On April 13, the Maltese government continued to build upon its growing crypto-progressive reputation with the release of the Consultation Paper on the Financial Instrument Test, a research report outlining Malta's vision for classifying digital assets that are tracked via distributed ledger technologies (DLTs).
The 44-page document has three objectives:
- Map how definitions for digital assets on distributed ledgers are generally obscured under current regulatory frameworks;
- Reaffirm how the Financial Instrument Test can clarify regulatory ambiguity via updated classification standards; and
- Prompt "feedback" from the DLT community regarding related ecosystem concerns.
Building off of its November 2017 Discussion Paper on Initial Coin Offerings, Virtual Currencies and Related Service Providers, the MFSA's most recent report analyzes how the European Union's overarching Market's in Financial Instruments Directive (MiFID) defines financial instruments and, more importantly, if those definitions carry implications for DLT assets like virtual currencies.
In addition to evaluating the underlying methodology of the Financial Instrument Test, the MFSA is seeking to discover whether a given DLT asset "is encompassed under (i) the existing EU legislation and corresponding national legislation, (ii) the proposed Virtual Financial Assets Act (VFAA) or (iii) is otherwise exempt."
Industry feedback will be accepted and reviewed on a rolling basis until May 4, 2018, at which point the MSFA will begin establishing a "final version" of the test.
The Financial Instrument Test is likely to be administered in two parts, which will be comprised of 12 checklists for classification. The report states that this process could eventually utilize an "external reviewer."
The first stage would evaluate whether that particular asset qualifies as a Virtual Token (VT) or "utility token," as it is more commonly referred to. The proposed definition for a VT under the VFAA is "a form of digital medium recordation that has no utility, value or application outside of the DLT platform on which it was issued and that cannot be exchanged for funds on such platform or with the issuer of such DLT asset."
If it is not concluded that the asset is a VT, "the second stage would determine whether the DLT asset would qualify as a financial instrument under Section C of Annex 1 in the MiFID," which establishes definitions for financial instruments like transferable securities, money market instruments, and units of collective investment undertakings, among others.
If the second stage also fails to define the asset, then it "would qualify as a Virtual Financial Asset (VFA) under the aforementioned VFAA." The MFSA is hoping that the Financial Instrument Test can become a mandatory requirement under the proposed VFAA, making it applicable to digital asset exchanges and investment intermediaries. The new regulatory stipulations would also apply to "non-licensed persons" who are providing services or performing activities related to DLT assets "in or from within Malta."
The initiative highlights the incredibly complex task modern financial regulators have found themselves in when trying to classify DLT assets, and introduces the Financial Instrument Test as a stop-gap measure for this peculiar moment in monetary regulation.
It's unclear how long this new test would be useful for, in the ever-changing crypto regulations landscape. However, like the Securities and Exchange Commission's (SEC) Howey Test in the United States, the MFSA's Financial Instrument test could greatly aid regulators as they find a more permanent solution for classifying DLT assets.
Parties interested in providing feedback to MFSA regarding the Financial Instrument Test or related concerns are encouraged to respond though MFSA's dedicated response website. Per the MFSA consultation paper, questions about the MFSA document itself should be directed to email@example.com.