Private banks can now determine whether the Maltese regulator will believe that a distributed-ledger-technology asset they are handling qualifies as 'electronic money' according to Schedule III Financial Institutions Act; a financial instrument as defined by Schedule 2 Investment Services Act; a virtual financial asset; or a virtual token according to the Virtual Financial Assets Act.

The so-called Financial Instrument Test applies not only to issuers who offer DLT assets to the public while using Malta as a base, but also to private banks and other firms that perform services in accordance with either the Virtual Financial Assets Act or traditional financial services law.

The MFSA has also issued something it calls a 'guidance note' on the subject, which propounds the following three vague principles.

• Users have to act honestly, fairly and professionally and comply with the relevant provisions of the guidelines when 'compiling' the test.
• Every user must undertake the test again if the 'features' of any assets of the DLT in question change during its lifecycle.
• No user is allowed to tamper with the test, its content or determination. If he/it does, the determination will be null and void.

A test in three stages

To complete this so-called test, users must take three steps.

• The registration of user and DLT asset (i.e. Bitcoin/other crypto-currency) details. This is where the user in question answers such posers as "does the DLT asset have a maturity of more than 397 days?"
• DLT asset determination. Here users are required to put in their own details as well as the DLT asset’s details in the various fields of an electronic sheet. They must proceed sequentially from one sheet to the next, as indeed they must as they go through the three prongs of the test. There are many checklists to fill in at this stage. In order to determine whether a DLT asset qualifies as a Financial Instrument in terms of point (10) of Section C to MiFID (‘C(10) Financial Instruments’), for example, the user has to state whether the asset can be settled in cash at the option of one of the parties other than by reason of default or other termination event, if it is traded on a regulated market, a MTF, an OTF, or a trading venue in a so-called 'third country' (presumably an inferior country to a first or second country) that performs a function similar to that of a regulated market, multilateral trading facility (MTF) or an organised trading facility (OTF), and if the DLT asset shares the characteristics of another derivative.
• Declarations. Here the user considers the purpose of the DLT asset and whether such an asset allows for the transferring of credit risk from one party to another. Another question for this part of the test asks: "Is the DLT asset termed as a Contract for Difference or [does it] give the holder an economic exposure, which can be long or short, to (i) the difference between the price of an underlying asset at the start of the contract and the price when the contract is closed or (ii) the difference in the price of two different underlying assets?"

The white paper that precedes every initial coin offering or ICO must contain all the information that investors need to make "an informed assessment of the prospects of the issuer, the proposed project and of the features of the virtual financial asset." This information must be presented in an "easily analysable and comprehensible form" and any advertisements made in connection with the ICO must be faithful to the contents of the white paper.

Supporting legislation

On 4 July the Maltese Parliament approved three pieces of legislation with a view to promoting the jurisdiction's crypto-currency profile. These are the aforementioned Virtual Financial Assets Act plus the Malta Digital Innovation Authority Act (which sets up a discrete regulator) and the Innovative Technology Arrangements and Services Act.

Section 7 article 2 of the first schedule to the VFA Act states that every white paper must contain: a description of the reason behind the initial virtual financial asset offering; a detailed technical description of the protocol, platform and/or application and the associated benefits; a detailed description of the sustainability and 'scalability' of the proposed project; associated risks; a detailed description of the characteristics and functions of the virtual financial assets being offered; a detailed description of the issuer, the VFA agent, the development team, advisors and any other service providers that may be involved in the project's realisation; a detailed description of the issuer’s wallet/s; a description of the security safeguards; a detailed description of the life cycle of the initial virtual financial asset offering and the proposed project; a detailed description of project financing; a detailed description of the targeted investor base (usually HNWs); an exchange rate of the virtual financial assets; a description of the underlying protocol’s interoperability with other protocols; a description of the manner in which funds will be allocated; the amount and purpose of the issue; the total number of virtual financial assets to be issued and their features; the distribution of virtual financial assets; the consensus algorithm, if there is one; incentive mechanisms to secure any transactions; any applicable taxes; any set soft cap and hard cap for the offering; the period during which the offer is open; any person underwriting or guaranteeing the offer; any restrictions on the free transferability of the virtual financial assets being offered and the DLT exchange/s on which they may be traded, to the extent known by the issuer; methods of payment; and other things.