PKF weighs the prospects for future VFA business | PKF Malta

Last year, Prime minister Joseph Muscat sent a message on Twitter to Binance CEO welcoming the latter to Malta, creating high expectations. Now nine months later, the island is busy tackling the queues of VFA agents, Issuers, system providers and system auditors willing to file for licenses in anticipation of new business.

This begs the question - are we going fast enough? The government says progress was registered at breakneck speed but others lament that other countries such as Estonia and Zug (Switzerland) have raced ahead of us.

This article will give a commentary on the rules and fees applicable when applying for VFA licensing in Malta and Estonia. Pragmatists say that Malta is doing a steady job in drafting robust laws to protect investors and its own reputation so much so that it won the trophy for attracting Binance’s attention last year. Quoting Cointelegraph, it was informed last month by Binance (a mega exchange listed in Japan) that it could confirm its plans to expand in Singapore and Malta - both slated for a full launch this year.

Last September, Binance had announced it would be starting private beta testing for a crypto-fiat exchange in Singapore while last June, it tried to open a bank account in Malta (although no information on the bank was released). Binance had plans to launch a security tokens trading platform on the island but so far, no announcement has been made in this respect, possibly because the authorities are busy with their task to appoint local VFA agents and system auditors.

Rumours abound that these appointments are expected to be concluded shortly, since over 30 firms have applied to act as VFA agents. In comparison, Estonia introduced laws for licensing of companies operating in the cryptocurrency industry and it proudly states that the number of licenses issued has surpassed 900 (500 DLT platforms and 400 wallet providers).

As in Malta, as yet there are no banks in Estonia which support cryptocurrency business. Estonia in an effort to fight the threat of money laundering scams, enacted a revamped law regulating the circulation of cryptocurrencies and implemented a light touch licensing regime for companies operating in the sector.

As will happen in Malta, licensees in Estonia which cannot manage to open a bank account will do so in another country or sign with different payment service providers such as e-money or payment institutions. Estonia issues two licences. One for companies providing an exchange and another one for a virtual currency wallet service. There is a long list of KYC documentation to be prepared by applicants and the fees payable for each license amount to €345.

One may conclude that Estonia is the ideal place for start-ups to set up VLT business. But there is a fly in the ointment. Last year, there were a series of investigations led by the Organized Crime and Corruption Reporting Project which uncovered the Azerbaijani and Russian Laundromats.

The first one was a front for a network of illicit financial payments that used reputable banks and secret companies to funnel payments from a US$2.9 billion slush fund to buy political influence and launder Azerbaijan’s international image.

In this scheme, most of the funds were deposited into bank accounts operated by four shell companies held in the Estonian branch of Danske Bank, Denmark’s largest bank. Another investigation uncovered a direct link to the Russian scam which uncovered fraud and corruption running into millions.

Back to Malta, and by comparison the government is vigilant in its quest to protect Malta as a reputable jurisdiction. This status, has been recently confirmed by Fitch which issued an A rating with a stable outlook. The rules issued under the Virtual Financial Assets Act 2018 provide for more than two licences as is the case in Estonia. There are four classes.

To start with accredited applicants for Class 1 license, pay an application fee of €6,000 and annual supervisory fee of at least an almost equivalent amount. These are authorised to receive and transmit orders and/or provide investment advice in relation to one or more virtual financial assets and/or the placing of virtual financial assets.

A Class 2 license carries a €10,000 application fee and minimum almost equivalent annual supervisory fee and holders are authorised to provide any VFA service but not to operate a VFA exchange or deal for their own account. They may hold or control clients’ assets or money in conjunction with the provision of a VFA Service.

A Class 3 Licence carries an application fee of €14,000, and an annual supervisory fee of €12,000 where revenue is up to €250,000. This permits applicants to provide any VFA service but not to operate a VFA exchange. This license empowers holders to hold or control clients’ assets or money in conjunction with the provision of a VFA Service.

Finally, all Class 4 Licence holders are authorised to provide any VFA service and may hold or control clients’ assets or money. A Class 4 license carries an application cost of €24,000 and an annual supervisory fee of €50,000 for revenue up to €1 million and the fee goes up on a sliding scale. The official processing time taken for such licenses is unknown but one expects a timeline of 3 to 6 months. There are additional charges to get a Whitepaper registered which stands at €8,000 plus a €2,000 compliance fee.

Agents who wish to represent applicants have to be vetted by MFSA and must employ at a minimum three officers who passed an accreditation exam and competence interview by the regulator. There is a range of fees payable by agents starting at the lowest application fee of €10,000 followed by €12,000 and €15,000, depending on the remit the VFA agent wishes to apply under. An annual supervisory fee of an equivalent amount follows each VFA license.

The schedule of fees and charges goes on to prescribe the amount payable for the certification of an innovative technology arrangement, in which case applicants pay a fee of €40,000 for a two-year certification fee. The process of software systems audit has to be carried out by third party service providers who are successful in getting approved from Malta Digital Invocation Authority (MDIA) as system auditors. The systems audit fee currently reads at €3,000 flanked by a further €2,000 initial processing fee to the regulator. The authorisation process for the willing systems auditors themselves carries an initial processing charge of €7,500 and a registration fee of €15,000, bringing it to €22,500.

Readers may comment that the DLT regime in Malta has a robust background and the authorities are doing their best to filter prospective service providers which need to attest they are well versed in the innovative aspect of this new sector. It is not surprising that Malta, is cognisant to protect its standing as a reputable financial centre which over the years has been careful not to attract money laundering scams from shady banks in Russia or Azerbaijan or Iran.

Such a stance has earned Malta a good name where to invest as a safe and well-regulated EU domicile. In this context, Binance signed a MOU with the Malta Stock Exchange for a possible future collaboration. The company considers Malta “one of the best places” for blockchain firms that fully deserves the acclaim as a ‘Blockchain Island’. The company also praised the “very welcoming and reasonable” stance of local regulators towards the crypto sphere.

In conclusion, PKF augurs that the future is bright and this year will see a respectable line-up of start-ups choosing Malta to prosper in the DLT sector.