Fintech, Blockchain and Bitcoin – three ugly sisters | PKF Malta

It goes without saying, the “enfant terrible” that is Blockchain technology is already being implemented by some of the world’s largest and most successful companies

Recently a political meeting saw an ebullient prime minister declaring that new economic sectors like Fintech and Blockchain will make Malta “future proof”, as unlike financial services they do not depend on the country’s tax regime which is under blitz from Brussels.

It goes without saying, the “enfant terrible” that is Blockchain technology is already being implemented by some of the world’s largest and most successful companies. Yet, for the uninitiated which include the vast majority, they instantly associate the new technology as the incubator for the volatile yet ubiquitous virtual currency – namely Bitcoin.

The latter has whetted the appetite of a number of get-rich quick speculators – some of whom have burnt their fingers in the process. Yet, Blockchain cannot be tarnished with the same brush that demonised virtual currencies. Arguably, it is only fair that those who are not familiar with the disruptive revolution hitting our digital world, need to be patient and try to get to grips with the essentials.

Some say we are on the cusp of the second industrial revolution and we all need to jump on the bandwagon and enjoy the ride. Blockchain is a ground-breaking technology that can disrupt many traditional sectors such as banking and commerce but it could also have the potential of integrating millions of people from the emerging markets. Government believes in this novelty and recently there has been three laws targeting the digital sector, trying hard to measure and regulate it. As always, government cannot act in vacuum and is opening the doors to various consultants and experts to come up with ideas and knowhow.

Mindful of the legal and technical minefield that lie ahead, it called for legal experts to help design and suggest parameters within a legal and safe framework. An ad hoc committee chaired by Steve Tendon and other select consultants is now officially advising government on the way forward.

Steve’s close contacts with Silvio Schembri, the junior minister responsible for the digital economy, has borne fruit and a policy has taken form which, this year, will usher a national Blockchain island forum where representatives of all sectors of the industry will be invited onboard. Silvio Schembri believes the promotion of Malta as a base for the development of this technology will enhance the island’s economic prospects by “providing necessary legal certainty to allow the industry to flourish”.

Is this just wishful thinking or a realistic belief in the potential of Blockchain to change the way business is conducted? The obvious early user of the technology is the iGaming industry as the facilities concerning cryptocurrencies may enhance the industry but there are other sectors. Steve would like to see Malta becoming a jurisdiction that attracts talent from all over the world.

The stealthy technology was baptised in 2008/2009 within the fora of programmer forums that gave birth to a new digital currency that guarantees these properties of trust without requiring a central authority. This is called Bitcoin. Decentralised management of digital assets was ensured in a tamper-proof manner by using a distributed ledger stored across the network.

One need not trust any institution when using Bitcoin – the underlying framework guarantees that the cryptocurrency can be transferred and used as one would expect with normal money. Yet try to explain how the complex Blockchain functions to the layman and you start seeing many furrowed faces.

Imagine the difficulty of the abstract notion associated with the underlying technology noting how Blockchain technology uses things that exist, and how the birth of the ill-famous Bitcoin concept was criticised by central bankers. To try to understand the jargon, one may state that: Blockchain is the track, Bitcoin is the train.

The next question is, “How can Blockchain solve the problem of dwindling trust in transactions which are subject to the occasional intrusion by unknown hackers?” The dilemma right now is an issue of trust; we run billions of transactions but we have no means of trusting each other.

If someone asks: “What does Blockchain technology solve?” The answer is that Blockchain solves the trust issue. To comprehend the global issues that beset commerce one needs honest answers to five questions, namely: Do you really trust the intermediaries? Do you trust your credit cards? Do you trust your transactions? Do you trust your banks and your government? Do you trust news? Introduce Blockchain and trust will be rekindled.

To start with; the technology uses various formats but the most basic is a hash. What is a hash? It’s basically a mathematical method to represent text. What is a block? It has an address and some data. To create a hash one needs to mine it. When you mine it, it is going to try to find the combination of all this data. A Blockchain is a chain of blocks. The next step is to venture into a system that can faithfully code the entire process. Another famous virtual currency that is competing with Bitcoin for prominence is Ethereum.

This is a popular framework, yet it is not the only one since there are a thousand varieties of less popular virtual currencies. In this complex and constantly changing scenario one can sympathise with difficulties of assimilation for everybody not only lawyers, judges, regulators but even for the banking industry. Without any doubt, Blockchain has the potential to revolutionise business and redefine companies and economies.

Many believe it could bring about change similar to that meted by major revolutionary technologies. Readers may ask, “Since Blockchain is the forerunner of cryptocurrencies then why is the European Central Bank so risk adverse? The answer is that the Commission has been slow to evaluate the merits of this phenomenon. Last year the European Commission adopted a proposal for legislation to amend the 4th Anti-Money Laundering Directive that will bring virtual currency exchanges and wallet providers into the EU’s antimoney laundering framework.

Grey skies are receding and sunshine is slowly brightening our horizon. It is an undeniable fact that support for Bitcoin is growing at a fast rate. Quoting Joseph F. Borg, VP of Bitmalta, he thinks the technology will also change the banks, whether they embrace it or not.

Some people think that cryptocurrencies will hurt the banks – but in his opinion, this won’t happen. It goes without saying that bankers will roll up their sleeves and invest more to embrace this technology as it is an evolutionary process (like the internet) which cannot be suppressed.

Little Malta as an early believer can join the race to become an economic pocket Hercules.


George M. Mangion

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George Mangion is a senior partner of an audit and consultancy firm, and has over twenty-five years’ experience in accounting, taxation, financial and consultancy services. His efforts have seen PKF instrumental in establishing many companies in Malta and placed PKF in the forefront as professional financial service providers on the Island.