25 Jul 2019
The MFSA has recently taken a significant step towards revisiting the local capital markets regulatory framework by publishing a Consultation Paper on Security Token Offering. In line with MFSA’s Vision 2021, the proposed STO consultation reflects the efforts to bridge the gap between traditional securities and technology driven business whilst ensuring high standards of investor protection, financial stability and market integrity.
Through the publication of this Consultation Paper the MFSA intends to guarantee legal certainty for STOs which has been somewhat of a grey area to date. Following the implementation of the Virtual Financial Assets Act, Malta was one of the pioneers concluding that DLT Assets qualifying as financial instruments (in terms of MiFID) should be regulated under traditional financial services legislation. The Consultation Paper which has been drawn up to compliment the VFA regulatory framework makes references to various concepts already established in the VFA Rulebook. The paper also aims at providing clarity as to which DLT Assets qualify as Security Tokens and how their issue and listing on trading platforms should be regulated. The paper refers to the utilisation of the Financial Instrument Test one is able to determine whether a DLT Asset correlates as a financial instrument. The MFSA is proposing further classification between transferable securities in terms of MiFID II.
Through the Consultation Paper, it is made clear that the MFSA aims to differentiate between Traditional STOs, which refer primarily to traditional transferable securities such as shares or bonds, and Other STOs which refer specifically to the technology representation including a token, that share some qualities with traditional transferable securities such as a token that only gives the right to profits of certain investments of a business.
Through the proposed STO Policy one may conclude that the MFSA is taking a prudent approach in that the Authority is initially proposing to introduce the framework for Traditional STOs. The applications for approval of prospectuses would be submitted by issuers which are incorporated as limited liability companies in Malta with its register of members being able to be kept in dematerialised form, using DLT.
The MFSA is currently undergoing discussions to amend our Companies Act to allow and facilitate the issuance of securities in tokenized form. This would be a game changer and will render Malta the most attractive jurisdiction from where to launch a security token offering.
In relation to Other STOs, the MFSA has concluded that it would be beneficial that the Authority carry out further analysis relating to the risks and challenges that the regulation could generate. In the future, specific regulatory instruments specifically for Other STOs will be published, to establish legal certainty on the nature of the instrument and the rights of the investors. We fail to understand why the MFSA is taking this staggered approach and why the MFSA is seeing such a significant difference between the models.
When the MFSA receives an application for approval with regards to a prospectus and/or application for the authorisation for admissibility to listing, the MFSA will adopt a three-pillar evaluation taking into consideration applicants Financial Soundness, Corporate Governance and compliance with Transparency. The MFSA is mindful that STOs, like ICOs are a significant source of funding by start-ups and that it would be necessary for the issuer to draw up a Financial Due Diligence Report to explain the business model against a defined set of parameters.
A crucial aspect raised in the Consultation Paper is the fact that whereas traditional venues operate through a centralised exchange system, in the context of DLT, trading venues can be structured to operate in two different ways: centralised and decentralised exchange systems. Both exchange systems allow for the adoption of DLTs and provide the issuance and trading of STOs. In addition to the differentiation between exchanges the MFSA has also taken a look into permissioned and permissionless systems. A centralised system employing DLT would mean that the trading venue holds an inventory of the securities tokens whereas a decentralised exchange consists of multiple users connected to each other and each user would have the same copy of the ledger, thus forming a distributed ledger – assets are traded in a peer-to-peer manner, automatically and the tokens are not held by the trading venue but are held by the user.
In addition, the Consultation Paper dedicates a section to the Market Abuse Regulation (MAR) (Regulation (EU) 596/2014) as being applicable to security tokens as a type of financial instrument, including, but not limited to, credit default swaps and contracts for difference. The MFSA refers to insider dealings, the unlawful disclosure of inside information and market manipulation. The MAR is a fundamental regulation in order to protect market integrity. The regulation also serves as a requirement for an integrated, efficient and transparent financial market. The paper also dedicates a section to post-trade settlement as the arrangements of transferable securities to be represented in a book-entry form in a dematerialised form
The consultation paper is a significant step in merging the traditional securities and technology enabled securities offering under one regulatory framework.
The consultation period is open until the 30th of August 2019 and all interested parties are encouraged to send their feedback to the Authority. Drop us an email on email@example.com should you require any assistance or further information.