The Malta Financial Services Authority has published a Consultation Paper on a Rulebook to regulate the role of Virtual Financial Asset Agents (VFA Agents). This proposed set of rules is intended to supplement the provisions on VFA Agents set out in the Virtual Financial Assets Act (VFAA).
This follows the Consultation Paper issued just last week on the Virtual Financial Assets Regulations to be issued under the VFAA.
The role of the VFA Agent is to assist issuers of tokens/coins qualified as Virtual Financial Assets (VFAs) and operators providing VFA Services under the VFAA. Issuers of VFAs are required to appoint such Agents to advise them on their responsibilities and obligations under the VFAA, to ensure compliance, advise on matters relating to trading of VFAs on a DLT exchange and to be a contact point with the MFSA. The VFA Agent, although acting on behalf of the issuer and as a liaison with the MFSA, is to remain independent and must disclose to the MFSA any information as is required.
The VFA agent is also required to apply for a VFA Services licence Apart from abiding by the requirements of the law when filing an application, the Agent must also ensure that the persons wishing to offer VFA services are fit and proper.
Who may act as VFA Agent?
The role of the VFA Agent is a licensable activity under the VFAA requiring registration with the MFSA.. Only advocates, accountants and auditors may act as a VFA agent. Firms made up of such professionals, including firms acting as corporate service providers and legal organisations, owned and controlled by such professionals can also act as VFA Agents.
The proposed Rulebook provides that VFA Agents must ensure that DLT assets in relation to which an application for registration of a whitepaper is being made, qualifies as a VFA. VFA Agents must endorse an Issuer’s determination on whether a DLT asset qualifies as a VFA, by notifying the MFSA that the Issuer’s assessment is correct. In doing so, the VFA Agent is required to list any assumptions it has made or any reservations it may have. Such a determination is crucial as the MFSA will not make its own determinations on whether an asset is indeed a VFA.
When it comes to ICOs or Initial Virtual Financial Asset Offerings, it is the duty of the Agent to set out milestones, which the issuer must abide with. The systems auditor, as defined under the Innovative Technology Arrangements and Services Act, must prepare a report which covers all aspects of an issuer’s technology arrangements, including cyber security; the VFA Agent in turn must be satisfied with this report.
Registration, On-Going Obligations and Enforcement
To be licensed as VFA Agents, applicants must fulfil certain criteria, present an application to the MFSA and pass from a process of scrutiny based on various tests such as the fit and proper test. The MFSA has the power to vary such registrations and it may even de-register a VFA Agent. The Agent is also given the faculty to ask MFSA to suspend its registration, for a period of six (6) months, if there are justified reason.
The role of a VFA Agent carries specific on-going obligations. VFA Agents must have on-going adequate business organisation, systems, experience and expertise and must adopt the dual control principle. Continuity and regularity in the performance of a service is of the utmost importance and carries with it certain obligations. Agents may also be subject to inspections to ensure on-going compliance.
A requirement set out by the proposed Rulebook is that of taking out and maintaining a full Professional Indemnity Insurance cover. The Agent must also submit a compliance certificate to the MFSA in relation to AML/CFT.
VFA Agents are also allowed to outsource certain tasks, however undue additional operational risk must be avoided to ensure continuous and satisfactory service to clients. If the MFSA sees that certain obligations will not be able to be met due to such outsourcing, then it may not authorise the outsourcing of these tasks.
It is also proposed that where a client of the VFA Agent appoints more than one VFA Agent, the Agent must still abide by all the obligations set out in the Rulebook, while the Client must outline how responsibilities are to be shared between the Agents.
With regards to Enforcement, the MFSA has various sanctioning powers which must be applied with a certain element of proportionality. A breach or infringement of a Rule set out in the Rulebook may lead to administrative penalties, without recourse to a court of law, with penalties possibly running up to a maximum of hundred and fifty thousand Euro (EUR 150,000). In such cases VFA Agents have a right of appeal to the Financial Services Tribunal.
Industry participants and interested parties are encouraged to send their feedback to the MFSA by no later than the 31st of July 2018.
For more information on ICOs, Virtual Financial Assets, Blockchain, Smart Contracts and related areas please contact Dr Ian Gauci on igauci@gtgadvocates.com and Dr Cherise Abela Grech on cabelagrech@gtgadvocates.com