Issue link: https://maltatoday.uberflip.com/i/1365202
maltatoday | SUNDAY • 25 APRIL 2021 14 COMMERCIAL A robust VFA framework attracting serious players Distributed ledger technology heralded the rise of crypto currencies and the subsequent need for authorities to regulate their increasing popularity. Hermann Ciappara, Head, Virtual Financial Assets, at the Malta Financial Services Authority (MFSA) spoke to PAUL COCKS about the VFA Act and the importance of oversight and enforcement What are Virtual Financial Assets? VFAs are an electronic rep- resentation of value that are stored on Distributed Ledger Technology, or blockchain, and their access is based on cryptographic or encryption keys. Although crypto assets have been around for the past dec- ade, these have been largely operating in an unregulated space. Malta was among the first jurisdictions on a global level to propose a legislative framework which regulates crypto assets, with the launch of the VFA Act in November 2018. The legislative frame- work was structured on exist- ing principles emanating from legislation that regulates tradi- tional financial services, mainly the EU's MiFID directive. MiFID is the Markets in Fi- nancial Instruments Directive and has been applicable across the European Union since No- vember 2007. It is a corner- stone of the EU's regulation of financial markets, seeking to improve their competitiveness by creating a single market for investment services and activ- ities while ensuring a high de- gree of harmonised protection for investors in financial in- struments. The aim of the VFA legisla- tion is to protect investors who invest in crypto assets as well as ensure that we attract good crypto assets operators to our jurisdiction. The MFSA must have realised this would be a tougher sector to regulate because of the technology involved. This must have presented greater risk with regard to anti-money laundering (AML) and com- batting financing of terrorism (CFT). So how did the MFSA counter those concerns? We were very much aware of the higher risks involved in this sector, especially with regard to AML and CFT, particularly because of the anonymity that is intrinsic to these assets. This was one of the reasons behind introducing a new actor – the VFA Agent – whose role is to vet applicants and carry out due diligence, before they even apply for a licence with the MFSA. The VFA Agent is it- self a subject person under the Maltese Prevention of Money Laundering Act and has the obligation to report any wrong- doings it uncovers. When applications reach the MFSA, the Authority car- ries out fitness and proper- ness checks on the beneficiary owners and shareholders once again, checking their source of wealth and funds to ensure money invested in these com- panies is all legitimate. We also make sure they have a robust management struc- ture in place, with senior man- agement having the right ex- perience and backgrounds, as well as being fit and proper for their respective roles. We also carry out mandatory interviews of Money Laundering Report- ing Officers and Compliance Officers. We look at their con- trol procedures and their cus- tomer on-boarding processes, as well as the business risk and customer risk assessments that they have in place. As part of our checks, we also ensure that they adopt good Know Your Customer protocols and con- duct transaction monitoring as well as sanction screening. Malta cannot afford to attract bad apples in this high-risk sec- tor. In fact, in addition to car- rying out a risk assessment of these entities, the MFSA con- stantly collaborates with the Financial Intelligence Analysis Unit (FIAU) to conduct its su- pervision among VFA Service Providers, as is the case for the rest of the regulated entities within the financial services industry. This is essential for ensuring that players in this sector are observing and ad- hering to the regulations, and, whenever necessary, regulatory action is taken. In the past few months, the MFSA imposed a Directive against two VFA Ser- vice Providers, which enforce- ment action was also published on the MFSA website, in line with its standard enforcement policy. Since it's a technology-focused sector, do you also certify the technology setup of appli- cants? Although the sector is based on blockchain, some of our applicants also use innovative technology arrangements, or smart contracts, which calls for the need to have systems audi- tors check their code and con- firm that the smart contract is doing what it is supposed to do. Auditors also ensure that our operators have robust cy- ber resilience setups in place to ensure that they are protected as much as possible from cy- ber-attacks. I think that such technology assurance is in fact one of our biggest strengths, and on this we collaborate closely with the MDIA (Malta Digital Innovation Authority). Now that there is an EU pro- posal on crypto assets, I am pleased to see that what Malta has implemented two years ago is being proposed in a substan- tial way today on a European level. This is also indicative of the foresight that our legisla- tors had back then. Has this stringent regulation we have in place led to limited feedback on VFA applications? What is the reason for appli- cants to withdraw from the process? During the early months of 2019 we started registering VFA Agents since these were intended to work directly with the VFA service providers be- fore these submitted their ap- plications to the MFSA. As the market is consolidating, today we are down to 16 registered VFA Agents, from the original 23. With regards to VFA Service Providers which submitted no- tifications, 31 October 2019 was the date by which they had to decide whether to apply with the MFSA for a VFA services licence. By this date, we had received 34 letters of intent. Among the ones not following through, there were start-ups which could not meet the rig- orous standards we had estab- lished, while others had been rejected by the VFA Agents. For some, it was indeed a mat- ter of lack of readiness on their part, to be regulated in the manner envisioned under the VFA Act. Today we have 14 VFA Service Providers operat- ing on the island. Considering the investment the MFSA put into this legislation, was it all worth the results obtained to this date? This sector is still in its infan- cy, but our expectation is that it will grow, especially in view of the position being adopted by the EU on regulating crypto assets in the very near future. Our aim from the very begin- ning was to attract serious in- ternational players which want to operate within a robust regulatory framework. The in- vestment that has been made is starting to bear fruit and the future of this sector is looking positive. Hermann Ciappara