1. Overview of theVirtual
Financial Assets Act
26th July, 2018

2. THE NEED FOR REGULATION
Harvard Business Review- 17th July 2018- “How Regulation could help Cryptocurrencies Grow”
“Without clear regulations, cryptocurrency innovation in the United States is being stifled. Entrepreneurs sit on
the sidelines for fear of innocently running afoul of the law. Investors, meanwhile, hang back because of
uncertainty regarding valuations. And the commonweal suffers, as other countries lure innovators away from
the United States by creating rules that make their jurisdictions more hospitable to this growing asset
class.
Given the regulatory uncertainty, the United States also risks allowing fraudulent purveyors of
cryptocurrencies to drive out the good. To be sure, federal and state enforcement officials have aggressively
sought to stamp out fraudulent initial coin offerings (ICOs) and cryptocurrency trading platforms. But without
clear and coherent guidelines to attract good actors to the U.S. market, fraudsters might push out the good
actors. At least one estimate pegs the frequency of ICO scams to be as high as 80%.
Although still nascent, cryptocurrencies worldwide are nevertheless on the rise, with money raised by issuers in
the first half of 2018 already exceeding the amounts raised in all of 2017. Yet the growth of this 21st-century
innovation is being hampered in the United States because our regulators are forced to use enforcement tools
created decades ago, well before the internet took off, and in some cases even before World War II. Additionally,
overlapping oversight by various agencies creates a structural barrier to change and drives up costs for creators
of cryptocurrencies. This improvised approach needs to be improved.”

3. OVERALL DLT REGULATORY FRAMEWORK
Licensing of a DLT asset
(excluding Virtual
tokens) and of a VFA
service provider under
the VFA Act is
mandatory, whilst
licensing under the
ITAS Act is optional.

4. PROGRESSTIMELINE
• October 2017 – MFSA launches consultation paper on Collective Investment
Schemes investing inVirtual Currencies
• January 2018 – MFSA issues rules for funds investing inVirtual Currencies
• February 2018 – Government issued consultation document on the overall
DLT legislation
• March 2018 – MFSA issues consultation on Financial Instrument test
• April 2018 – Bills are sent to parliament and Binance announce their
relocation to Malta. Okex and Neufund follow in May 2018
• July 2018 – The 3 Bills are fully approved by parliament on the 4th July and
the Acts are published on the 20th July
• July 2018 – MFSA launches Consultation documents on VFA regulations and
Rules forVFA Agents and Guidance Note on Financial Instrument test

5. • No Act is yet effective.VFA Act is likely
to be effective from 1st October 2017.
• MFSA has to issue Rules on Issuers and
VFA services providers (not just theVFA
agents)
• Issue of specific AML guidelines
• Finalise application documents forVFA
service providers
• Setup and approval ofVFA agentsNo…but getting there!

6. SO WHAT DOESTHEVFA ACT INCLUDE?
• Definitions of what is aVirtualToken, a Financial Instrument, Electronic
Money and aVirtual Financial Asset
• The Financial Instrument test
• The licensing and requirements and obligations of aVFA agent
• Licensing Process of an InitialVFA Offering (ICO) with list of what a
whitepaper needs to include in the First Schedule
• The licensing of the variousVFA service providers

7. DEFINITIONS
DLT asset
(a) a virtual token;
(b) a virtual financial asset;
(c) electronic money; or
(d) a financial instrument, intrinsically dependent on, or utilises, Distributed Ledger Technology.
VirtualToken
A form of digital medium recordation whose utility, value or application is restricted solely to the
acquisition of goods or services, either solely within the DLT platform on or in relation to which it was
issued or within a limited network of DLT platforms:
Provided that the term ''DLT platform'' referred to in this definition shall exclude DLT exchanges:
Provided further that a virtual token which is or may be converted into another DLT asset type shall be
treated as the DLT asset type into which it is or may be converted.

8. DEFINITIONS
Third Schedule of the Financial Institutions Act defines
"Electronic Money" means electronically, including magnetically, stored monetary value as
represented by a claim on the issuer which is issued on receipt of funds for the purpose of
making payment transactions….. and which is accepted by a natural or legal person other than
the financial institutions that issued the electronic money.
"Virtual Financial Asset" or "VFA" means 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
(c) a virtual token

9. Financial InstrumentTest
Does the DLT asset qualify as aVirtual token as per
definition in theVFA Act?
Does the DLT asset qualify as aTransferable
Security under MiFID?
Does the DLT asset qualify as a Money Market
Instrument under MiFID?
Does the DLT asset qualify as a unit in a Collective
Investment Scheme?
Does the DLT asset qualify as a Financial Derivative
under MiFID?
Does the DLT asset qualify as an Emissions
Allowance under MiFID?
If yes
If yes
If yes
If yes
If yes
If yes
Determination
of FI
(MifID)
If No
If No
If No
If No
If No
Determination
ofVirtual
Financial Asset
(VFA Act)
Exempt
Does DLT asset
have features of
Instrument of
Payment?
If No
Determination of
Electronic Money
if it fulfills
Electronic Money
Checklist
(Financial
Institutions Act)
If yes
If No

10. EXAMPLE OF FINANCIAL INSTRUMENTTEST –VIRTUALTOKEN
i. EXCHANGEABILITY
Virtual Token should remain
exchangeable either solely within the
DLT platform on or in relation to which
it was issued or within only a limited
network of DLT platforms
ii. PURPOSE
VT should be a form of digital medium
recordation whose utility, value or
application is restricted solely to the
acquisition of goods or services.

11. EXAMPLE OF FINANCIAL INSTRUMENTTEST –TRANSFERABLE SECURITY
i. EXCHANGEABILITY
The first criterion to be assessed is the negotiability of a DLT asset on the
capital markets. Therefore, it has been established that such a feature is a
sine qua non for a DLT asset’s classification as a Transferable Security. In
this respect, the Test also considers whether the transferability of the DLT
asset is restricted solely to the issuer, given that only under such a scenario
would the DLT asset be considered as non-transferable. For the purposes of
this determination, the negotiability feature shall also apply to DLT assets
which have not yet been issued, should such assets be designed to be
negotiable on the capital market upon issuance.
II. RIGHTS
A DLT asset’s qualification as a Transferable Security is further subject to
the assessment of the rights attached to it in order to determine whether
these effectively render such DLT asset akin to a share in a company,
partnership or other entity, and depository receipt in respect of share/s, or
bond or other form of securitised debt or gives the right to acquire or sell
any such Transferable Securities or gives rise to a cash settlement
determined by reference to, inter alia,Transferable Securities.

12. VFA AGENT UNDERTHEVFA ACT
• Regulated by Article 7 (Issuing of ICO) andArticle 14 (Application of a service licence) of theVFA Act
• The main role of the VFA agents is twofold i.e. to act as a guide to the VFA issuer or VFA service
provider applicant, but also to act as a first filter for the regulator. Be also a point of liaison between
MFSA and client
• VFA agents have a pivotal role to play in the AML/KYC process being a subject person for PLMFTR
• "VFA agent" means a person registered with the competent authority under this Act and authorised to
carry on the profession of:
(a) advocate, accountant or auditor; or
(b) a firm of advocates, accountants or auditors, or corporate services providers; or
(c) a legal organisation which is wholly owned and controlled by persons referred to in
paragraphs (a) or (b),
whether in Malta or in another recognised jurisdiction, or any other class of persons holding
authorisations, qualifications and, or experience deemed by the competent authority as
possessing suitable expertise to exercise the functions listed under articles 7 and, or 14;
• Transitory provision “VFA agent within the meaning found under this Act, shall, within one month from
the date of coming into force of this Act, apply to the competent authority for registration in terms of
article 7”

13. PROPOSED RULES –VFA AGENT
• VFA agent shall propose 2 designate persons + Money Laundering reporting Officer
• VFA Agent required to have an initial and on-going capital of 50,000 EUR
• Obtain a Professional Indemnity Insurance (Optional)
• Insurance policy that covers loss of money or loss or damage to any other asset or property belonging
to the VFA Agent or which is in the care, custody or control of the VFA Agent or for which the VFA
Agent is responsible. (Mandatory)
Registration Process
• Preparatory Phase:
Notify Authority of its intention, in writing, of intention to offer VFA agent service. To include description
of proposed structure and whether registration is needed as VFA agent under article 7 or article 14 or
both. MFSA will then schedule a mandatory meeting with applicant and by not later than 60 days from
this meeting, the applicant is to submit an application document with all supporting documents, plus pay
the application fee when submitting this application.
• Pre-registration Phase:
After review of application by MFSA will issue an ‘in principle Registration’ valid for 3 months. During
these 3 months, the applicant needs to settle any outstanding issues raised during application process.

14. PROPOSED RULES –VFA AGENT
• TheVFA Agent shall be required to prepare and submit to the MFSA, on an annual
basis, a Compliance Certificate in relation to the Issuer. Provided that where there
have been any breaches of the Act, the Regulations or these Rules, theVFA Agent is
required to include a statement regarding such breaches in the Compliance
Certificate.The Compliance Certificate should further include a confirmation that:
(i) All the local AML/CFT requirements have been satisfied, which confirmation
should be obtained from the Issuer’s MLRO ; and
(ii) the Issuer’s Innovative Technology Arrangement complies with any
qualitative standards set and guidelines issued by the Malta Digital
Innovation Authority applicable to the particular type of arrangement
(irrespective of whether the said arrangement holds a certification or
a ruling of eligibility under the Innovative Technology Arrangements and
Services Act), which confirmation should be obtained from the Issuer’s
Systems Auditor .

15. VFA AGENT - IMPORTANT
• Fitness and Properness
• Substance in Malta
• Adequate Due Diligence Systems (higher level than for traditional finance) with a
robust KYC and cyber security systems and controls.
• Knowledge on different business models
• Liable forAdministrative penalties of up to 150,000 EUR for each infringement
• In case of a convicted criminal offence liable to 500,000 EUR fine and/or
imprisonment of up to six months
• Importance of record keeping, especially for annual certificate and backing of FI test,
which has to be confirmed byVFA agent (signed)
• VFA Agent as part of the AML/CFT obligations is to ensure that with regards the client
there is proper identification and verification; ongoing monitoring; know well the
source of funds/wealth (especially if this source is crypto currencies)

16. INITIAL VFA OFFERING (ICO)
It is mandatory to have any initial virtual financing offering (ICO) by a Maltese entity to be registered
under theVFA Act by:
- Drawing up a whitepaper and have it delivered to MFSA at least 10 working days before the
intended publication date. This whitepaper needs to include the very extensive list of items
included the First Schedule of the Act. (Very few I have seen for far comply with such a list)
- Appoint a VFA Agent which will guide the issuer on drawing up this whitepaper and be the only
point of contact between the issuer and the MFSA. Such VFA agent will also be responsible to do
all KYC and due diligence procedures on the issuer. VFA agent also needs to submit to MFSA on an
annual basis a certificate of compliance on behalf of the issuer.
- Transitory Provision: Undertaking an activity in terms of article 3 (i.e Initial VFA offering), within
three months from the date of coming into force of this Act, draw up a whitepaper and register it
with the competent authority in terms of the said article, provided that this paragraph shall be
applicable only to those persons who have commenced an offering or have applied for admission
to trading in terms of article 3 by not earlier than two weeks prior to the coming into force of this
Act
- Minimum transparency requirement and additional transparency requirement if trading on a VFA
exchange

17. LICENSING OF SERVICE PROVIDERS
TheVFA Act lists the following types of service providers:
- Reception andTransmission of Orders
- Execution of orders on behalf of other persons
- Dealing on own account (Trading against proprietary capital)
- Portfolio Management
- Custodian and Nominee Services (Wallet Providers)
- Investment Advice
- Placing ofVFAs
- Operation of aVFA Exchange
Transitory Provision: is providing aVFA service within the meaning found under
this Act shall, within twelve months from the date of coming into force of this
Act, apply to the competent authority for licence in terms of article 14.

18. SERVICE PROVIDERS – PROPOSED REGULATIONS UNDER THE VFA ACT
Exemptions from needing any service licence under included in the proposed regulation. Some interesting
exemptions include:
• Persons dealing on own account in terms of the Act and not providing any other VFA services or performing
any other activities in virtual financial assets unless such persons:
i. are market makers; or
ii. deal on own account when executing client orders;
For purposes of this exemption, dealing on own account shall mean the trading by a person in its own name
and transactions in one or more virtual financial assets.
This exemption shall not be automatically operative but their applicability shall be subject to the
determination in writing by the competent authority that the requested exemption applies.
• Persons which provide VFA services exclusively for their parent companies, for their subsidiaries or for other
subsidiaries of their parent undertakings. Any person who intends to apply this exemption shall notify the
authority thereof, prior to the application of such an exemption.
• Collective investment schemes licenced under the Investment Services Act or otherwise authorised by a
European regulatory authority, providing services in Malta in exercise of a European right.

19. SERVICE PROVIDERS – PROPOSED REGULATIONS UNDER THE VFA ACT
TheVFA Service licences listed under the regulation are:
VFAA Class 1 Licence holders authorised to receive and transmit
orders and, or provide investment advice in relation to
one or more virtual financial assets and, or the placing
of virtual financial assets.
VFAA Class 2 Licence holders authorised to provide any VFA service
and to hold or control clients’ money, but not to
operate aVFA exchange or deal for their own account.
VFAA Class 3 Licence holders authorised to provide any VFA service
and to hold or control clients’ money, but not to
operate aVFA exchange.
VFAA Class 4 Licence holders authorised to operate a VFA exchange
and to hold or control clients’ money, virtual financial
assets and, or private cryptographic keys and
custodian or nominee services solely in relation to the
operation and activities of suchVFA exchange.

20. AML IN THE CRYPTO WORLD – 5TH AML DIRECTIVE
DIRECTIVE (EU) 2018/843 OFTHE EUROPEAN PARLIAMENT AND OFTHE COUNCIL of 30 May 2018
amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes
of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU
(commonly known as the 5th AML directive) states:
(8) Providers engaged in exchange services between virtual currencies and fiat currencies (that is to
say coins and banknotes that are designated as legal tender and electronic money, of a country,
accepted as a medium of exchange in the issuing country) as well as custodian wallet providers are
under no Union obligation to identify suspicious activity. Therefore, terrorist groups may be able to
transfer money into the Union financial system or within virtual currency networks by concealing
transfers or by benefiting from a certain degree of anonymity on those platforms. It is therefore
essential to extend the scope of Directive (EU) 2015/849 so as to include providers engaged in
exchange services between virtual currencies and fiat currencies as well as custodian wallet
providers. For the purposes of anti-money laundering and countering the financing of terrorism
(AML/CFT), competent authorities should be able, through obliged entities, to monitor the use of
virtual currencies. Such monitoring would provide a balanced and proportional approach,
safeguarding technical advances and the high degree of transparency attained in the field of
alternative finance and social entrepreneurship.
• Reference is just for Crypto-to-Fiat and Fiat-to-Crypto exchanges, with no mention of any other VFA
service providers

21. 5TH AML DIRECTIVE – TRANSPOSITION IN MALTA
• Understanding that the 5th AML did not capture the fast pace of this industry and
thus did not go far enough in including all possible players (as already included in
theVFA Act).
• With Malta being a forerunner in this industry it would make sense to include
VFA issuers,VFA agents andVFA service providers (exchanges, market makers
dealing on own account) when transposing the 5th AML directive and thus go
beyond what is included in the 5th AML directive.
• Then FIAU would proceed to issue the corresponding implementing procedures.

22. ULTIMATE AIM
To have a robust regulatory framework to make sure that……
……the bad apples do not make it into Malta’s fintech industry.

23. EMCS
Regional BusinessCentre
Level 2
University Heights
Msida MSD 1751 Malta
Tel: +356 2777 2777
Mob: +356 79430077
Your Contact
Silvan Mifsud
Senior Manager
silvan.mifsud@emcs.com.mt