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Cryptocurrency and ICO Regulation

Thursday, November 8, 2018

Malta, the country with the 32nd highest global GDP per capita, recently achieved what all other international financial and economic powerhouses have either failed or been reluctant to do: it passed a bill introducing a set of rules which formalise the regulation of Initial Coin Offerings (“ICOs”) and cryptocurrency exchanges.  Whilst the Virtual Financial Assets  Bill (the “Bill”) has not yet become law, the bill provides much needed guidance for those involved in the sector.


To date, many of the major financial regulators of the world have taken the stance that investment in cryptocurrency should be avoided. Others have adopted the position that the issue of tokens or “virtual financial assets”, pursuant to an ICO; (1) either may constitute the issue of a security (which would be subject to local regulation on the issue of securities); or (2) may or may not be classified as the issue of a “utility token” (which would be subject to a separate regulatory regime),  with a decision on the utility vs security status  often taken after the event (if at all). Conversely, the position taken by the Malta Financial Services Authority (“MFSA”) aims to provide regulatory certainty for ICOs, cryptocurrencies and blockchain technology businesses in setting out a clear framework as to what constitutes cryptocurrency and an ICO, necessary steps for compliance and penalties for non-compliance.


Financial regulators can (and do) give warnings to potential investors, however, in reality, the influx of  new cryptocurrencies and the ease with which they can be purchased, means that these warnings are often ignored.  Whilst the global market capitalisation of cryptocurrencies has suffered a fairly spectacular fall from grace during 2018, this is still an industry that has a market capitalisation of over $210 billion (down from a peak of around $800 billion in January 2018).  Given the scale of growth and sector value, there was an expectation that other jurisdictions would have followed Malta’s approach but generally, that has not yet been the case.  Perhaps regulators believe that the virtual currency market could all be a “hyped-up bubble” that would have disappeared by now.  Indeed, the pace at which bitcoin in particular has gained recognition over the last 18 months may have caught many regulators by surprise and they may still be coming to terms with what this heightened profile means for the way businesses and individuals transact financially in the future.


Certain financial authorities have begun to take steps forward.  The SEC in the US has attempted to clamp down on illegitimate ICOs and cryptocurrency traders and South Korea has started taking steps towards regulation. Still, the position remains that the lack of global regulation means that ICOs continue to be a popular choice for fraudulent companies and individuals posing as entrepreneurs who raise large sums of money from investors without any realistic prospect of a return on investment.  This may well add fuel to the well-trodden and misplaced argument that cryptocurrency is a hotbed of criminal activity.


Some of the key features of the Bill are outlined below:


  • licencing requirements – individuals or entities proposing to issue virtual financial assets or who carry out certain specified activities in relation to virtual financial assets must apply to the MFSA for a licence prior to carrying out such activities;
  • appointment of agents – an individual or entity proposing to issue virtual financial assets must appoint an “agent”, being a lawyer, accountant or auditor, who is approved by the MFSA;
  • whitepaper –prior to offering virtual financial assets, issuers shall be required to publish a detailed “whitepaper”, which must contain certain information (outlined in the Bill), including the following:
    • a background on the issuer(s), agents and service providers associated with the offering;
    • characteristics of the virtual financial assets;
    • the amount and purpose of the issue;
    • a description of the issuer(s) wallet(s) used; and
    • security safeguards against cyber threats.


Whether or not the attempts by the MFSA to lead the way in cryptocurrency regulation, resulting in Malta becoming a global cryptocurrency superpower, remains to be seen.  Opinions are also divided as to whether the legislation is being proposed to encourage inward investment or simply to prevent rogue ICOs from taking place within the jurisdiction.  Either way, the steps taken by the MFSA can only be positive for a multibillion dollar industry which is distinctly lacking in a widely recognised legal framework and which may only be at the beginning of its journey.


Andrew Tzialli