MFSA finalises Financial Instrument Test

In a Circular to Issuers of Virtual Financial Assets, issued by the MFSA today, further guidance has been given regarding the online registration form for Whitepapers. Moreover, the final version of the Financial Instrument Test has been published, the Glossary of Terms of the Virtual Financial Assets Framework has been updated with new definitions and a clarification regarding Systems Auditors has been issued.

Whitepaper Online Registration Form

An online registration form has been introduced on MFSA’s website for issuers of VFAs, which form is to be submitted by the VFA Agent.

The Circular defines a VFA Agent as either being a VFA Agent in accordance with Article 7 of the Virtual Financial Assets Act or who has submitted an application for registration as a VFA Agent in accordance with Article 7 of the Act, provided that such person shall have at least three proposed Designated Persons who have successfully completed a course approved by the Authority.

The online application is organized into two stages which include the submission of details pertaining to the Virtual Financial Asset.

A Guidance Note is expected to be issued by the MFSA.

Financial Instrument Test

The MFSA has issued the final version of the Financial Instrument Test (‘FIT’), created to determine whether a Distributed Ledger Technology Asset  (‘DLTA’) falls within the Virtual Financial Assets’ legal framework.

The DLTA is assessed to determine whether it is a financial instrument in terms of MiFID, electronic money, as defined under the Third Schedule to the Financial Institutions Act (Chapter 376 Laws of Malta), or a virtual token. If the DLTA is not classified as any of these DLTAs, then the FIT will determine the DLTA to be a virtual financial asset (‘VFA’).

The Test is divided into 3 main sections;

1.    the inputting of user and DLTA details;

2.    the determination of the DLTA; and

3.    the declaration that the test was prepared in accordance to the VFA Act and

               its guidelines, in a truthful and complete manner.                                                                                  

Updates to the FIT

The MFSA has carried out changes to the manner in which the DLTA is to be determined, by reorganizing certain aspects of the FIT.

When assessing the DLTA in order to determine whether it can be classified as a virtual token, there has been a reorganization in the order of the questions posed. More importantly, the FIT will now allow a DLTA whose standard typically allows it to convert into another DLTA to be classified as a virtual token, if the DLTA has technical restrictions in place preventing convertibility into any other DLTA.

Following the assessment of the DLTA and its exclusion from being classified as a Virtual Token, the DLTA is then assessed to determine whether it is a Financial Instrument. This section of the FIT has been reorganized quite heavily, for instance the DLTA is first assessed in terms of whether it is a contract intended for transferring credit risk, rather than whether it is a transferable security.

The sections assessing the DLTA in terms of whether it is a transferable security or a money market instrument have been merged. Most notable, the DLTA is not automatically excluded from being a transferable security based on the fact that it is an instrument of payment, as previously indicated in the former FIT and former Guidance Note. If the DLTA is negotiated on the capital markets and has features of a transferable security, the DLTA can be classified as a transferable security, even if it has elements of an instrument of payment.

An updated Guidance Note supplementing the Financial Instrument Test is expected to be updated accordingly in the coming weeks.

Additions to the Glossary

The MFSA has updated the Glossary of Terms for the Virtual Financial Assets Framework with the addition of a number of terms; Admission to Trading on a DLT exchange; Auditor; Board of Administration; Connected Person; Cyber Security Framework; Experienced Investor; Functionary; Offer of virtual financial assets to the Public; Parent Undertaking; Public Sector Issuer; Regulated Information; Related Parties; Restricted Person; Substantial Unitholder; and Systems Auditor.

For instance Admission to Trading on a DLT exchange shall mean the process by which the DLT exchange on boards a VFA and subsequently permits participants of the said exchange to enter into transactions in that VFA and subject to the rules of the said exchange.

The glossary elaborates further on when a whitepaper is to be registered with the MFSA in case of an admission to trading on DLT exchange and on circumstances when the VFA has been offered to employees.

Systems Auditor

For the time being, systems auditors appointed by issuers, due to having an innovative technology arrangement in place are not required to have been registered with the Malta Digital Innovation Authority (‘MDIA’). However, the systems auditors must meet all of the competence recognition criteria as set out in Section 3 of Chapter 01, Part A – Systems Auditor Guidelines, and Section 6 also touching on the certification of pen testers as issued by the MDIA.

The submission of a systems auditor’s report to the MFSA, will have no bearing on whether the systems auditor themselves will be granted registration with the MDIA.

Article by Dr Bernice Saliba

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