In this article, we explore the rapidly developing fintech sector in Malta and outline the robust legislation in place on virtual assets.
Malta is regarded as a jurisdiction of choice when deciding where in the world to set up a Fintech entity. A recognised hub for business, holding one of the fastest-growing finance centres, its developed infrastructure and pool of experienced professionals are well-equipped to support the financial services sector which is exploring innovation in technology.
The jurisdiction offers start-ups and established businesses a competitive fiscal regime, flexibility in a variety of structures and the protection of robust regulation. Although globally recognised for finance, its smaller, yet concentrated market size is an ideal environment to test new technologies before launching at an international scale.
A globally leading crypto-friendly jurisdiction, Malta has been pro-active in developing its fintech sector which has been driven by a supportive and efficient regulator. Malta has set global standards in the legislation on virtual assets and the protection of a regulatory framework has encouraged many fintech start-ups to the jurisdiction which are pursing innovative projects. In developing regulation, the jurisdiction offers a fintech business comfort in the know that the legislation in place mitigates any harmful risk to the business and its consumers.
The Regulatory Environment
A testament to the jurisdictions regulator, Malta was the first country in the world to develop a regulatory framework for virtual currencies, ICO’s and DLTs. The regulatory framework includes three bills titled; the Malta Digital Innovation Act, the Innovative Technological Arrangement and Services Act, and the Virtual Financial Asset Act.
In 2018, the regulator, the Malta Financial Services Authority (MFSA), launched the ‘FinTech Supervision Function’ which focuses on FinTech and the operationalisation of the Virtual Financial Asset Act Framework.
In 2019, the MFSA published the ‘Fintech Strategy’ to support the Authority to enable businesses to act on opportunities which can drive innovation in financial products. The Authority set up six strategic pillars to support the sector; Regulation, Innovation, Architecture, Knowledge, International Links and Security. The Authority aims to support the organic growth and long-term success of Malta’s financial services sector by providing cohesive support in the development of innovative financial solutions.
In 2020, as part of the MFSA Fintech Strategy, they launched a Regulatory Sandbox to allow fintech start-ups, scale ups, technology firms and financial service providers, the opportunity to test financial technology in a safe and stable environment. A Sandbox environment holds the same characteristics exhibited by the production environment, which provides testers with assurance in the predicted outcome from their innovation in financial instruments. The aim of the Sandbox was also to highlight any regulatory gaps or hurdles the innovative projects could face.
The Regulatory Sandbox holds four main objectives; Innovation, Sustainability, Legal Certainty and Knowledge. Businesses can apply to test in the Regulatory Sandbox by submitting a proposal to the MFSA. The regulator will assess the proposal and provide the applicant regulatory guidance throughout its sandbox lifecycle.
The Malta Digital Innovation Authority (MIDA) also established the ITA Sandbox, recognised as the technology assurance sandbox, which is specifically designed for start-ups or small scale businesses that are exploring with technological innovation for financial instruments. The sandbox aims to provide these smaller entities which a safe environment, guidance through the regulatory and legislative environment across jurisdictions, the assurance and protection in the jurisdictions regulatory framework, and additional support to overcome barriers-to-entry before going to market.
The MDIA is also regarded as the first regulator to certify DLT platforms and smart contracts, and the registration of technology arrangements. The regulation aims to safe guard consumer protection and market integrity in the implementation of robust legislation.
Since the two Sandbox’s were launched, they have received 12 proposals, which demonstrates the regulator’s efficiency and supportive approach to the sector.
In 2020, in an effort to support the regulator further, and the development of the sector, the MFSA became an official member of the Global Financial Innovation Network (‘GFIN’). Holding over 70 National Authorities, the global network aims to support innovative financial services providers and their relationship with the regulators in the exploration of technological innovation.
In 2021, the European Commission implemented the Digital Finance Package (DFP), which was created to establish a competitive and cohesive European finance sector which supports and encourages innovative financial products while preserving consumer protection, market integrity and financial stability. The package consists of a digital finance strategy, legislative proposals on crypto-assets, digital resilience, and a renewed retail payments strategy.
In 2022, in January the MFSA renewed its commitment towards continuing its journey in becoming an enabler of sustainable, technology-enabled financial innovation and digital finance within the financial services sector. The renewal covered three main areas; regulatory guidance; the MFSA’s innovation facilitators; and stakeholder collaboration. The Authority is committed to adhering to global regulatory standards, and maintaining market integrity, consumer protection and financial transparency.
To strengthen the fintech market further, MFSA is currently undertaking a FinTech Adoption Study (FAS) to assess the adoption of Fintech in the local market. The Authority aims to understand the implications of the use of innovative technology and digital transformation occurring within the Maltese Financial Services sector. Whilst doing this, the Authority aims to highlight any risks in the space and analyse the current market conditions.
In addition to this project, the Authority is currently in the process of updating its Regulatory Sandbox to introduce the second version of the Rule 3, which involves a more comprehensive understanding of the Sandbox Lifecycle process.
The MFSA is also participating in the EU Supervisory Digital Finance Academy (EU-SFDA), which aims to strengthen supervisory capacity surrounding innovative digital finance. The EU have drafted regulation on Markets in Crypto-assets (MiCA) as part of the Digital Finance package which the MFSA are monitoring to ensure the jurisdictions regulatory framework is consistent and prepared to adapt with this new regulation to ensure the legislation aligns together.
The Academy highlights the risks and opportunities involved with financial technology, and aims to enhance consumer protection, maintain market integrity and financial stability on an EU-wide scale. With this, the initiative helps to develop supervisory practices for fintech projects.
The Current Market
In 2022, Malta’s fintech sector is pre-dominantly made up of virtual currency-related service providers, which are defined as Virtual Financial Asset Service Providers. They undertake activities in virtual currencies which are regarded as financial instruments. The Virtual Financial Asset Act regulates these specific class of virtual assets and the MFSA have established a Financial Instrument Test which determines it to be, or not to be, a virtual financial asset.
Examples of Fintech businesses that currently operate in Malta include payment service providers, digital lending, blockchain entities, investment funds that trade in cryptocurrencies and more.
Affinity Group’ Services
We are an established multi-jurisdictional Corporate Service Provider with offices in the Isle of Man, Malta and the Cayman Islands and have been operating in the fintech sector for many years. We provide a personal approach to corporate services, which involves bespoke and tailored solutions for individual business models. We meet unique client requirements and exceed expectations.
We work with Governments, Regulatory bodies, Banks, and our global network of intermediaries which support our services in fintech. Our established relationships and experience has led us to work on a number innovative cases across jurisdictions.
Our fintech services include;
- Administration services
- Bank account opening
- Designated Business Act 2015 Application
- Fiduciary services, as required under the Designated Business Act
- Maintenance of accounting records and preparation of financial statements
- Money Laundering Reporting Officer (“MLRO”)
- Data Protection Officer (“DPO”)
- Corporate structuring and Regulatory compliance
- VAT registration
- ICO consulting and advisory
- White Paper drafting / review
- Advice in relation to fundraising
- Development of Tokens and smart contracts
- Assistance with security testing / security audit report
- Liaison with legal advisors