Mixed messages on bitcoin from government and MFSA

The president of BitMalta said that the MFSA 'might have had some relevance if it were issued five years ago'

paul_cocks
Paul Cocks
9 August 2017, 8:00am
The first Bitcoin ATM in Malta was unveiled in Sliema, introduced by local start-up Ivaja through a crowd-funding campaign
The first Bitcoin ATM in Malta was unveiled in Sliema, introduced by local start-up Ivaja through a crowd-funding campaign
The government’s plans to turn Malta into one of the first countries to fully embrace blockchain technology and cryptocurrencies have encountered considerable push-back by the Malta Financial Services Authority, which remains particularly leery of the virtual currencies, MaltaToday has learned.

In May, Prime Minister Joseph Muscat announced a wide-ranging national strategy, which would see Malta lead the race to embracing the new technology and set the standards for other countries to follow.

Blockchain is a decentralised and distributed digital ledger that is used to record transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network.

Cryptocurrencies – or virtual currencies – on the other hand are digital currencies in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Presently, the best-known and most popular is Bitcoin.

Last week, the first Bitcoin ATM in Malta was unveiled in Sliema, introduced by local start-up Ivaja through a crowd-funding campaign.

The parliamentary secretary for the digital economy, Silvio Schembri told MaltaToday in an interview that the country already had all the elements in place to embrace blockchain – a gaming sector and authority, strong financial services, a reliable ICT infrastructure and an attractive tax regime.

He said that a new authority would be set up to regulate the blockchain industry in Malta.

And therein seems to lie the cause of the discord between the government and the MFSA, as many within the authority fail to understand why a new authority is needed to issue licences and regulate the new technology.

Sources told MaltaToday that a number of senior officials within the MFSA and working closely with chairman Prof. Joe Bannister – while recognising the advantages of the blockchain – are skeptical of the wisdom of Malta taking a leading role in embracing cryptocurrencies, when many other countries seem to have adopted a wait-and-see approach.

And while Muscat and Schembri continue to expound on their plans to make Malta the Silicon Valley of the new technology, the MFSA last week issued a stark public warning on the ‘risks’ inherent in the use of cryptocurrencies.

“Unlike traditional money, acceptance of payment in virtual currency depends entirely on the voluntary consent of the recipient,” it said. “Furthermore providers of services in relation to virtual currencies are currently neither regulated by law nor authorised by the MFSA.”

The authority said that people needed to be aware of the risks when buying, holding or trading such virtual currencies, including the risk of losing one’s money.

The warning provoked a strong reaction by BitMalta, the first Maltese association advocating blockchain technologies and cryptocurrencies to the general public.

Lawyer Jonathan Galea, president of BitMalta, told MaltaToday that the MFSA “might have had some relevance if it were issued five years ago”.

He said that the benefits and potential advantages of cryptocurrencies were widely accepted, with countries like Japan having already gone as far as to accept Bitcoin as legal tender.

“Maybe some people are not aware of the developments made in the field, but cryptocurrencies are today as secure as you want them to be,” Galea said. “This warning by the MFSA was, to put it mildly, misplaced.”

He said he was disappointed by the MFSA’s ultra-cautious approach and its tendency to quote long-since settled issues, while Muscat and Schembri were actively advocating the adoption of blockchain technologies and cryptocurrencies in Malta.

“Blockchain technology is firmly rooting itself as the next big thing, a disruption which will echo that of the Internet back in the late 90s, and cryptocurrencies are but one single application of such a technology, albeit an important one as they show what can be achieved through the use of blockchain technologies.”

Galea said that cryptocurrencies were here to stay – even though he personally believed Bitcoin would not end up being the principal player – and it was therefore better to consider measures to educate the public about them rather than scaremonger. 

Sources told MaltaToday that many MFSA officials seem to be of the same opinion as Galea and others but have found it difficult to convince their superiors of the need to be the guiding voice in this sector.

Perhaps, some wondered, it was no surprise that Schembri visited the MFSA this week to launch a consultation document on the restructuring of the authority and a revision of its functions and role.

What MFSA said:
  • Money may be lost on the exchange platform


Virtual currencies may be obtained from someone who owns them or through an exchange platform. Currently exchange platforms are not normally regulated and in some cases they have failed or gone out of business with the consequence of consumers losing significant amounts of money. Exchange platforms are not banks and if an exchange platform loses any money or fails, there is no specific legal protection.
  • Money may be stolen from your digital wallet


Virtual currency is stored in a ‘digital wallet’ on a computer. Although digital wallets have public and private keys or passwords, they are still vulnerable to hackers. Virtual money may therefore be stolen from your wallet. Consumers losing virtual money have little prospect of having it returned. Furthermore if you lose the key or password to your digital wallet, your virtual money may be lost forever.
  • You are not protected when using virtual currencies as a means of payment


When using virtual currencies as a means of payment you are not protected by any refund rights under EU law. Unauthorised or incorrect debits from your digital wallet can therefore not usually be reversed.
  • The value of virtual currency can change quickly, and could even drop to zero


Different virtual currencies have different values. Furthermore the value of virtual currencies can easily go down as well as up. Unlike the value of traditional currencies, there is no guarantee that the value of virtual currency funds remains stable.
  • Transactions in virtual currency may be misused for criminal activities


Transactions in virtual currencies are largely untraceable and provide a high degree of anonymity. This makes virtual currencies vulnerable to misuse for criminal activities such as money laundering. Law enforcement authorities may therefore decide to take action against or close exchange platforms and prevent you from accessing or using any digital funds that the platforms may be holding for you.

BitMalta’s rebuttal
  • Money may be lost on the exchange platform


It is a well-known practice among cryptocurrency holders that funds are best stored on a local PC rather than on an exchange. One of the primary breakthroughs brought about by cryptocurrencies is that they remove the need for any middlemen in transactions, and exchanges should only serve as a temporary means of storage for active trades. Money may also be lost on any other website where you store e-money.
  • Money may be stolen from your digital wallet


Facebook accounts can also be hacked, and your very identity may be stolen, and anything else connected to the Internet is prone to external attacks. Your data is only as secure as you want it to be, and cryptocurrencies are simply another form of data which is stored onto your computer. If you store your cryptocurrencies on a PC with no security measures in place, then you will be subject to third party attacks.
  • You are not protected when using virtual currencies as a means of payment


You are not protected even when making payment in cash. If you use cryptocurrencies on a reputable website with integrated consumer protection, the applicable risk is the same as for any other means of payment.
  • The value of virtual currency can change quickly, and could even drop to zero


The value of cryptocurrencies is mostly determined through demand and supply, with some cryptocurrencies pegging their value to that of other currencies or commodities. Well-established cryptocurrencies such as Bitcoin have experienced less volatility as their adoption rate increases.
  • Transactions in virtual currency may be misused for criminal activities


The same applies to an even greater extent to transactions in fiat currencies. Cryptocurrencies in fact rank very low indeed when it comes to use by terrorists since they utilise a public ledger system through which transactions can be tracked, making them a poor choice for money laundering. If anything, blockchain technologies allow for a paradigm shift in AML measures as they allow for a much more transparent system than the traditional ones.

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Paul Cocks joined MaltaToday after having spent years working in newspapers with The Times...