In a recently released report, The Malta Financial Services Authority (MFSA) has disclosed expertise feedback addressing the challenges related to crypto-assets and legal definition of the Security Tokens (STOs).

The report comprises opinions from the experts of national agencies, technology service providers, regulated businesses, law and consulting firms among others.

When and How as the Report was prepared?

The process of assessment started in July 2019, which began with the consultation of the authorities from various industries to identify challenges across security tokens and to establish legal certainty regarding the crypto assets. The feedback process ended on September 16, 2019, with the participation of 18 experts across various industries.

During the assessment process, the MFSA had asked the industry authorities their opinions and advice on the definition of the security tokens. The MFSA focused on the study of the framework of European Union Legislations and its probable implications on the security tokens. It also considered the directives from Markets in Financial Instruments and the Market Abuse Regulations among others

As a conclusion of the assessment, MFSA recognized that MFSA and the EU directives lacked the appropriate legal definition of the security tokens. They also concluded that the digital ledger-based solution could be viable but it needs alterations in the EU directives about the central security Depository (CSD) rules otherwise it can create complications in the deployment of the blockchain technology

The Feedback of the Industry experts

The majority of the experts disapproved of the categorization of the security tokens proposed by the MFSA. Most of them believed that the distinction in terms of tokenization is inappropriate as the concept of transferable securities is unified under EU law. And the classification can lead to the risk of structuring arbitrage. One of the suggestions was to restructure the framework for the securities that utilize distributed ledger technology (DLT).

Some of the experts suggested adopting the taxonomy for crypto assets proposed by the Blockchain Research Institute. Some believe that classification should be done as per the impact of blockchain technology and the underlying infrastructure of the project.

The report document contains opinions about management of rights, alternative solutions obligations related to transferable securities, double-check verifications of transactions among several other issues.

Malta’s Crypto-favored policy

Malta is the heaven for the crypto industry with its crypto-friendly policies and thus it is popularly known as the Blockchain Island among the crypto community. But Malta is notoriously known as a money-laundering hub as well.

But as the government has tightened its regulatory policy in the last year due to several scams and financial frauds, the loopholes in the regulatory policy have become the hindrance for the crypto startups.  Due to the lack of appropriate regulatory compliance, crypto startups are finding it difficult to procure loans from the banks. Banks are reluctant to offer their financial services to the unregulated businesses and regulating the businesses under the MFSA is a time-consuming process that takes several months for registration and licensing. 

Jayashree Ingle

CBW - External Analyst

INDIA