A recent Malta Financial Services statement revealed that almost 70 per cent of companies that once notified the regulator of intentions to form part of Malta’s Virtual Financial Asset (VFA) framework have, two years later, failed to request to be licensed.

In a statement issued last week, the national financial services regulator revealed that 57 companies which in 2018 established themselves in Malta to enter into a transitory period prior to getting their VFA licence, have failed to formally request for the licensing process to begin, six months after the deadline expired.

Just 26 companies, mainly comprising of cryptocurrency exchanges, proceeded to launch the application process for a VFA service provider licence, currently being vetted by the MFSA. So far, not one company has acquired a VFA licence in Malta.

This meant that such companies were availing themselves of the transitory period which allows companies to provide VFA services, but ultimately failing to apply for licencing when the time came.

The issue received much attention after Malta Today’s explosive headline ‘Malta’s cryptocurrency flop: 70% of firms have given up on getting licensed,’ prompting the MFSA to highlight that blockchain related activities in its broadest sense, involving Distributed Ledger Technology, is regulated by the Malta Digital Innovation Authority.

It also pointed out that the MFSA authorises the use of Virtual Financial Assets (VFA) for financial services, where such crypto-assets use tokens on underlying DLT frameworks.

In June 2018, Parliament enacted The Innovative Technology Arrangements and Services Act, The Virtual Financial Assets Act and The Malta Digital Innovation Authority Act, with hype surrounding the idea of becoming a ‘Blockchain Island’ reaching fever pitch in between September and November of that year, with huge conferences taking place.

Asked to react to the news that so many companies failed to initiate the VFA service provider licensing process after availing themselves of the transitory period, Managing Director of Blockchain Advisory and a licensed VFA Agent (acting as a gatekeeper between companies seeking a VFA license and the MFSA) Jonathan Galea, spoke of the dangers of unnecessary hype.

Turning to the list of companies published by the MFSA following the termination of the transitory period, which was 1st November 2019 to 31st October 2019, Mr Galea said that “While the published list far exceeds the actual list of applicants currently undergoing the VFA Service Provider Licensing process, it is important to keep in mind the double-edged sword that portrays any kind of generated hype.”

He recalled how in 2018, companies have flocked “in droves” to Malta to start-up their business, “off the back of some misguided conception that it would be an easy ride”.

Jonathan Galea, Managing Director of Blockchain Advisory and licensed VFA Agent 

Indeed, the pioneering legislations surrounding blockchain technology attracted huge interest, some coming from genuine and professional practices, others less so.

“The scope of the VFA Regulatory Framework has always been clear – that of offering regulatory certainty and clarity for industry stakeholders and service providers who are in it for the long run.

“This is clearly reflected in the intricacies and fine details of the VFA Regulatory Framework which is not found in any other framework in the world, and is the product of long months of studies and analyses, with constant fine-tuning being done even two years following the promulgation thereof.”

Taking in the broader picture, Mr Galea remarked that of course mistakes have been made in the way Malta entered the blockchain and cryptocurrency arena. He pointed towards the hype surrounding the island as being one of the most significant errors.

“I would say that the main mistake was that of allowing the hype surrounding the monikered ‘blockchain island’ to rise to unjustifiable heights when the VFA Framework in its totality, including the VFA Rulebook, were not yet ready, meaning that interested entities could not apply for a license.

“This led to a perceived prolonged period of inactivity, when in reality a lot of work was being done in the background, such as ensuring that the lunga manus of the MFSA, the VFA Agents, were properly vetted and licensed, as well as ensuring that the regulatory authorities are properly educated and knowledgeable about the industry prior to embarking on the licensing process for the VFA SPs.

“For those who were not privy to such work being done in silence, it was easy to levy criticism at the misconceived presumption that the ‘blockchain island dream’ was built on smoke and mirrors.”

He added that the VFA service provider licensing process is well underway, and said that “as a licensed VFA Agent, we are satisfied with the professionalism being shown by the MFSA in terms of handling such applications, especially as these are the first batch of VFA Applications being processed by the Authority.

“One can of course hope that the process itself becomes shorter as the Authority becomes more familiar with the ins and outs of this novel framework. Throughout this learning curve, various tweaks are being made to the framework to cater for the everchanging needs of this dynamic industry.

“What I would call for, however, is increased cooperation between all the regulatory and supervisory authorities touching upon this industry, namely the MFSA, the MDIA, and the FIAU, as certain overlapping red-taping measures which cause a lot of frustration…” he lamented.

Mr Galea rounded off his commentary by questioning whether the Blockchain Island dead:

“Is the blockchain island dead? Yes… the one which the hype-wave surfers wanted. Is Malta, as an EU Member State, leading the charge into regulating this novel industry, out of the running yet? Definitely not. This is just the start.”

Jean-Michel Azzopardi, Founder and CEO of Kralanx Cyber Security – which marries his experience in blockchain technology and cyber security – agrees that the Blockchain Island idea has fallen apart – but he too sees this as, almost, a positive step.

“Malta has unknowingly created something of value with the VFA act, and while it undoubtedly seems as though the Blockchain Island has fallen apart, there is a silver lining.

“The sheer difficulty of obtaining a Maltese license is a commonly understood fact in the blockchain industry and this is exactly why the Maltese license holds so much value.”

He added that, in stark contrast, “one could easily walk into other jurisdictions, drop €5,000 to €10,000 to obtain a licence in under three months – which sounds fantastic at face value – until one begins to recount the sheer amount of scammers in the industry”.

Mr Azzopardi said “investors do not respect such a license - this is well established.

“A Maltese license on the other hand, raises valuation drastically as it proves that the business has had to jump through a plethora of hurdles in order to obtain said license and thus is not a scam. Proof that a project is not a scam in this industry is invaluable.”

Mr Azzopardi praised the MDIA for its efforts in regulating DLTs and innovative technologies, but criticised the MFSA for having taken its “sweet time”.

“This is no secret and I would argue that it has negatively impacted the industry far more than setting a high regulatory bar.” Hanging on to the notion of Malta as a Blockchain Island, he said this depends on the “malleability and agility of the MFSA”.