Malta, the 'Blockchain Island': First Country to Establish a Full Regulatory Framework for Distributed Ledger Technology

On Wednesday (4 July 2018), the Parliament of Malta, an island nation that is part of the European Union, unanimously approved three bills that regulate Distributed Ledger Technology (DLT), making Malta the first country to provide legal certainty in this space.

The three bills passed by "The House" on Wednesday evening, just before summer recess, are the Innovative Technology Arrangements and Services Bill (Bill No. 43), Virtual Financial Assets Bill (bill No. 44), and the Malta Digital Innovation Authority Bill (Bill No. 45). 

This is how Joseph Muscat, Malta's Prime Minister, announced the news on Twitter:

The man he refers to in this tweet, Hon. Silvio Schembri, is the Junior Minister (or Parliamentary Secretary) for Financial Services, Digital Economy and Innovation.

Before these bills were approved, several crypto exchanges, including Binance, BitBay, and OKEx, had announced their intention to move their base of operations to Malta.

Silvio Schembri said in a press release:

"This marks an important milestone through which companies will be provided with the necessary tools to operate in a regulated environment. This will put minds at rest for investors and whoever uses this new technology that is likely to change the world. I am optimistic that further companies will choose Malta to operate from with a system that offers stability and that will eventually result in further economic growth."

Jean-Ph Chetcuti, the co-founder and managing partner at Chetcuti Cauchi, a Maltese law firm, said in an interview:

"We now have a comprehensive framework for the blockchain industry to grow and flourish in Malta. This is a momentous milestone for Malta as a forward-looking economy, truly confirming Malta as the 'Blockchain Island'. We now have ample legal certainty for existing and new DLT projects. The larger crypto operators we have been speaking to in the last months are more comfortable committing to further investment and they are setting up in Malta."

 

Featured Image Credit: Photo by "Giuseppe Milo" via Flickr; licensed under "CC BY 2.0"

European Central Bank to 'Close the Gaps' in Crypto Surveillance

Neil Dennis

The European Central Bank (ECB) said on Wednesday it aims to overhaul its monitoring of cryptocurrency trading activity by making improvements to both its on- and off-chain surveillance.

In a paper published on August 7 titled "Understanding the crypto-asset phenomenon, its risks and measurement issues", the central bank said that while the risks digital assets pose to issues such as financial stability and consumer safety are easily identifiable, there are currently too many gaps in the data available to determine exactly how much of a risk they pose.

The ECB said in the paper:

Important gaps and challenges remain: exposures of financial institutions to crypto-assets, interlinkages with the regulated financial sectors and payment transactions that include the use of layered protocols are all examples of domains with prominent data gaps.

Identifying Risks

The ECB identifies in the paper areas where cryptoassets may have an adverse impact on the stability and efficiency of the financial system and the economy. It adds:

While these risks are currently contained and/or manageable within the existing regulatory and oversight frameworks, links with the regulated financial sector may develop and increase over time and have future implications.

The extent to which the financial system and economy may be exposed to such risks will depend much on how the interconnectedness of cryptoassets with investment vehicles and retail payments develops: it noted specifically that cryptoasset derivatives connect investors with the digital asset market without them having to hold cryptocurrencies directly.

Closing the Gaps

The paper advised, therefore, that the ECB must prolong and improve its data collection on the growing asset class - refining both its qualitative and quantitative analysis. Problems arise, however, because:

Available data on crypto-assets are neither complete nor fully reliable for the purposes of monitoring market trends to the degree of detail necessary to gauge their risks.

Specifically, it said, it is hard to retrieve data on segments of the market that remain off radar such as illiquid trading platforms that may be affected by "wash trading" - a form of market manipulation that creates the illusion of robust trading activity.

A Call to Arms

The ECB said it is developing statistical initiatives along with the central banking community to help close the data gaps associated with cryptoassets. It added:

Looking ahead, the ECB will continue to work on indicators and data by dealing with the complexity and growing challenges encountered in analysing on-chain and layered protocol transactions.

Furthermore, it said, investigation will continue regarding new data sources for information on the finacial system's interlinkages with cryptoassets.

The report concluded:

With respect to the off-chain transactions, amid a multitude of methodological options, further work will focus on increasing the availability and transparency of the reported data and the methodologies used, harmonising and enriching the metadata and developing best practices for indicators on crypto-assets.