The test includes some precise steps, which filter out crypto assets from ICOs that can be termed as securities.
The EU State Member Malta has recently turned a hot destination for business in the cryptocurrency and blockchain space for its crypto-friendly rules. With growing regulations from around the globe, fintech companies are considering to shift their operations to Malta that provides a conducive environment to operate.
With the growing dilemma regarding which ICOs should be classified as securities, the country has proposed a new test that clearly helps to define whether the crypto assets being derived from ICOs can be classified as securities or not. In one of the latest consultation paper that was published last Friday, April 13, the Malta Financial Services Authority (FSA) has set out a proposal for the Financial Instrument Test which, if approved, will ultimately become a part of the Virtual Financial Asset Act (VFAA).
The concept of this test was initially proposed back in November 2017, and based on the feedback from this discussion paper, the agency has formulated a methodology for the test. Now as per the latest paper, the test comprises a three-stage process in which the first stage is to verify if any Distributed Ledger Technology (DLT) asset falls under the category of what the agency describes as “virtual tokens” commonly referred to as the Utility tokens in the crypto industry.
The paper states:
“Virtual token is a DLT asset which 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.”
The Malta FSA said that the tokens falling under this category will be exempted from the VFAA. Once the assets have been traded in the secondary market, they would then pass through the second phase of the test wherein securities will be determined based on the definition formed by European financial regulators which includes money market instruments, transferable securities or financial derivatives.
If the token falls under the definition of any of these assets, it will come under the regulatory scrutiny of the existing Markets in Financial Instruments Directive (MiFID) which is enforced in the European Union financial markets.
The negative outcomes would be followed by the third-stage of scrutiny where it will see ICO tokens that are regulated under the proposed VFAA. According to the FSA, this method will adopt a hybrid framework which takes into consideration both the regulations – EU regulations as well as the national ones.
Malta regulatory body has put the papers open for public feedback till the 5th of May which comprises of rules that aims to cover all the ICOs organized in the country.
Malta has often been termed as the Blockchain island by several companies that provides a blockchain-conducive environment while functioning within the ambit of legal rules of the country and the European Union. Due to this reason, last month in March, popular cryptocurrency exchanges like Binance and OKEx announced plans to make Malta as their new home state of operations.
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