Introduction of a Financial instrument Test in connection with ICOs

MFSA issues Consultation Paper on the proposed introduction of a Financial instrument Test in connection with ICOs.

Following the issue of a discussion paper by MFSA on Initial Coin Offerings, virtual currencies and related service providers, the Malta Financial Services Authority (MFSA) has now issued a Consultation Paper on the proposed introduction of a Financial Instrument Test.

The consultation process puts Malta at the forefront in the creation of a clear regulatory framework for crypto-assets and distributed ledger technology. The proposed test analyses each category of financial instruments under MiFID within a DLT context.

The MFSA is considering introducing a Financial Instrument Test as a mandatory requirement which would be applicable, both within the context of ICOs conducted in or from Malta, as well as in the intermediation of DLT assets by persons undertaking certain activities in relation to DLT assets.

Thanks to a twelve-criterion checklist, the test will determine how a DLT asset should be classified and regulated in terms of local and EU legislation. The test would essentially be based on the following criteria:

1. Whether the DLT asset falls within the definition of a virtual token
2. In the case where the DLT asset is not classified as a virtual token, whether it qualifies as a financial instrument in terms of MiFID and in terms of the Malta Investment Services Act
3. In the case where the DLT asset does not meet both the tests in (i) and (ii), whether the DLT asset will qualify as a Virtual Financial Asset in terms of the proposed Virtual Financial Assets Act (VFAA)

Furthermore, the consultation paper puts forward a clear definition of virtual tokens as a DLT asset that ‘has no utility, value or application outside of the DLT platform on which it was issued and that cannot be exchanged for funds on such platform or with the issuer of such DLT asset’.

In brief, this means that after carrying out the proposed Financial Instrument Test, if a token is classified as a virtual financial asset, the new proposed laws would apply and the operator would not require a license under MiFID. Virtual tokens (as defined) are out of scope of the aforesaid regulatory space.

The introduction of the proposed VFAA, together with the proposed Financial Instrument Test will provide legal certainty to the industry, instilling market stability and protection to investors.

The consultation process closes on 4 May 2018.

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