According to Gartner, blockchain will generate annual business value of more than $3 trillion by 2030. PwC interprets that data to say that possibly 10 percent of the world’s economic infrastructure might run on blockchain by that time. While there is a lot of excitement around blockchain with regard to how blockchain can break down barriers, improve trust, and enhance traceability and transparency of transactions, a PWC survey notes that regulatory uncertainty is a key concern that mars the development of blockchain projects, followed by the lack of trust, and interoperability. Blockchain regulation is something that has seen a lot of knee-jerk reactions from governments in different parts of the world. Regulators worldwide have shown a mixed reaction to tokens and initial coin offerings (ICOs).
Malta along with Switzerland and Singapore has moved toward forming regulations on tokens to speed the growth of blockchain development. The US on the other hand has shown a typical agnostic approach to regulation, leaving it to the different states to come up with their own regulations. The official People’s Daily of China on the other hand, called for regulation of blockchain technology at the domestic level. The Chinese Communist Party’s official media, however, doubled down on the government’s commitment to harnessing the technology’s benefits.
With the haphazard manner of blockchain regulation, companies are left to guess how regulators in their jurisdictions will regulate commercial activities migrating to the blockchain. PwC advises blockchain entrepreneurs to keep abreast with regulatory developments and to engage with lawmakers at all levels. What if the government of a state itself took a proactive stance to blockchain regulation while keeping blockchain entrepreneurs in the loop? That is what the Mediterranean island nation of Malta with its unique geographic position straddling Europe, the Middle East, and Africa has gone ahead and done, as it tries to position itself as the ‘Blockchain Island’.
In the middle of last year, Malta became the first country in the world to provide an official set of regulations for blockchain, cryptocurrency, and distributed ledger technology companies. The goal was to provide companies the ability to work in a regulated environment.
The government understood the fact that serious entrepreneurs in the blockchain, cryptocurrency, and distributed ledger space needed legal certainty. In fact, the paranoia of operators in these sectors is that one or two years after they have set up operations and started growing their businesses, the ruling dispensations of the day might one day come up and tell them that their operations are not within law. Even though very few countries have legislated on blockchain technology, Malta wanted to gain a first mover advantage by providing entrepreneurs the assurance of legal certainty. Malta became the first country in the world to offer a comprehensive DLT regulatory framework when parliament passed laws regulating the technologies in October. What’s unique about Malta’s laws are that they go beyond financial focused technologies and have a broad ambit while dealing with ICOs, cryptocurrency exchanges, and digital currencies.
Malta’s comprehensive laws
The first law is the Malta Digital Innovation Authority Act (MDIA). The MDIA establishes the Malta Digital Innovation Authority while also certifying the DLT platforms. The focus of this law is on internal governance arrangements and it outlines the duties and the responsibilities of the authority that will certify distributed ledger platforms. The goal of setting up the MDIA is to provide legal certainty and to improve the credibility of the operators who use the platform.
The second law, the Innovative Technology Arrangement Services Act (ITAS Act) involves the arrangement of DLT platforms and the certification of the platforms. The bill regulates cryptocurrency exchanges and other operators in the cryptocurrency market.
The third law, Virtual Financial Assets Act (VFA Act) regulates ICOs, cryptocurrency exchanges, and wallet services providers, among others. The law went into effect in October last year. It gave companies registered in Malta that seek to launch ICOs six months to comply with the laws. The government also gave cryptocurrency exchanges one year to comply with the law.
But does Malta as a destination for blockchain startups have a value proposition other than the regulatory environment? The government of Malta says that the Island nation’s overall value proposition is underpinned by a number of critical pull factors. In addition to the bespoke regulatory authority, MDIA, for distributed ledger platforms, the Malta Financial Services Authority also has a reputation for being meticulous and business friendly. In addition, Malta has a highly developed operational infrastructure to support innovative businesses highlighted by the presence of professional legal firms as well as a strong cluster of the top four and medium tier audit firms.
Malta’s Junior Minister for Financial Services, Digital Economy, and Innovation within the Office of the Prime Minister of Malta, Silvio Schembri, told International Finance: “Malta enjoys a highly stable political and economic environment. The sustained growth of the blockchain industry is being supported by investments in innovation that are planned for this sector just like those for the AI industry. Our strong ICT infrastructure, which is 5G ready, ever-growing gaming industry, and strong financial services sector, a tech-savvy population – the huge human capital that lies in our talent base – and our drive to be innovative act as solid foundations to deepen Malta’s first mover advantage in the Blockchain sphere.”
Moreover, With the publication of the government consultation paper on the establishment of the Malta Digital Innovation Authority, the framework for the certification of distributed ledger technology platforms and related service providers and a Virtual Currency Act, Malta has made great strides towards making the country a leader in DLT regulation. “The three acts that are now in effect – the Virtual Financial Assets Act; the Malta Digital Innovation Authority Act and the Innovative Technology Arrangements and Services Act providing a holistic regulatory framework,” Schembri added. Malta did not stop there, and after a public consultation, the Malta Financial Services Authority published its fintech strategy based on six pillars: regulations, ecosystem, architecture, international links, knowledge, and security.
“The two elements of this strategy which appear to be most anticipated by stakeholders are the setting up of a regulatory sandbox, under pillar 1, and the establishment of an innovation hub, under pillar 3. The authority plans to issue a consultation document on each of the six pillars of the strategy, with that on pillar 1 expected to be published in the coming weeks,” Schmebri told International Finance.
Exante, a financial and technological company created by professional traders, with ten offices in Europe and Asia and more than 300 employees, is one of the innovative blockchain companies using Malta as a base. It claims to provide the greatest number of markets among brokers in Europe, and describes itself as the only one to offer cryptocurrencies since 2012. With regard to Malta’ s advantages as a blockchain hub, Patrick O’Brien, Exante’s spokesman, told International Finance: “Malta’s advantageous geographical location, being within three hours direct flight from other European financial centres was partly the reason behind Exante’s choice to move to Malta. With an accessible, respected, and forward-looking regulator, we believe that the Island’s stable political arena was a perfect choice. Malta’s banking sector, composed of a combination of solid and reliable Maltese banks and major international banks, played a role in addition to the forward-thinking ability of our government in the blockchain and crypto space.”
Exante on the whole encourages blockchain-initiatives made by the government in Malta and is actively involved in their implementation. Having established a highly-profitable hedge-fund bitcoin fund a few years ago while closely cooperating with many bitcoin exchanges, the founders of the company have amassed a wealth of experience in this technology. Exante shares its experience for carrying out other projects aimed at developing not only blockchain in Malta but other crypto technologies as well.
Ana Benic, the founder and CEO of another blockchain startup based in Malta, NextHash, also speaks highly about the close interaction between blockchain entrepreneurs and the regulators in Malta. “Malta has already built up a sizeable crypto community that is bringing awareness about its blockchain prowess to the rest of the world. Not only today, but even more in the future, entrepreneurial world will not be limited by jurisdiction but by the availability of a digital community and infrastructure. In Malta the blockchain community itself is very strong and, considering the size of the country, you can smoothly communicate with the regulator and your peers,” Benic told International Finance.
NextHash, which trades under the brand Nexinter, is a digital asset platform. Nexinter is currently operating as a regulated crypto exchange in the European Union using Estonian licenses and the Maltese MFSA notification. With regard to Malta’ approach to technology innovation, Benic told International Finance, “Malta is keen to explore new evolving technologies and to deeply understand whether they will bring true innovation and sustainable growth. This is indeed an attractive environment for startups because of its agility and the infinite possibilities to extend their reach as well as the ability to comply with regulatory frameworks without major headaches.”
Challenges of scale
What are the challenges that Malta can face as it tries to position itself as a blockchain innovation hub? With Malta’s limited population and size, how will companies scale smoothly after a point?
“Malta has been one of the first jurisdictions to identify the opportunities associated with this new sector and has spearheaded the way in adopting a regulatory framework. Although the government has pitched the country as ‘Blockchain Island’, the challenges which lie ahead will be in retaining strong industry players who have or intend to relocate to Malta for purposes of making use of Malta’s regulatory framework,” says Exante’s O’Brien. Another question that rises is whether the Maltese immigration system will be flexible to allow growing companies to meet their talent needs by enabling smooth movement of talent from outside Malta. The strong economic growth that Malta is currently experiencing has had a significant impact in reducing the level of unemployment in Malta and consequently the availability of labour. “Over these last few years the economy has experienced an influx of foreign workers to support the growth in the various sectors of the economy including those in the blockchain space and related areas. As a result, the government has reviewed the process to allow non-Europeans to work in Malta to improve the efficiency with which such applications are duly processed to ensure that these meet the requirements of the industry’” says Minister Schembri.
Malta’s main aim with regard to talent is to attract the best talent from abroad while supporting its local talent resources and industries. “Since blockchain is a new industry, not just for us but for the world itself, bigger countries that are now looking at what Malta’s DLT legislation as a blueprint. As a government, we immediately sought to take the necessary actions to strengthen the existing skills and prepare future generations to pursue a career in this new emergent industry. In fact, very recently, 19 students were awarded scholarship grants to pursue their Master’s degree in DLT. This was done through an investment of €160,000 and is interesting to note that the background of these students are in diverse areas such as law, finance, business and management. Through this master’s program we sought to fuse ‘stand-alone’ professions with a new emergent industry, an approach which is likely to mould such sectors as we know today,” added Schembri.
Yet another challenge that companies in the blockchain field faced in Malta according to a Times of Malta report in March was the resistance on part of banks with regard to opening accounts for crypto and blockchain companies. The paper reported that banks were declining these companies requests to open accounts claiming that such accounts were outside their ‘risk apetite’. The companies on the other hand were complaining that the banks were not differentiating between cryptocurrency and blockchain even though the two were not always linked. With regard to the reluctance of banks to open accounts for crypto and blockchain companies, NextHash’s Benic said, “This is indeed one of the problems that the industry is facing as a whole. It is still an overall problem to open a bank account in Malta for crypto-related companies. Nevertheless, we deeply understand the challenge that banks are facing and we can disclose that we managed to obtain an account with the help of our policies and infrastructure. We still believe there is are some gaps between the regulator and the banks in Malta, as also elsewhere in EU and around the world. Nevertheless, we are confident that such gaps will shrink over time and Malta will be playing a leading role to make it possible.”
The Maltese government got itself involved to resolve the issue with Minister Schembri himself holding talks with banks and their stakeholders to for a better understanding of the industry. The Malta Financial Services Authority (MFSA) and the Financial Intelligence Analysis Unit (FIAU) then jointly published a consultation document to provide guidance for credit institutions, payment providers and electronic money institutions that have the capacity to open accounts for entities using financial technology, according to the Malta Business Observer.
Malta’s government did not put a number on the blockchain investments that Malta has attracted. However, the government highlighted the fact that under the VFA Framework, the MFSA has registered 13 VFA agents and the authority has received notifications from a number of entities who are operating under the transitory provisions. The MDIA also approved three systems auditors for DLT projects. The government considers this an important milestone since VFA Agents and systems auditors will both assist authorities throughout the supervision and licensing process. It believes that this will ensure market stability, integrity, and consumer protection.
Blockchain conferences organised in Malta are well attended by industry delegates from all over the world. “It is interesting to note the level of participation in recent blockchain themed conferences in Malta. These conferences attracted more than 5000 delegates putting Malta as an attractive jurisdiction to a substantial number of operators in this space,” says Minister Schembri, highlighting the global interest in the Maltese blockchain sector.
Eman Pulis organises the Malta AI and Blockchain Summit, a successful forum which highlights Malta’s blockchain value proposition to the global technology community. “The Maltese Islands have a lot to offer, particularly in terms of their location – such a central position makes us an ideal point of connection between markets in Africa and Europe. We also have other advantages, such as an English-speaking population and a favourable climate, with plenty of leisure opportunities, making Malta a great place to relocate to,” Pulis told the International Finance.
Besides providing companies and executives opportunities to network and do business in Malta, The Malta Blockchain Summit also work closely with initiatives such as Malta Enterprise. In November, the Malta AI and Blockchain Summit will also be launching Malta Week, which offers not one, but two shows. “We are inviting investors to come and explore what Malta has to offer in this show-packed week – and the synergy between the Malta AI and Blockchain Summit and the Medical Cannabiz Summit make it an excellent chance for a conversation on the myriad investment opportunities to be found when blockchain and medical cannabis cross paths,” added Pulis.
So how does the government visualise Malta’s blockchain sector’s growth in the coming years?
The government believes that the onset of the new legal and regulatory framework has established very strong foundations for the sector making its future bright. It says the plans for a regulatory sandbox, the development of a high-end incubation centre, and equally, the plans to attract venture capitalists and accelerators, will further strengthen the development of the industry in Malta. In addition, the government believes these developments will strengthen the overall ecosystem and attract the service clusters that are an integral part of a development strategy set for this sector.
“We are on the right path and should continue to gain strategic competitive advantage in the global economy as leaders in the field while attracting investments and positioning the country as a hub for the application of emerging technologies and their development,” said Minister Schembri.
Malta’ success in drawing further blockchain investments partly depend on how its competitors – both far and near – fare, especially with regard to the regulatory environment they offer. NextHash’s Benic is optimistic that regulators will progressively better regulate the crypto sector. She also believes that going forward, regulations will be progressively harder and licences will become harder to obtain for new entrants. “We are also curious and eager to observe how the current exchanges will adapt and survive in a progressive regulatory environment. Nevertheless, it is key not to mistake blockchain technology for crypto companies, where blockchain tech is the underlining technology behind the cryptocurrencies. We believe that companies developing just the blockchain technology and not dealing with financial instruments should be considered and regulated as regular technology companies.”
Exante’s O’Brien is of the opinion that blockchain’s future is bright in the sense that in the same manner in which email became a ‘killer app’ for the internet, identity solutions will be a ‘killer app’ for blockchain. “While many would still argue the applicability of Blockchain on a global level, they cannot ignore the paradigm shift felt throughout the world. In 2018 alone, more than € 2.1 billion was spent on blockchain implementation globally. The cascading effect increased investment in ICOs by sixteen-fold and more than a dozen countries are officially developing their own cryptocurrency,” he says. Nevertheless, he sees the Asean nations as potential trailblazers in the global blockchain sweepstakes because of their tech savvy populations and the obvious demographic dividend they enjoy. “While the decentralisation movement largely began in the West, it has certainly made its way East, as jurisdictions in the region have come to shape global conversations and developments across the wider industry. One of the primary reasons the Asia-Pacific region looks poised to be a trailblazer in blockchain is its consumer market. Not only is it big – the size of Asia’s middle class is expected to reach 3.5 billion by 2030 – but it is especially eager to embrace new technologies. The region’s enthusiasm for cutting-edge technologies can be attributed to its uniquely young, technology-curious population,” added O’Brien. But as of now, Malta is enjoying its moment under the Mediterranean sun as the world’s first ‘blockchain Island’.