreed and shared, for instance in insurance, trade deals, public health systems, foreign policy, international aid, taxation, loans – the list is seemingly endless. Indeed, every financial process that requires record-keeping and involves multiple parties could potentially benefit from blockchain technology. Proponents argue that, if properly implemented, distributed ledgers can bring improvements in transparency, efficiency and trust due to the centralised nature of the database and the fact that all changes are encrypted in such a way that they cannot be altered or deleted without leaving a record of the data’s earlier state.
As interest in this technology is rising to unprecedented levels, industry experts have come together to form BitMalta, an association advocating blockchain technologies and cryptocurrencies to the general public, as well as the Blockchain Malta Association, which promotes education, research and public debate for the advancement and development of digital economy in Malta. The island’s government has indicated that it is willing to throw its doors wide open to help companies develop new solutions. While there are no imminent plans in the pipeline, the island’s leaders do not rule out the possibility of establishing their own blockchain and their own cryptocurrency.
Blazing the Trail
DLT is still at a nascent stage; nonetheless, its proposition is so compelling that a number of other jurisdictions are investing in it now in order to carve out a role for themselves. Malta has taken proactive steps, and it is the country’s ambition to lead the race to embrace the new technology and set the standards for other countries to follow. However, most experts say that it is unrealistic to assume that any regulatory framework currently in the making, including Malta’s, would be able to account for, and foresee, all issues related to blockchain regulation. Growing pains are sure to follow. Yet, there is no other way than taking proactive steps. The blockchain opportunity is too big to be ignored. Malta’s Government is a big backer of this technology and wants to undertake selected projects itself. This will ensure a flow of projects to attract overseas players to Malta, stimulate the local blockchain industry and encourage start-ups. The signal that Malta is open for blockchain business could not be clearer.