MFSA boss denies loophole gives cryptocurrencies free rein

Cryptocurrency companies which have rushed to set up shop in Malta will have a full 12 months in which they can become fully licenced under the new onerous laws that will regulate blockchain technologies.

But the CEO of the Malta Financial Services Authority has denied suggestions that grandfathering clauses in the laws that allow ‘unlicensed’ companies to carry on their business until they are fully regulated, will give them free rein to exploit their legal vacuum.

Joseph Cuschieri said companies setting up businesses in Malta ahead of the laborious licensing stage will still have to abide by all the legal provisions regulating the sector, irrespective of when they started their operations.

Malta recently passed three laws aimed at regulating blockchain technologies such as cryptocurrencies. The new laws will enter into force in the coming months and will make Malta among the first countries in the world to provide a complete set of for operators working in blockchain.

Now dubbing itself as “the blockchain island”, the Maltese government wants to bill its trailblazing regulation and incentives to build its own Silicon Valley for the new technology.

But concerns have also been raised about whether such distributed ledger technologies can be used for money-laundering and the financing of terrorism, and whether the industry is also prone to scams or market manipulators.

One such concern was raised in The Shift, which pointed out a potential loophole in the law that would allow companies currently operating in Malta to continue operating in an unregulated manner for the year-long transition, following the entry into force of the new laws.

The Virtual Financial Assets Act – one of the three laws making up Malta’s blockchain legislation – allows companies already operating in Malta 12 months to apply for a licence with the MFSA. This means they could be operating for up to a year without having been approved for a licence.

But Cuschieri said that a 12-month period was necessary for operators to apply for the licence.

“Once the law comes into force in November, we would have a situation where these companies are effectively committing a criminal offence by continuing their operations,” Cuschieri told MaltaToday when contacted.

“To rectify this, it was decided to grant a 12-month period to operators, during which period they are to apply for a licence. The application can be quite lengthy and could take the MFSA up to six months to process.

“What we are saying is that companies that are already operating must notify us immediately and tell us that they are operating in the sector so that we can start monitoring them until they have a licence in hand.”

Cuschieri stressed that this did not mean that these companies would not be required to abide by the provisions of the law, or any other relevant legislation, such as those related to the prevention of money laundering.

“Once the law is in force, as a company you are obliged to abide by that law, even before you are granted a licence,” he said. “If on the other hand you are not granted a licence, then you can no longer operate in Malta.”

Lawyers working in the sector who spoke to this newspaper said a transitional period was normal when new laws come into force.

They said that while the length of the transition period could be questioned, 12 months was not an abnormal period of time to allow operators to become compliant or complete an application process.

“For example, the recently-introduced regulations on beneficial ownership of companies included a similar grace period for companies that had been incorporated before the regulations came into force,” they said.

They said the laws are actually quite stringent and include sufficient measures to deter dodgy operators. Moreover, given that there are currently no regulations, the introduction of new laws is only going to reduce any risks of illicit behaviour, they said.

Malta’s ‘blockchain island’ marketing has now gone beyond the simple regulatory framework: Prime Minister Joseph Muscat has taken a leading role in promoting the industry by endorsing and engaging with some of the world’s leading blockchain entrepreneurs.

Some of the largest cryptocurrency exchanges, like Binance, have announced moves to Malta over the past year.

Asked whether it would have been safer not to allow companies to operate before the laws were in force, Cuschieri insisted that authorities can’t stop companies from operating.

“The reality is that at the moment, there is no legal framework for addressing issues with those that are already operating,” he said.

He said that as things stood, cryptocurrencies, both locally and abroad, exist within a grey market, meaning they are not legal, but also not illegal.

“With the new laws, authorities will have the necessary tools to be able to carry out enforcement and to turn the local market into a regulated one.”