The Malta Financial Services Authority (“MFSA”) has published a position paper on the tokenisation of fund units in response to growing global demand for wealth diversification. As the financial sector continues to evolve through emerging technologies, the MFSA aims to uphold financial stability, market integrity, and consumer protection.

Tokenisation has become increasingly significant in global financial services due to its potential for enhanced transparency, accessibility, and seamless transactions.

The paper focuses on tokenised units or shares in Collective Investment Schemes (“CIS”), particularly in the context of maintaining the share register via distributed ledger technology (“DLT”). Rather than addressing the full trading lifecycle, the MFSA begins by laying foundational guidance on record-keeping in a tokenised format.

Tokenising CIS units represents progress for the asset management industry without disrupting the existing regulatory framework. It maintains the overall structure of CIS operations, though it may shift certain roles within the ecosystem.

The MFSA supports the issuance of fund units in token form, provided that each share class within a CIS is represented by a distinct digital asset and that these are segregated from other dematerialised instruments.

As tokenised CIS units are considered financial instruments, they fall outside the scope of the Markets in Crypto-Assets Regulation (“MiCA”) and are instead governed by the Markets in Financial Instruments Directive II (“MiFID II”). Accordingly, only MiFID II authorisation is required for marketing such units.

All things being considered, the distribution process is dependent on the nature of the token’s underlying assets. Therefore, in this regard the MFSA expects distributors to seek legal guidance accordingly.

The tokenisation of CIS shares or units is being permitted when conducted by:

• Licenced alternative investment funds (“AIFs”);
• Licensed professional investor funds (“PIFs”);
• Notified alternative investment funds (“NAIFs”);
• Notified professional investor funds (“NPIFs”); or
• Undertaking for Collective Investment in Transferable Securities (“UCITS”).

Custodians shall explain how tokenised assets will be securely held. Transfers of tokenised CIS units require prior CIS approval and verification of the acquiring investor.

The role of the fund administrator will adapt to the digital environment, particularly in managing blockchain-based share registers and smart contracts. Administrators must also conduct due diligence on both the wallet and wallet holder before processing transactions.

While tokenised CIS units remain denominated in fiat currency, the MFSA outlines several control measures:

Competence requirements

The governing body of CISs shall have the necessary knowledge, experience, and understanding of tokenisation and its underlying technology whilst also meeting the standards set out by the relevant regulatory framework.

Disclosure requirements

The ability of CIS shares or units to be tokenised shall be clearly demonstrated in the offering document and in doing so, shall inform the respective function within the MFSA. The MFSA expects the offering document to include the following disclosures:

• Information on the risks associated with tokenised shares or units and the creation and operation of digital wallets;
• Information on the related subscription and redemption procedures for the tokenisation of the shares or units;
• Information on anti-money laundering (“AML”) and know-your customer (“KYC”) requirements;
• Information on the arrangements for the issuance and redemption of tokenised CIS shares or units, including cut-off times and changes to settlement periods, when applicable;
• Information on any limitation on the transferability of the tokenised shares or units to third parties;
• Information on the safekeeping arrangements applicable to tokenised shares or units; and
• Information on the actual risks associated with tokenised units or shares, including reliance on the chosen blockchain.

Risk mitigation

Inherently, tokenisation carries risks which the MFSA expects to be mitigated through the application of appropriate strategies. The MFSA provides a non-exhaustive list of key risks that are to be included in the offering documents.

1. Distribution Ledger design;
2. Key management;
3. Privacy and User identity;
4. Recovery and Contingency planning;
5. Digital system failure;
6. Authentication and Authorisation;
7. Clear communication of risk;
8. Third-party dependence risk; and
9. Governance risks.

This new position paper represents an important step for Malta to continue cementing itself as a jurisdiction leader in the sphere of DLT and tokenised assets.

For information or assistance, please contact us at info@gtg.com.mt

Author: Dr Neil Gauci