The MFSA has introduced specific supplementary rules applicable to collective investment schemes (‘CISs’) investing in virtual currencies (‘VCs’). These rules are clear testimony to MFSA’s efforts to implement a comprehensive and robust regulatory framework in this growing digital industry. The rules seek to enhance investor protection, market integrity and financial soundness in relation to CISs that invest in VCs and set out criteria relating to competence, risk warnings, quality assessment, risk management and valuation.
These supplementary rules apply to Professional Investor Funds (‘PIFs’), whether investing in VCs directly or indirectly through a trading company or SPV. Units of collective investment schemes which are/have been created through Initial Coin Offerings shall be deemed to comprise direct investments in VCs.
Parties involved with the scheme and its service providers must be competent and knowledgeable enough in the field of information technology and VCs. The governing body of the CIS must have at least one member with adequate knowledge and experience in the field of information technology, VCs and Distributed Ledged Technology. In the case of self-managed structures, the CIS is required to submit evidence that the investment committee member/s, or the Board of Directors of the Scheme if no investment committee has been appointed, has sufficient knowledge and experience trading on an established virtual currency exchange. In the case of externally managed funds, it is the manager who must be able to demonstrate that he has the appropriate knowledge and expertise in this space.
The application process requires that the primary persons connected with the PIF undergo a fitness and properness test in order to ensure that the parties possess a good standing and sufficient competence to carry out the functions required of them in connection with the PIF. Proper financial controls and management of liquidity and capital will also be taken into consideration. The application process shall comprise of three stages, the preparatory phase, the pre-licensing phase and the post licensing phase. In reviewing the documents published in connection to the application process, the MFSA will take into consideration the nature of the PIF and the type of VCs it will invest in.
Proper and consistent procedures assessing the valuation of assets of such schemes should be carried out by a natural or legal person independent from the PIF so as to ensure that a proper and impartial calculation of assets is given. All applicants must ensure that prior to investing in VCs on behalf of the scheme, the risk profile of the VC investment should fall in line with the risk management policy of the scheme. In addition, the investment manager must carry out appropriate research in order to assess the quality of the VCs being invested into.
If you are looking to set up a scheme investing in VCs or if you require further clarification on these rules, please contact WH Partners for further guidance on Financial.Services@whpartners.eu