MFSA chief looks to attract quality with new crypto regulations

In the new age of crypto regulation, Malta’s focus will be more on attracting quality companies rather than bringing in high numbers, the MFSA CEO Kenneth Farrugia told MaltaToday.

The MFSA is in the process of adapting an EU regulation on markets in crypto assets, known as MiCA, into the national legislation.

But Farrugia said the transition is expected to be smooth, as most of the requirements envisaged by MiCA are already embedded in the local legislation.

“We only have minor changes and some fine-tuning. Practically 80-85% of MiCA was practically taken from our legislative framework.”

Back in 2018, Malta introduced the Virtual Financial Assets Act. This established a regulatory regime governing ICOs, cryptocurrency exchanges, and wallet providers. But the regime failed to attract many crypto companies.

“We started with 180 participants when we didn’t have the licensing regime in place. When we introduced licensing, there were around 30 who showed interest, and now we only have 11 companies authorised in Malta,” Farrugia said.

Farrugia said Malta’s financial regulators have learned a lot from the whole process, and the focus in now shifting to attract quality rather than quantity.

“We’re not about attracting and having 100 or 200 operators in Malta. We want to attract the big companies who are ensuring quality delivery of the services and controls. That’s the main objective,” he said.

Farrugia emphasised that the effectiveness of the MiCA regime will ultimately boil down to how effective it is on the ground, and how supervisory authorities conduct their interventions.

“In the case of Malta, the MFSA and other participants like the FIAU, we’ve been testing this model for the past three to four years. We have been reviewed by the FATF, IMF, Moneyval, and so on, partially on the crypto side of things. We implemented a number of recommendations,” he said.

“We also took on other recommendations on the financial sector that were given to us by supranational authorities. These were embedded into the VFA framework. So even our people are now well-versed to implement the obligations into practice and into supervisory interventions,” he continued.

The MFSA and FIAU has also taken enforcement action on a number of VFA agents, and assets have been frozen on a particular exchange. Farrugia said this shows the progress made on crypto enforcement.

“In our case, I think we can use that competitive advantage to our own benefit, not to reduce the requirements or the effectiveness, but to continue to improve and be more effective on the ground.”

There are still risks in crypto investments, including cyber security, fraud and the safeguarding of clients.  “We need to continue to invest our efforts to improve, because we’re not perfect.”

What’s next for crypto?

It has been a turbulent year for the crypto scene. Indeed, it was this time last year that the cryptocurrency exchange FTX filed for bankruptcy after its rival Binance – the world’s largest crypto exchange and once the poster boy of Malta’s crypto dream – pulled out of a deal to acquire the company.

FTX was the third-largest exchange at the time of its collapse. But an article by CoinDesk on 2 November revealed that an affiliated trading firm, owned by the FTX chief executive Sam Bankman-Fried, held a significant amount of FTX’s exchange token. This sparked a spike in withdrawals, and on 11 November, the company filed for bankruptcy.

This led to a crisis of confidence, and crypto prices have only partially recovered from the shock. But Farrugia thinks the sector will recover, especially with jurisdictions and blocs like the European Union and the US starting to regulate crypto.

“I think it will recover, and it is the way forward. Apart from that, crypto is also now amalgamating into other financial products, like FIs for processing purposes,” he said.

Farrugia added that infrastructure is key to supporting the sector. It needs human resources with the technical know-how. “You cannot have an employee going through the transactions. You need technical resources and systems to evaluate and identify trends and typologies so we can take action.”

He said a crucial factor to this MiCA regulation is cooperation with other authorities in the EU and beyond, especially with the number of cross-border transactions taking place.

The MiCA regulation was approved in May 2023 but will come into force in December 2024. There will be a transitional period depending on the member state which could extend until June 2026.

In Malta, the MFSA carried out a public consultation on the planned changes to the VFA framework.

According to the consultation document, several requirements will be reduced in line with the MiCA regulation, and others will be added in.

The new rulebook will come into effect once published, but there will be a three-month transitionary period for new requirements pertaining to the orderly wind-down plan, service-specific requirements, supplementary conditions and the whitepaper disclosure requirements.