Blockchain has the potential to revolutionise the financial industry by removing reliance on intermediaries to clear and settle accounts and introduce significant cost savings. One survey, by Bain & Co, estimates that total savings to global financial markets could reach anywhere from USD15 billion to USD35 billion.
To underscore just how much excitement there has been since bitcoin – the cryptocurrency developed by Satoshi Nakamoto (a pseudonym) that uses blockchain technology – first emerged in 2009, firms that have engaged in research and development of this technology have raised more than USD1.55 billion in venture capital since 2012, according to CB Insights.
Given the importance of this technology, Malta has decided to take a lead role and aims to position itself as a leading hub for blockchain technology and its offshoots.
The tone is being set at the very top by the Maltese Government and as Nicholas Warren, Senior Manager, Financial Services at Chetcuti Cauchi Advocates, explains: “There has been a report commissioned by the Malta Gaming Authority regarding a soft rollout of cryptocurrencies. Malta is looking to develop a framework and legislation with respect to cryptocurrencies, for them to be properly regulated. We are pushing to become the first EU jurisdiction, even worldwide jurisdiction, to have blockchain as an integral part of our infrastructure and to remain at the forefront of cryptocurrency developments.
“Indeed, we have started to see considerable interest over the last six months in cryptocurrency funds and investment services providers investing in cryptocurrency capabilities.”
It is still early days but increasingly law firms, both onshore and offshore, are fielding cryptocurrency enquiries and are, in response, having to learn about the technology to provide the appropriate legal advice. Warren confirms that Chetcuti Cauchi are developing a blockchain `champion’ within the team, who will lead on things related to cryptocurrencies and DLT technology.
“Here in Malta there is going to be a big blockchain conference in December with numerous international speakers. We have plenty of events to attend to sharpen our knowledge on this emerging asset class. We are also part of BitMalta. This is a group formed by lawyers IT and professionals, to develop and create awareness of cryptocurrencies and, more widely, blockchain technology,” confirms Warren.
Warren is actively in discussion with four different promoters interested in launching cryptocurrency funds. Some, he says, are looking to purchase cryptocurrencies, others are looking to invest in mining equipment used to mine the cryptocurrency itself. From a strategy perspective, they are not looking just at Bitcoin but a range of cryptocurrencies.
“As everybody knows, Bitcoin has shot up in value 300 or 400% since the start of the year, while other cryptocurrencies offer a good opportunity to invest long, while the price is lower, to harvest potentially higher returns at a later stage.
“We are also seeing interest among promoters to set up brokerages to include cryptocurrencies alongside established currencies such as the USD and Euro. There is one broker here in Malta already providing such a service, where people can buy and sell various traditional cryptocurrencies such as Bitcoin, Ethereum, etc.”
Large banks such as UBS, HSBC and Barclays are currently working on something called the Utility Settlement Coin, which they plan to unveil next year to settle and clear financial transactions over blockchain.
“What these banks aim to do with the USC is convert traditional currencies into cryptocurrencies by digitising them, in effect. Rather than have supply and demand influencing the value Bitcoin, which is highly speculative and volatile, the USC will be backed by an established currency.
UBS hopes to be fully licensed to support this business activity by the end of 2017,” says Warren.
In terms of what the MFSA’s position is likely to be, Warren expects these funds to receive the green light, noting that there is nothing in Malta’s current legislation to prevent them from being established. There is a possibility, therefore, of setting cryptocurrency funds here in Malta in the same way one would set up as a Professional Investor Fund (PIF) or an Alternative Investment Fund (AIF).
“My feeling is that the MFSA would prefer them to be set up as AIFs, the reason being there is a higher degree of oversight that is required (compared to a PIF). For example, you need to appoint a custodian. Other than that, the MFSA has intimated that it would consider cryptocurrency fund applications,” asserts Warren.
At this point in time, it is unlikely that the Notified AIF would be a realistic option, given that there is no direct regulatory oversight; this is the sole responsibility of the AIFM. This is still too much of an emerging asset class for funds to be considered under the NAIF regime.
I think for the time being, Malta will push such products towards the regulated AIF regime rather than the NAIF regime. However, that said, there is nothing per se that prevents a NAIF from being used unless it is specifically prohibited. I expect the AIF route to be the preferred route, both for managers and the end investors, given that this is a new, and therefore higher risk, area of the market.
“At least investors will know that under AIFMD all of the service providers appointed to a cryptocurrency fund are regulated by the MFSA, and that the fund has itself had the regulator’s approval, thereby safeguarding investors’ interests,” says Warren.
Last November, the Maltese Stock Exchange included at blockchain as one of 23 points that it wants to implement. Warren says that he expects the MSE to announce new developments with respect to blockchain in the next few months. Using blockchain technology would help the MSE to increase its operational efficiency in terms of the way trades are settled and cleared.
Another interesting development is active discussion on ETFs, which the MSE is driving. Again, Warren expects to hear something on ETF regulation in the next few months.
In the meantime, the MFSA is busy doing its homework on blockchain technology and the possibilities that this could open for the jurisdiction. A national committee has been established to advise the government on how to develop this niche and innovative area.
“The push to have a soft rollout of cryptocurrencies, with the Gaming Authority, the MFSA, and other players within the regulatory sphere all involved, I think shows that this is being taken seriously. Being a European jurisdiction, it is natural to expect Malta to look up to see what the EU’s position is, but for the time being things are quite quiet. We could benefit from a first mover advantage, and then adjust our regulations at a later date, if necessary. We could even become the benchmark against which the EU develops its regulation. Time will tell,” remarks Warren.
Having the tone being set at a higher level shows that Malta intends to be at the forefront of such an innovative sector. And with the proper oversight in place, investors are likely to take succour from those who choose to establish Malta-based cryptocurrency funds, going forward.