Malta’s journey towards becoming the world’s first Blockchain Island

By Stephen McCarthy, CEO, Malta Digital Innovation Authority

In light of the regulatory void centring on the use of Digital Ledger Technology (DLT) platforms and Blockchain technology, the Maltese Parliament has taken the lead in establishing a new regulatory framework, with the primary aim of providing transparency and legal certainty.

The legislation aims to instil more transparency and certainty, as society places more trust in MDIA certified DLT platforms.

Furthermore, this regulatory framework positions Malta at the forefront of technological innovation, as it creates a “cutting edge hub” for the digital economy.

Three Acts were enacted by Government, namely the:

Malta Digital Innovation Authority (“MDIA”) Act, which provides for the setup of the MDIA as the lead authority in the innovation technology sector;

Innovative Technology Arrangements and Services (“ITAS”) Act, which regulates Innovative Technology Arrangements and Services, such as the software and coding used in DLT, smart contracts and related applications, together with the technical administration and review services; and

Virtual Financial Assets (“VFA”) Act, which regulates Initial Virtual Financial Assets Offerings and delineates their licensing requirements.

The MDIA’s regulatory framework will dress up the technology, making sure it meets criteria for safe use and an element of accountability. The MDIA will also act as a conduit for the development of new economic sectors, whilst working in tandem and collaborating with, rather than replacing, other National competent authorities such as the MFSA and the MGA.

The new regulatory framework also introduces a new regime under the MFSA, regulating the approval of initial coin offerings (“ICOs”) and providers of VFA services.

The VFA Act defines the term “VFA” to encapsulate “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 electronic money, a financial instrument or a virtual token”.

Moreover, VFA issuers may elect to have their Innovative Technology Arrangement (“ITA”) certified by the MDIA.

The Acts and regulations in place allow for flexibility, in that other innovative and emerging technologies, such as Artificial Intelligence (“A.I.”) may in the future also be captured by the ITAS Act.

The regulatory framework places focus on Systems Auditors and Technical Administrators (collectively referred to as “Technology Service Providers”). The Systems Auditor guidelines, which are now open for public consultation, state that the Systems Auditor will be responsible for performing review or audit services in relation to an ITA upon its initial certification and annually in terms of ongoing compliance.

Systems audit reports shall be prepared in accordance with standards issued by International Auditing and Assurance Standards Board.

The Systems Auditor would naturally need to have a sound and up-to-date knowledge of the applicable regulations, standards and guidelines. Furthermore, Systems Auditors and their nominated Subject Matter Experts will need to demonstrate to the MDIA their key competencies and suitable expertise.

Systems Audit Control Objectives have also been designed to provide and assist the Systems Auditor with an audit framework in the field of ITAs, these being based on five key principles, namely, security, processing integrity, availability, confidentiality and protection of personal data.

Other entities required to register with the Authority under the ITAS Act include the Technical Administrator and Resident Agent.

Every ITA must have a registered Technical Administrator in office at all times.

Additionally, when non-residents submit an application for recognition under the ITAS Act, a Resident Agent who is habitually resident in Malta needs to be appointed and approved by the Authority.

The introduction of the MDIA Guidance Notes serves as another milestone in establishing Malta as the Blockchain Island.