Malta (Shutterstock photo)
By Jay Derenthal
A lack of legal framework for securities tokenization in jurisdictions around the world has largely hampered the ability of companies to tokenize assets.
But a significant change came to that climate over the summer, when Malta’s parliament gave unanimous approval to legislation that provides crypto sector businesses and investors the regulatory certainty necessary to create an environment of trust and innovation.
Within the legislation, enacted through the passage of three bills designed as a synergistic triad and summarized below, are provisions that constitute the world’s first integrated framework for the regulation of government-sanctioned token offerings. Understanding this legislation offers insight into the potential near future of a digital economy where the majority of assets could be tokenized.
The Malta Digital Innovation Authority (MDIA) Act
The MDIA Act provides for the formation of the Malta Digital Innovation Authority (MDIA) and outlines its mission to regulate and promote the growth of the cryptonomic sector in Malta.
The Innovative Technology Arrangements and Services Act (ITASA)
ITASA is the legal embodiment of Malta's “technology first” approach to crypto regulation. Provisions in the act offer definitional criteria and guiding principles for Malta to become the first country in the world to hire blockchain developers to certify the quality and governance mechanisms of the distributed ledger software used by a company seeking approval to operate domestically.
The Virtual Financial Assets Act (VFAA)
The VFAA establishes a regulatory framework to govern entities that work directly or indirectly with virtual financial assets, including security token offerings (STOs) and initial coin offerings (ICOs), exchanges, wallet providers and crypto investment advisors. The VFAA-sanctioned financial instruments test will be used by the Malta Financial Services Authority to determine whether or not an offering will tokenize a security. The VFAA also establishes a strictly defined set of guidelines and requirements for token-offering white papers to be submitted to the MDIA for approval.
An Opportunity for Malta to Attract Security Tokenization Projects
The regulatory clarity provided by Malta as a member state in the European Union economic region may give Malta-based token offerings an advantage in the EU marketplace. Registering a security token offering in Malta does not circumvent the regulations of other jurisdictions. However, as an EU member state, what is a legal and regulated security offering in Malta is, by virtue of the single European market, considered legal in other EU member states.
The European Union's prospectus directive and regulations are applied to securities issuance on a pan-EU basis to promote a more or less standardized legal framework for all EU members. This EU directive is usually applied by state regulators internally in a modified format using country-specific rules. Because Malta-based STOs will exist and operate in a large and well-established, cross-border fintech regulatory framework, Malta may have an opportunity to attract more STOs to set up shop on its shores.
"Token offering regulation has given Malta a competitive edge in attracting STO and ICO projects,” said Jan Sammut, CEO of ICO Malta, a Malta-based provider of turnkey token offering solutions. “Malta has established clear definitions of token offering rules and terms for what can and cannot be done, protecting investors and providing legal certainty for operators. There is a growing interest in Malta from companies that want to tokenize an existing business or revenue stream to raise capital for further investment, as a viable and efficient alternative to seeking venture capital.”
Malta further cemented its lead in securities tokenization with German-based blockchain equitization technology company Neufund’s July announcement of its partnership with Malta-based Binance, the world's largest token exchange, on a collaboration with the Malta Stock Exchange aimed at creating a decentralized and regulated global stock exchange for listing and trading security tokens.
Over the summer, Malta also opened the way for the legally binding listing and trading of tokenized securities when the Malta Stock Exchange signed a memorandum of understanding (MoU) with token exchange OKEx. The partnership is expected to be finalized late this year, with the launch of a sandboxed version of the security token trading platform anticipated in early 2019.
“Security tokens exist as a representation of value that creates the promise of payments of dividends for investors, and the ability to liquidate the equitized asset for the asset owner,” Sammut said. “This, of course, makes them subject to security laws regulation. And that’s a good thing. If Malta can help make STOs a mainstream financial instrument, equity markets could be transformed in a way similar to how cryptocurrencies are transforming currency markets. Every type of equity can potentially be tokenized. The invention of the security token may be just the beginning to open a massive multi-trillion dollar addressable market.”