Introduction
Malta, often referred to as "Blockchain Island," has positioned itself as a pioneer in cryptocurrency and blockchain regulation. With a clear regulatory framework, Malta aims to attract blockchain and cryptocurrency businesses, ensuring a secure and conducive environment for innovation. This article delves into Malta's regulatory landscape, highlighting its evolution, key regulations, and impact on the crypto industry.
Malta's journey into the world of cryptocurrency regulation began in the mid-2010s, as the global interest in blockchain technology and digital assets surged. Recognizing the potential economic benefits and the need for a regulated environment, Malta started crafting its crypto regulatory framework around 2017.
The Maltese government, led by a forward-thinking administration, aimed to create a balanced approach that would attract innovative businesses while protecting investors and ensuring compliance with international standards. This proactive stance culminated in the introduction of three key legislative acts in 2018.
Malta's cryptocurrency regulation is overseen by several key bodies:
- Malta Financial Services Authority (MFSA): The primary regulatory body responsible for overseeing financial services, including cryptocurrency and blockchain-related activities.
- Malta Digital Innovation Authority (MDIA): Focuses on promoting and regulating innovative technology arrangements, ensuring their integrity and proper functioning.
- Financial Intelligence Analysis Unit (FIAU): Responsible for combating money laundering and financing of terrorism, ensuring compliance with AML/CFT regulations.
Ensuring Compliance with AML/CFT Principles: Law on the Prevention of Money Laundering of 23 September 1994 and the Prevention of Money Laundering and Funding of Terrorism of 1 January 2018
The principles of anti-money laundering (AML) and countering the financing of terrorism (CFT) are codified in Malta's Prevention of Money Laundering Act of September 23, 1994, and the Regulations on the Prevention of Money Laundering and the Financing of Terrorism, effective January 1, 2018. These regulations are enforced by the Financial Information Analysis Unit (FIAU), which oversees compliance for innovative technological services. Additionally, the FIAU's implementation procedures hold legal authority.
To ensure adherence to AML/CFT laws, the Group of Financial Action Task Force (GAFI) is empowered to gather, process, analyze, and disseminate data provided by regulated entities.
Implement Robust AML/CFT Programs:
- Establish internal policies, procedures, and controls to detect, prevent, and report suspicious activities.
- Conduct risk assessments to identify and mitigate potential money laundering and terrorist financing risks.
Customer Due Diligence (CDD):
- Perform thorough due diligence on their customers, including verifying identities and monitoring transactions for suspicious activity.
- Ensure ongoing monitoring of customer relationships and transactions to detect and report unusual behavior.
Reporting Obligations:
- Report suspicious transactions to the FIAU promptly.
- Maintain records of all transactions and customer information for a specified period, ensuring that they are readily accessible for regulatory review.
Training and Awareness:
- Provide regular training for employees to ensure they are aware of AML/CFT requirements and can recognize and report suspicious activities.
Independent Audits:
- Subject their AML/CFT programs to regular independent audits to ensure effectiveness and compliance with regulations.
By adhering to these stringent requirements, crypto companies in Malta can help prevent their platforms from being used for money laundering or terrorist financing activities, thereby fostering a secure and compliant operating environment.
The Malta Digital Innovation Authority Act (MDIA Act)
The Maltese government aims to position Malta as a hub for innovation by enforcing the Malta Digital Innovation Authority Act (MDIA Act) of July 15, 2018. This Act established the Malta Digital Innovation Authority (MDIA) to support technological innovation through collaboration with national authorities and regulation of digitization activities.
Objectives and Principles of MDIA:
- Promoting public policies that encourage technological innovation
- Encouraging the development and use of innovative technologies
- Protecting Malta's reputation for technological innovation
- Aligning national regulations with international standards and laws
- Collaborating with other regulators on AML/CFT, data protection, and fair competition
- Ensuring transparency and control in the use of innovative technologies
The Innovative Technology Arrangements and Services Act (ITAS Act)
To standardize the regulation of emerging technologies, Malta enacted the Innovative Technology Arrangements and Services Act (ITAS Act) on November 1, 2018, overseen by the MDIA.
Key Provisions of the ITAS Act:
- Principles for the registration of Innovative Technology Service Providers
- Conduct guidelines for service providers, emphasizing integrity, transparency, and expertise
- Requirements for appointing a Resident Agent for non-resident applicants
Definitions under the ITAS Act:
Innovative Technological Solutions: Software and architecture used in designing and delivering Distributed Ledger Technology (DLT), characterized by:
- Distributed, decentralized, and/or replicated ledgers
- Public, private, or hybrid access
- High protection against retrospective interference
- Encryption and ongoing testing
Innovative Technological Services: Include review or audit services by system auditors and technical administrative services by technical administrators, as referenced in the Act.
Cryptocurrency Licensing in Brief
Businesses aiming to provide Virtual Financial Asset (VFA) services in Malta must obtain a license. The application process involves submitting an online VFA service provider application form.
Types of Cryptocurrency Licenses:
- Class 1 License: Financial advisory, receiving and transferring VFA-related orders, offering investment advice
- Class 2 License: Provision of crypto wallets, peer-to-peer exchange, management of investment portfolios
- Class 3 License: Over-the-counter trading and transactions, market making (excluding VFA exchange)
- Class 4 License: Comprehensive VFA operations, including customer fund management and all types of cryptocurrency exchanges
Taxation of Crypto Companies in Malta
Tax administration for crypto companies in Malta is managed by the Commissioner for Revenue (CFR), which has issued guidelines on applying income tax, stamp duty, and VAT to activities involving distributed ledger technology (DLT). The primary rule is that the tax treatment (VAT, stamp duty, and income tax) of any DLT asset depends on the asset's use rather than its category.
General Taxes for Maltese Crypto Companies
Corporate Income Tax (CIT)
- Rate: 35%
- Regulation: Income Tax Management Act
Value Added Tax (VAT)
- Rate: 18%
- Regulation: Value Added Tax Act
Stamp Duty (SD)
- Rate: 2%-5%
- Regulation: Duty on Documents and Transfers Act
Social Security Contributions (SSC)
- Rates: Vary based on employee's age, salary, and other conditions
- Regulation: Social Security Act
VAT Exemptions for DLT-Related Activities. Many activities related to DLT are exempt from VAT, including:
1.Cryptocurrency as Payment Instrument:
- When a crypto-asset is used as a payment instrument accepted by certain operators, it is treated as fiat money.
- The exchange of cryptocurrencies for other cryptocurrencies or fiat money is VAT-exempt.
2. Cryptographic Mining:
- Mining activities are generally outside the scope of VAT if there is no direct recipient.
- If service providers are paid for actions such as transaction verification, the standard VAT rate applies.
3.Issuance of Financial Tokens:
- If financial tokens are issued solely to raise capital, they are exempt from VAT, as this activity does not constitute the provision of goods or services.
By adhering to these tax regulations, crypto companies in Malta can ensure compliance while benefiting from a clear framework that supports innovation in the digital finance sector.
Next Steps: Alignment of Malta's Crypto Regulations with MiCA
In April 16, 2024, the Maltese Parliament approved updates to the Virtual Financial Assets Act (Chapter 590, Laws of Malta) (“VFA Act”) to ensure further alignment with the Markets in Crypto-Assets Regulation (MiCA).
Malta’s decision to be at the forefront of blockchain innovation and distributed ledger technology by creating a legislative framework for crypto-assets under the VFA Act in 2018, under the supervision of the Malta Financial Services Authority (“MFSA”), encouraged several crypto-asset service providers to establish operations in Malta. The VFA Act – in a manner similar to MiCA – draws its inspiration from the Markets in Financial Instruments Directive. This means there are very few discrepancies between the VFA regime in Malta and MiCA.
The updates to the VFA Act, which were approved by the Maltese Parliament via the Virtual Financial Assets (Amendment) Act, 2024 (“VFA Amendment Act”), principally focused on the removal of the requirement to appoint a VFA agent. Effectively, in line with MiCA, this means that:
Any issuer who would like to register a whitepaper under Article 3 of the VFA Act, and any person who would like to apply for a license to provide a VFA service per Article 14(1) of the VFA Act, may do so directly with the MFSA – and no longer requires the appointment of a VFA agent in Malta to coordinate the licensing process.
The VFA Amendment Act also updates terminology and certain obligations of issuers, in line with the provisions of MiCA. The jurisdiction, with the overall guidance of the MFSA, intends to maintain the pace to ensure that Malta is prompt and ready for the implementation of MiCA.
Conclusion
Malta's progressive approach to cryptocurrency regulation, positions the country as one of the desired destinations for digital assets investment. With an advancing legal framework and government support for fintech development, Malta offers a compelling proposition for businesses seeking to capitalize on the opportunities presented by the digital economy.
If you would be interested in learning more about Malta, and how you can play a bigger role in defining the upcoming rules and regulations, we invite you to connect with us and schedule a complimentary consultation.
