Virtual Financial Asset Service Provider Licensing: Procedure and Requirements

With a wide spread of blockchain technology, to ensure proper and professional business conduct, the world has faced a need for its regulation. Malta, a jurisdiction that undoubtedly takes lead among all states with blockchain-specific legal acts and is sometimes referred to as the “Blockchain Island”, has recently introduced additional rules for blockchain activities licensing.

Our partners at Blockchain Advisory Limited, leading Malta blockchain consulting company, have agreed to shed some light on the licensing regime for Virtual Financial Asset (VFA) Service Providers and share their legal analysis on our blog.

Virtual Financial Asset Rulebook

On February 25, 2019, the Malta Financial Services Authority (MFSA) published the Virtual Financial Asset Rulebook, known simply as the “Rulebook”, charting the regulations for the operators in this field of financial assets, with Chapter 3 of the Rulebook focusing on the Virtual Financial Asset rules for VFA Service Providers.

The Chapter applies to VFA Service Providers licensed under the VFA Act and applicants seeking to be licensed under the Act. VFA Service Providers must engage VFA Agents duly registered or in the process of being registered with the MFSA in accordance with Article 14 of the Act.

As such, as we have previously reported on our social media, Blockchain Advisory Limited has successfully applied for registration as a VFA agent and is composed of a team of lawyers and technical professionals who have successfully completed a course approved by the Authority.

Licensing Criteria

A person seeking to become a licensed VFA Service Provider must be a legal person established in Malta, act in an ethical manner, taking into consideration the best interests of clients and the integrity of Malta’s financial system, and overall be applicable under various factors demanded by MFSA under its “Fit and Proper” criteria.

These criteria demand that applicants have:

1) Integrity: of good repute and intends to act honestly and in a trustworthy manner;

2) Competence: possess an acceptable level of knowledge, professional experience, and expertise necessary for carrying out the functions of a VFA Service Provider;

3) Solvency: with an initial capital requirement of 730,000 EUR applicable to Class 4 VFA Service Providers and maintain this amount as a permanent minimum capital, as well as pay the submission and annual fees to MFSA.

Application Process

The Application Process is broken into several phases:

1) The preparatory phase during which the VFA Agent notifies the MFSA of an intent to apply for a VFA Service Provider license on behalf of the applicant with a statement including the proposed structure with a list of persons for key positions, a list of VFA services that the applicant seeks to carry out and a legal opinion that the activity does not fall under regular financial services. Once all these documents are received the Authority will set up a meeting with the Applicant, as well as set up a deadline of 60 days for the Applicant to submit its application and pay application fees.

2) The pre-licensing phase depicts the period during which the Authority reviews the documentation and if everything is satisfactory, it provides “principle approval” of 3 months, during which the applicant must finalize outstanding issues, satisfy pre-licensing conditions and provide the original and supporting documentation.

3) Post-licensing / pre-commencement phase defines the 12 months window after the review and approval of all the documents, during which the VFA Service Provider must commence its work.

Staff Requirements

There are key functionary positions that the VFA Service Provider applicant must appoint. These are:

1. VFA Agent – a crucial figure who will be acting as a bridge between the Authority and the VFA Service Provider;
2. Board of Administration;
3. Risk Manager;
4. Compliance Officer;
5. Money Laundering and Reporting Officer (MLRO);
6. Auditor.

Compliance Requirements

The VFA Service Provider license holder has several important obligations to maintain, such as notifying the MFSA of certain breaches and changes of its strategy, security and core regulations; maintaining an insurance policy; submitting an annual Compliance Certificate drawn up by its Compliance Officer;  undertaking a Financial Instrument Test which shall be signed by the Board and Compliance Officer; holding and controlling clients’ assets in segregated and highly secure accounts; following supplementary conditions applicable to VFA Exchanges set out by Chapter 3 of the Rulebook.

Conclusion

Compliance for blockchain businesses is no easy task. This is why we are beyond grateful to Blockchain Advisory Limited for agreeing to share this piece on the Legal Nodes Blog.

If you would like to know more, please check out the Blockchain Advisory Limited Blog.

Blockchain Advisory Limited can assist in further queries and guide the applicant through the process of attaining the above rules and regulations, as well as prepare one for any new policies and procedures required in this respect. Don’t forget that you can order their services through Legal Nodes.

Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.

Beverly Tonna, Lead Advisor at Blockchain Advisory Limited