Second Reading in Parliament for Blockchain Bills: The Virtual Financial Assets Act and the legal framework for ICO’s

The Maltese Government has presented the much anticipated Virtual Financial Assets Bill (the "Bill") for its second reading in Parliament. The Bill provides further clarity as to the manner in which virtual assets (termed "Virtual Financial Assets" ("VFA") will be regulated in Malta, specifically in relation to the issuing of ICOs in or from or within Malta.This includes the necessary license requirements and conditions which must be adhered to by individuals or entities who issue VFAs or who provide certain specified activities in relation to VFAs.

The Bill, which aims to enhance investor protection and market stability, is in line with the various consultation documents which have been published to date both by the Malta Financial Services Authority ("MFSA") and by the Government.

Once passed, the Bill will introduce a new regulatory framework for Initial VFA Offerings (more commonly referred to as "ICOs") and VFAs and to make provision for matters which are ancillary or incidental thereto. The Bill regulates the type of VFAs which may be issued through an Initial VFA offering and admission to trading on a DLT exchange, which must be made with a registered whitepaper to be delivered to the MFSA as the competent authority.

Initial VFA Offerings are defined as DLT-enabled methods for raising funds whereby an issuer, who must be a legal person duly formed in Malta, issues or proposes to issue a VFA in or from within Malta, and offers it to the general public in exchange for funds.

Both the Bill and the proposed Innovative Technology Arrangements and Services Act define a DLT as a digital or electronic database or ledger in which information is recorded, consensually shared, and synchronised across a network of multiple nodes and:

(a) Is distributed, decentralised, shared and replicated;

(b) May be public or private, permissioned or permissionless or a hybrid therein;

(c) Is immutable and protected with cryptography; and

(d) Is auditable.

The Bill also includes specific information and requirements which must be included in a whitepaper prior to the issue of an ICO, along with the manner in which advertisements relating to either an initial VFA offering or an admission of a VFA to trading on a VFA exchange shall be carried out.

Advertisements are referred to as being any form or medium of marketing activities disseminated to the public by means of any type of media which promotes the purchase of a VFA or the procurement of a VFA service including initial VFA offerings. The Bill also includes applicable principles which must be applied by issuers of VFA in or from within Malta.

The Bill defines a VFA as: "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 (a) electronic money; (b) a financial instrument; or (c) a virtual token.

Virtual tokens, or "utility tokens", are DLT assets which have no utility, value or application outside of the DLT platform on which they were issued and may only be redeemed for funds on the platform directly by the issuer of the DLT asset.

The issuer of an ICO will be required to appoint a VFA agent, who must be approved by the MFSA as the competent authority and will be tasked with specific reporting and monitoring obligations.

License requirements will also apply in relation to the provision by any person of a VFA service in or from within Malta.

The Bill establishes a robust compliance and enforcement regime in Malta and lays down the necessary foundations to strengthen investor protection and curb market abuse and further enhances and solidifies Malta's budding reputation as a premier blockchain jurisdiction.