Following the Consultation Process on the proposed new Act regulating crypto-currencies and crypto-related services, the MFSA has issued a further Consultation Paper to gather opinions on the proposed Financial Instrument Test.

The Test is intended to determine whether a Digital Technology Ledger (‘DLT’) asset is to be classified as a virtual token, a financial instrument (as defined under MiFID) or a Virtual Financial Asset (‘VFA’). This is expected to form part of the proposed Virtual Financial Assets Act which will regulate virtual currencies and related services, including ICOs and virtual exchanges.

The DLT asset’s category will govern its legal regime: the proposed Virtual Financial Assets Act will regulate virtual financial assets; the Investment Services Act and ancillary rules and regulations will regulate financial instruments; and virtual tokens will be deemed to fall outside the regulations of these two Acts.

The MFSA envisages that this test will be applicable both when the asset is offered to the public as part of an Initial Coin Offering (‘ICO’), termed as an “Initial Virtual Financial Asset Offering”, in or from within Malta, and during the intermediation of the DLT assets by persons undertaking certain activities in relation to such assets in or from within Malta. If entities are providing any service and/or performing any activity in relation to DLT assets whose classification has not been determined for any reason whatsoever, including inter alia, because the issuance of the asset was conducted abroad, they should conduct the Test.

It is being proposed that the Test will consist of two stages:

First step

The first stage will effectively determine whether a particular DLT asset qualifies as a Virtual Token.

If a DLT asset is a digital asset “that has no utility value or application outside of the DLT platform on which it was issued and that cannot be exchanged for funds”, then it matches the definition of a virtual token and will be exempted from regulation under the VFA Act. If the result of this first step is negative, the second step will be implemented to determine whether the asset is a financial instrument.

Second step

If the DLT Asset is not deemed to be a Virtual Token, then the second stage will determine whether the DLT Asset would qualify as a financial instrument in terms of MiFID.

If this analysis results in a negative determination, then the DLT asset will be recognised as a VFA under the proposed VFA Act.

In the Paper, the MFSA is also proposing the requirement that the Test should be mandatory and that both the Test and the respective determination should be reviewed by an external reviewer. The Test is expected to consist of twelve checklists, offering an easier way to determine the classification of the asset.

Industry participants and interested parties are encouraged to send their feedback to the MFSA by no later than the 4th May 2018.

For more information on ICOs, Cryptocurrencies, Blockchain, Smart Contracts and related areas please contact Dr Ian Gauci on and Mr Samuel Gandin on

Disclaimer This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.
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