Last week, Binance, the largest cryptocurrency exchange by volume (around $2 billion daily), announced its intention to leave Japan, and to set up shop in Malta. The reason behind their relocation lies in the difficulty the exchange has had with receiving the required licenses provided by the FSA (Financial Services Agency), to allow it to operate in Japan. The exchange received a warning from the regulatory body that it might need to stop its operations. In a proactive move, especially as cryptocurrencies aren’t hindered by borders, Binance decided to go to Malta. Following Binance’s announcement to go to the island, other crypto-projects such as Tron or Monaco showed their interest in doing the same.
The move to Malta is not all that surprising. The island is geostrategically well-positioned; it is in the Mediterranean sea between its Italian and African neighbours, and is part of the European Union and of the Eurozone – opening the doors to the second biggest consumer market in the world. Additionally, the country has always been open to new technologies, added-value industries, and Internet-related services. Malta, being an isolated state with few natural resources on its soil, has no other choice than to embrace these added-value services and high-tech manufacturing in order to stay competitive, foster its economy, and to remain resistant to external shocks. Malta has the third highest share of service output as a percentage of its total gross value within the EU, which demonstrates the importance of services to them.
The main example of Maltese openness to unregulated industries is best described by its cooperation with the online gaming/gambling industry. In 2004, Malta was the first country to regulate the online gaming/gambling industry while other countries were tirelessly debating, and still are, whether to open their markets to gambling websites.
To create a framework for gaming businesses to strive, but for consumers to be protected, the government created the Malta Gaming Authority (MGA) which sets the framework to operate in the industry, provides licenses, performs audits, enforces the law, and revokes licenses when needed. In essence, the MGA brings integrity and transparency (leading to increased consumer protection and AML/KYC procedures), as well as tax revenue, from the gambling industry. The economy of the country greatly benefited from these regulations and openness to new markets. In 2016, the industry accounted for 12.5% of GDP and employed 9000 people.[modern_footnote]1[/modern_footnote]
Ref: The times of Malta (1)
Following the success of its regulatory framework within the online gaming industry, a new governmental body will be created for the cryptocurrency industry, whose chairman is to be appointed by the minister of Digital Economy. In the same fashion as for the gaming companies, a friendly but fair, transparent and secure regulatory framework will be built. Ultimately, Malta has the aim to become the European hub for digital currency ventures, as it currently is in the online gaming industry.
Malta’s future legislation
The first bill proposal is the creation of a new regulatory body: the Malta Digital Innovation Authority (MDIA). The role of this body will be to oversee the crypto market as a whole within the island’s borders; this will range from providing (and revoking) licenses, to performing auditing, research, and establishing new laws.
The MDIA will focus its efforts on the cryptocurrency space, unlike other countries where the bodies governing the industry have a certain degree of conflict of interest against cryptocurrencies, as they regulate the stock market as well. The body’s mission is “to provide legal certainty to an unregulated space”, its chairman will be appointed by the minister of Digital Economy, and its board will meet a minimum of once a month. From a simplistic view, the body ‘s structure will be similar to the one of the Malta Gaming Authority.
The second bill aims at setting up a framework for business registrations and certifications. To be certified, entities (corporate or incorporated) will need to follow strict, but fair, rules concerning transparency, integrity, and regulations, not only on Malta’s level but also at a European level. One of the aims of the second bill will also be to give smart contracts legal status, in the same way as for traditional contracts.
The third and last bill is to set up a framework for cryptocurrency-related services, such as ICOs, wallets, etc. A financial instrument test will be carried out, in order to determine if a token is a security or not (if it is, it will not receive a license, and will need to present its case in front of the Malta version of the SEC). Also, the MDIA will require companies to disclose and report certain information, such as the use of funds, founder identity, backing, token allocation, etc. in their whitepapers, as it is common practice for public companies with annual reports, and for private companies in pre-IPO stages with a prospectus.
The MDIA will, for example, require audits to be performed on smart contracts and protocols before being proposed to investors and users, ensuring that there are no flaws in the code, and that the market is ready for commercialization and usage. ICOs will be required to hire audit firms, or to use protocols such as Quantstamp, to ensure that no errors are left in smart-contracts (click here, if you want to know how Quantstamp aims to achieve this). The purpose of this requirement is to protect consumers against events such as the DAO hack.
The creation of such a body, specialized and focused on cryptocurrencies, is a first, and will help legitimize the cryptocurrency ecosystem. The MDIA will produce research, conduct conferences, and have a forward-looking approach to blockchain technology – enabling faster adoption from users and businesses. Besides regulating the space, the MDIA will also help Malta’s governmental agencies with adoption of blockchain technology (for real estate, digital ID, etc.) as well as creating standards to function in tandem with European and international laws.
Malta offers greater perspective than a sole regulatory frameworks
However, the decision of going to Malta is not uniquely caused by the country’s forward-thinking approach towards cryptocurrencies. The island also has a low corporate tax rate, doesn’t tax dividends nor interests and royalties, and is an attractive destination for young and talented individuals due to its warm climate. Nevertheless, the main attractiveness of the island is that it is part of the EU and the Eurozone. Therefore, being licensed in Malta means that you can operate freely within the full European Union and with some of their trading partners.
For instance, Binance aims to introduce fiat/crypto pairings (such as BTC/USD and ETH/EUR) on its platform, and will greatly benefit from being on EU territory. First, it eases the exchanges access to the European banking sector – enabling them to obtain the required authorizations to accept fiat deposits and withdrawals from Maltese banks, thus from everyone in the European Union. Secondly, it improves the credibility of the exchange in the eyes of European citizens, and finally, it will ease marketing efforts in the region for the company. With this step, there is no doubt that Binance will become a real competitor to Coinbase, or Kraken, leading to more competition in the space, thus better services (especially in relation with customer services and fee reduction).
Additionally, having a blockchain and cryptocurrency hub in Europe will attract many other business types to the island. Not only would specialized companies such as law firms, auditing companies, and venture capitalists be able to be close to their clients, but talented individuals could seek work on the island, allow companies to grow at a faster rate through networking and cooperation. This could lead to Malta creating similar ecosystems which Singapore, Hong-Kong, and San Francisco have in the tech industry.
One downside is that Malta, being a small island, cannot expand much more. Therefore, with the arrival of new companies and workers, real estate prices are expected to rise. Many studies have found that high real estate prices discourage entrepreneurship activities, as people are less inclined to take a shot at risky ventures.[modern_footnote]4[/modern_footnote]
This is a problem that has led to many industries to leave Hong-Kong and to install themselves in Shenzhen, a Chinese metropolis at Hong-Kong’s doors. To understand why and how San Francisco grew to become the tech mecca, and why Malta might have difficulties following a similar path, we recommend reading the article: “Why San Francisco is the new tech titan, not Silicon Valley“. Moreover, other promising destinations, such as Israel or Switzerland, already have friendly regulatory frameworks and will no doubt push their efforts further. Nevertheless, despite the fact that Malta might lack the proper infrastructures to become the hub of a wanna-be trillion dollar industry, Malta has the advantage of being in the European Union, and therefore might become an off-shore location for businesses to set up their HQ, foundations, or representative office while operating from somewhere else.
Benefits to the cryptocurrency space as a whole
There is no doubt that the population will greatly benefit, from an economic standpoint, from the arrival of cryptocurrency-related businesses, as it will feed the tax office and bring new jobs. Besides, the educational sphere may also see advantages being derived from the arrival of crypto-currency based enterprises; as universities would be able to propose conferences with top experts, and blockchain, coding, and cryptography curriculums and internships – providing positive externalities to the industry, not only in terms of awareness but also in terms of human capital.
Moreover, other countries currently debating whether or not to allow cryptocurrency ventures to operate freely within their borders might be inclined to hasten parliamentary talks, as they do not have the positive externalities that big countries have and would lose momentum. Bigger economies, like France, which are tending to lag when it is time to embrace new technologies and set regulatory frameworks, are probably going to observe what happens in Malta, and adopt friendly regulations later.
Also, a hidden advantage is that given Malta’s small size, it could become somewhat of a testbed for crypto trials. Currently, most transactions are conducted by cash, due to the high share of the shadow economy (valued at 25% of GDP by many sources), and the low trust toward banks. On the 22nd of March, the Maltese government issued a statement, caused by EU pressure, that they will increase the fight against tax evasion and increase their AML/KYC processes. Therefore – though somewhat of a long shot – the transparency of using blockchain technology could be of benefit to the government and make Malta a perfect place for small-scale trials of promising systems.
Ultimately, the main benefits of the Maltese government’s openness to cryptocurrency is the fact that they lay the foundations in the legislative environment for cryptocurrencies – thus adding legitimacy to this new asset class. A regulated space is better for everyone; from governments (for tax and supervisory purposes) to investors and businesses, as they would be ensured they have protections against fraud and litigation.
Regulations will minimize legal and operational risks for companies, encouraging them to adopt these new technologies, as ultimately this will enable them to cut costs, due to being able to avoid the use of third parties and being able to directly interact with the client via smart contracts and other blockchain technology. Additionally, blockchain enables transparency and trust, therefore, the government would be able to oversee the behavior of companies and users, ensuring that their products are genuine for example (click here to read our Blockchain In: The Supply Chain Industry, to see how blockchain technology can help with this).
Investors would also be beneficiaries, despite increased AML and KYC procedures, as for instance, exchanges within these regulated countries would have to prove that they have proper capitalization to protect customers in the case of bank runs or market crashes (with minimum capitalization ratios for instance), and security procedures to avoid hacks such as Mt. Gox, and suspicions such as the ones surrounding Tether (USDT), a stable-coin pegged to the dollar. Issues may yet arise regarding Tether, as it has never been audited, and therefore no-one truly knows what backs the currency. Given the role of the MDIA, we can be sure that to be used by companies licensed in Malta, the entities behind these tokens will have to provide proof regarding their liquidity and accountability.
References:
Malta’s official DLT (blockchain) discussion paper: https://www.mfsa.com.mt/pages/readfile.aspx?f=/files/Announcements/Consultation/2017/20171130_DiscussionPaperVCs.pdf
(1) Malta Gaming Authority, Annual Report 2016. Retrieved from: http://www.mga.org.mt/wp-content/uploads/Malta-Gaming-Authority-Annual-Report-2016.pdf
(2) Times of Malta, Malta is Europe’s gambling hub. Retrieved from: https://www.timesofmalta.com/articles/view/20110325/local/malta-is-europe-s-gambling-hub-brussels.356481
(3) Housing price and entrepreneurship in China, Lixing Li, and Xiaoyu Wu, Journal of Comparative Economics in r. Retrieved from: https://pdfs.semanticscholar.org/f22f/9bc07e88b271e27f4318886209d58441f94a.pdf
(4) Times of Malta, Malta ranked 5th on its use of cash. Retrieved from: https://www.timesofmalta.com/articles/view/20161006/business-news/Malta-ranked-5th-on-its-use-of-cash.627084