Malta – blockchain island in Mediterranean

Progressive attitude towards virtual currencies positioned Malta as the champion in crypto regulation for its plain legal framework and efforts to furnish legal certainty to the industry.

Being an EU based jurisdiction might add another value to do business, in lieu of choosing an offshore country. Malta is appealing to an increasing number of fintech businesses, crypto exchanges and investors thanks to its holistic legal framework.

Progressive attitude towards virtual currencies positioned Malta as the champion in crypto regulation for its plain legal framework and efforts to furnish legal certainty to the industry. Being an EU based jurisdiction might add another value to do business, in lieu of choosing an offshore country. Malta is appealing to an increasing number of fintech businesses, crypto exchanges and investors thanks to its holistic legal framework.

Overview of legislations

Financial service providers in Malta are bound to comply with all EU directives and General Data Protection Regulation, inter alia, Investment services Act, the Banking Act, the Financial Institutions Act and the Insurance Intermediaries Act. In response to a growing demand for laying out a regulative framework on digital assets, Maltese government enacted following acts in 2018 to regulate Blockchain, Distributed Ledger Technology (“DLT”) and Initial Coin Offering (“ICO”):

These legislations are predicated on the fundamental basic principles of market integrity, consumer and industry protection. Below is the brief outline for each legislative act.

VFA Act

While the cryptocurrencies are not considered as a legal tender, the Maltese government recognizes them as “a medium of exchange, a unit of account, or a store of value”. They represent the cryptographic format proportional to fiat currencies or utility tokens.

The VFA Act defines the classes of digital financial assets, establishes a framework for offerings of virtual financial assets to the public, such as ICOs and services based around virtual assets. In compliance with EU markets in financial instruments directive (MiFID), digital assets might be characterised as financial instruments. To alleviate this uncertainty, pursuant to VFA Act, Malta developed the financial instruments test for virtual and security token issuers to identify the type of asset and applicable legislation to the ICO and token. The test is designed to identify whether a certain asset qualifies as DLT or VFT.

Virtual financial asset means any form of digital medium recordation that is used as a digital medium of exchange, unit of account, or store of value and that is not: electronic money, a financial instrument; or a virtual token;

While DLT asset means virtual token, virtual financial asset; electronic money; or financial instrument, which is intrinsically dependent on, or utilises; Distributed; Ledger Technology.

If the asset at issue is found to be a virtual financial asset, this asset shall be regulated under the VFA Act.

As per article 3 of the VFA Act, issuers must publish “whitepaper” which has been signed by each member of the issuer’s board administration and contains all relevant information on the nature of the assets offered to public to allow investors to make informed judgement on the prospects of the issuer, presented project and features of virtual financial asset. The document should contain a disclaimer that “offering of virtual financial assets does not constitute an offer or solicitation to sell financial instruments.” The document must be in the “easily analysable and comprehensible form” and approved by the registered VFA agent who must be present with the issuer “at all times in place” to ensure compliance with the law.

Through regulation of each class of the digital assets, the Act deems to protect stakeholders and investors in the industry.

ITAS Act

The ITAS Act is primarily intended to establish a framework for registration of Innovative Technology arrangements, involving smart contracts, technology service providers and certifying technology platforms. Registration and certification will facilitate consumers and investors to be favoured with legal assurance that their investments are sound and will not be challenged by any sort of fraud. The provisions of the Act also refers to a Malta Digital Innovation Authority which functions as a regulator.

MDIA Act

On the basis of MDIA Act, the Malta Digital Innovation Authority was established in 2018, to found internal administration to inspect and certify DLT platforms to guarantee credibility for customers intending to use the platforms. The Act gave the Authority exhaustive power to recognise, certify, and regulate applications related to “innovative technology arrangements and services” (described in article 2 as “intrinsic elements including software, codes, computer protocols and other architectures which are used in the context of DLT, smart contracts and related applications”). The main reason why Malta chose this method is to make sure that technical sides of the matters are inspected by Tech specialists to keep standards and quality high and security is ensured.

Regulatory bodies

The purpose of the establishment of the Malta Digital Innovation Authority was to “address the development in Malta of all innovative technology arrangements and innovative technology services”) and to “seek the development of the innovative technology sector in Malta through proper recognition and regulation of relevant innovative technology arrangements and related services” (under Article 5 and 6 of the MDIA Act).

Specifically Malta Digital Innovation Authority in charge of the following statutory duties:

  • promotion and facilitation of the use of innovative technologies, to make them accessible and to hinder unethical application;
  • establishment of standards and norms for Innovative Technology Arrangements, applications, software and derivative products to remain in accordance with international rules, standards and laws;
  • policy reforms in cryptocurrency and blockchain technologies;
  • certification and audit of DLT and blockchain technology systems.

Malta Digital Innovation Authority has an authority to investigate the applicants who do not meet “quality and integrity standards required” under the current legislation and penalize those who do not meet compliance requirements with a fine up to €12,000 (about US$13,976) or/and imprisonment for up to 3 months. Malta Digital Innovation Authority IA collaborates with Malta Financial Services Authority (hereinafter referred as “MFSA”) to grant licences to service providers which use DLT and blockchain technology. Being a unified financial regulator of the country, the MFSA supervises financial exchanges in the country to thwart money laundering and related crimes and enforce applicable rules and has an authority to revoke licenses and to issue fines for non-compliance.

Taxation

Malta does not have a particular tax law or VAT applied to cryptocurrency transactions; the government published guidelines on tax treatment of transactions involving DLT assets. Transactions involving coins are treated in the same way as transactions involving fiat and conventional currency. Thus cryptocurrencies and bitcoins do not fall under the scope of income, duty and capital gains taxes within this jurisdiction.

On the contrary, coins transferred within coin exchange trade, earnings from this business are taxed similarly as trading stocks, at 35% corporate income tax rate. Mining is not subject to VAT, with the exception of cases when it is done against transaction fee payment.

Summary and future

Maltese regulations that prioritised the importance of the blockchain industry fostered blockchain business to meet the challenges brought by the fast-evolving digital landscape. Basically, the government laid down high standards to ensure the protection of market stakeholders and to preserve financial stability. New regulations might arise as the government plans to integrate artificial intelligence with cryptocurrency regulation, and might implement precise guidelines in relation to security token offerings. Thus, further regulatory measures might arise in the time to come. While digital assets and blockchain technologies remain largely unregulated leading to uncertainty, Malta might serve as a role model for regulatory efforts in other jurisdictions.

The content of this article is intended to provide a general guide to the subject matter, not be considered as a legal consultation.


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Lithuania AML Act application on blockchain and fintech business

Unlike the traditional financial system, digital currencies are particularly interesting for cybercriminals for anonymity and ease of cross border fund transfers.

Thanks to its potential role in the monetary future, the regulative measures should match the emerging nature of virtual assets and risks that need to be mitigated.

EU Regulators demand financial institutions to execute identity checks to verify their clients and to ascertain that they are not dealing with money laundering or terrorist financing. To implement EU Money Laundering Directive into it’s legislation, the government of Lithuania has amended its statutory regulations and by laws, specifically:

  • on 23 July 2020, the Board of the Bank of Lithuania adopted Resolution No 03-106 on the requirements for electronic money institutions and payment institutions regarding internal control, risk management and safeguarding of received funds;
  • on december 17, 2020, the amended provisions of article 10 and 11 of the Law on the Prevention of Money Laundering and Terrorist Financing, (hereinafter –”LPMLTF”) which established client due-diligence norms for both face-to-face and non-face to face identification requirements;
  • on December 30, 2020, the Director of the Financial Crime Investigation Service (hereinafter –”FCIS”) adopted Order No V215 on the approval of technical requirements to perform the client’s due diligence process remotely using electronic means allowing to directly transmit the image.

Under LPMLTF, businesses are required to have the following mitigation measures in place:

  • proper internal policies and control procedures to regularly identify, assess and manage the risk of money laundering and terrorist financing and monitor the competency of control processes;
  • appointment of compliance manager to organise the implementation of anti-money laundering/countering financing of terrorism (AML/CFT) measures and to cooperate with the FCIS;
  • employee awareness raising measures on the AML/CFT policies and valid legal provisions;
  • implementation of company-wide AML/CFT policies.

Client due-diligence

Moreover, the financial operators dealing with virtual currencies should ensure appropriate “Know Your Customer” compliance procedures when physical presence is not feasible. Only in the following instances the financial service providers are allowed to non-face-to-face identification (to establish identity remotely) of the customer and/or beneficial owner:

  • when using a personal data of the customer/beneficiary person from third parties;
  • when using electronic identification schemes issued in EU with high or substantial assurance levels;
  • when personal identification data is verified with a qualified e-signature affixed by a qualified signature certificate;
  • enabling live video streaming by electronic means in either of two ways:
  1. original Identification papers is being recorded during direct video footage and the customer’s identity is confirmed via advanced e-signature;
  2. the image of the customer’s face and original ID presented by the customer is videotaped in the course of direct video streaming;

Entities administering Initial Coin Offering shall determine and verify the identity of the individual who is acquiring virtual currencies and beneficial owners, before conducting monetary operations in the amount of EUR 3,000 or more. Entities must also take appropriate steps to identify the origin of the property and money associated with business affairs or the transaction.

Virtual currency exchange operators should take necessary measures for identification of the customer and the beneficial owner and verification of their identity before conducting digital currency exchange operations and transfer of funds equal to EUR 1 000 or more (even if the transaction is executed in a single operation or for several times as long as these operations seem to be interconnected), except for the cases when the identity has already been established.

Notification requirement

Under LPMLTF, entities engaged in financial services are bound by notification requirements, and timely monitoring shady and unusual monetary transactions that FCIS should be informed about.

Virtual currency exchange operators must notify FCIS when there is a financial operation equal or in excess of 15 000 EUR, or equal amount in foreign or digital currency, whether the financial transaction is executed in single or several linked operations.

Legal entities which have started or ended business activities of a virtual currency exchange operator or custodian wallet operator are required to notify the data processor of the register of legal entities within a period not later than 5 working days on the commencement and termination of their activities. Thereby, virtual currency exchange operators and custodian virtual currency wallet operators confirm that they and their management team are compliant with statutory requirements of AML/CFT policies.

As the business is going global, thanks to technological advancements, payments are now made 24/7. Our team advises on the progressive areas of e-transactions, blockchain and digital currency to help companies and new market participants to maintain regulatory compliance, implement best AML/CFT practices, governance arrangements and mitigation tools to address those risky areas of financial service.

Our team helps your business in the following matters:

  • incorporate your company and establish financial entities;
  • assistance in obtaining operating licenses from FCIS (payment institutions, electronic money, virtual currency exchange operator);
  • open an account in a payment system or in a banking institution.

Manimama strives for excellence in every case to meet customer’s expectations.

The content of this article is intended to provide a general guide to the subject matter, not be considered as a legal consultation.


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