Cryptobusiness regulation in Malta

05.07.2020

Not only from European but even from the world prospective Malta can be fairly called one of the revolutionary countries in industries like crypto business and fintech. Malta’s second name has become a phrase ‘the blockchain island’ and many businessmen brought to life their dream of registering their crypto companies in Malta. The reason for this boom is the fact that Financial Services Authority of Malta released numerous advisory documents starting at 2017 and passed several related laws in 2018.

Definition of VFAA

Generally, it is almost impossible to characterize crypto assets globally and uniformly. In the prevailing number of countries crypto assets are not defined legally so far. Nevertheless, some countries choose to identify this asset kind by using legislation that already exists and considers them currencies or digital investment forms.

This confusing situation is the reason why Malta’s Government decided to create the Law on virtual financial assets – the VFAA. The VFAA Law allowed countless companies launch crypto currency business or crypto exchanges in Malta and in the EU.

Categories of crypto assets in Malta

Virtual financial assets – this category includes traditional cryptocurrencies, for ex. Bitcoin. They cannot be included in any of the following types.

Security tokens – generally speaking tokens with characteristics of financial instruments belong to this group. Malta regulates issuing this type of tokens. STO or Security Token Offering is a term worth mentioning. It is a separate niche dedicated to the ICO with the engagement of security tokens.

Virtual money – tokens of this category store electronic cash value and are designed for payment transactions. Malta Financial Companies Act regulates this type of crypto assets and related business. This fact should be taken into account by crypto companies registered in Malta who seek issuing virtual money.

Product tokens – it can be said in general that all utility tokens fit in this group. Given he properties of these assets, their holder can exchange them like coupons for goods and services offered by the company who issued the tokens. Assets under this category are not regulated in a special way and, therefore, in Malta can be issued freely.

Please consider that when registering a Maltese company, it is necessary to have a dedicated VFA agent hired. They would ensure that the crypto asset was defined in a correct way and will play a mediator role between the company and MFSA.

Taxes on cryptocurrencies

Value of the asset at the moment of the transaction defines the value of a crypto asset for Malta income tax purposes. The relevant state authority has the right to determine the cost.

In the situation when product tokens are just issued, profits coming from them are liable to taxation like usual income. But once ICO is conducted to raise capital, Malta does not obliges ICO with taxes.

Malta has the same regulations for taxation on mining as for the profit from security tokens.

AML policies

Due to cryptocurrencies being so free-spirited and independent, their negative image had started to shape. Even though traditional money can be used for the same purposes, cryptocurrencies have reputation of a way of payment for illegal products like limited-use drugs and firearms. This statement can be considered true but only to some degree.

Following the program for virtual currencies issued and used in Malta, Maltese authorities continue dynamically lowering risks of non-legal activities with the participation of this assets.

The VFA agents, attached to the regulatory body, act as a link and a filter at the same time that splits all possible virtual assets issuers in two groups: ones who will work with MFSA and ones who will not. The agents have to be appropriately licensed and are supposed to meet all the regulator’s conditions, otherwise can be severely fined.

The task of such VFA agents is to determine whether the issuer’s level of competence is sufficient and how viable their project is. Their duty is not only being familiar with all legal procedures needed but also inspecting deeply the business proposal of the company to estimate possible risks coming with it. Afterwards the agent gives the final summary to define how stable the issuer is and whether they might show signs of fraudulent activity.

After passing the VFA agent’s inspection successfully, the issuer must comply with the regulations of user due diligence:

  • Firstly, the client must be completely identified by passport, utility bills or bank statements
  • Secondly, the issued crypto assets need to fulfill numerous technical conditions as having protection devices to prevent the use of proxy servers, unverified IP addresses and others.

No harmonization in crypto regulation in the EU

Unlike many policies, regulations on crypto assets’ practices have not been harmonized among the EU members. Many businessmen interested in launching a crypto company in EU are bothered by this problem and wonder why Malta’s systems cannot be used all over the Union.

The answer to this question is the different treatment of virtual assets in each country. Different states’ attitudes range from encouraging through neutral to negative. These polar attitudes are extremely difficult to harmonize.

Another problem is the absence of in international body who would standardize the crypto assets industry. That is why at the moment every state defines its own taxes and rules for cryptocurrencies.

Future predictions

If we would start from dates analysis, we would see that after bitcoin appearance in 2009 it took countries some time to react. Malta started crypto activities only in 2017 before releasing respective laws at 2018. Switzerland views bitcoin as a foreign currency since 2014. Japan identified bitcoin legal for tender only in 2016.

Experts came to the conclusion about the barriers on the way of harmonization and unification of crypto assets in the European Union. They are two:

  • Crypto assets that fall under the existing regulations (MiFID II, the EU Electronic Money Directive) are not clarified
  • The EU members have not yet adopted a clear opinion on the cryptocurrencies not regulated in the EU.

These problems block the so needed regulation of cryptocurrencies in the EU. Separate countries, especially Malta but also Japan and Switzerland, have come a much longer way in terms of being cryptocurrency-friendly states that the rest of the European Union. The rest of the EU is being many years behind due to the fear of countries not being able to control the financial system. The fear of increased criminal activities, tax evasion or money laundering are not at all unjustified. However, it is worth discussing whether they should be the basis of political decisions.

To sum up

Today, crypto industry in Malta provides favorable conditions for conducting business. For those who would like to start a crypto business in Malta COREDO is prepared to assist with every aspect of this procedure starting from opening a corporate bank account to registering a company in Malta. Our legal specialists are highly experienced in the sphere and would be glad to answer your questions about crypto activities in Malta.

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