The Malta Financial Services Authority has published a paper proposing a comprehensive legislative framework for Security Token Offerings (STOs). The authority sees STOs as a bridge between traditional securities offerings and technology-enabled securities offerings. The Security Token Offering MFSA Capital Markets Strategy was published as a consultation paper and is open for public feedback until the end of August 2019. The paper is designed to determine the viewpoint of various stakeholders within the Maltese economy, especially as pertaining to the legislative framework governing blockchain-based financial products such as digital assets, STOs and ICOs.
Malta, also known as blockchain island, has been positioning itself as a crypto-friendly nation. The government has launched several programs providing legislative and operational support for blockchain-based startups. The consultation paper is one such initiative and is part of the greater capital markets strategy outlined by the MFSA in its 2018 Fintech Strategy and Virtual Financial Assets Framework.
The Maltese capital markets strategy is being developed with five major pillars in mind. These factors were put in place to create a framework that supports innovation and technological growth while protecting investors and market integrity.
The five pillars of the Capital Markets Strategy are: defining the risk appetite of the listing authority, revising the regulatory framework, strengthening the sponsors’ regime, investing in human capital and technology, and finally, educating investors. The STO paper falls under the second pillar.
On the publication of the paper, the Chief Executive Officer of the MFSA, Joseph Cuschieri, stated, “The STO Policy, being issued for consultation today, forms part of Pillar II. Through this Security Token Offering policy, we are once again striving to be at the forefront of financial services regulation.”
The STO consultation paper is divided into six sections, each focusing on specific factors as they pertain to STOs.
The first section deals with defining STOs. The MFSA has classified STOs into two segments. The Maltese authority names these Traditional STOs and Other STOs. Traditional STOs are those which refer to transferable securities such as shares, bonds, convertible debt securities; derivatives, asset-backed securities, and other traditional securities (if they are supported by blockchain technology).
The second class of STOs, referred to as Other STOs are defined as “A technology representation (a token, the storage and/or transaction execution of which is intrinsically dependent on, or utilises DLT) that may share some qualities with traditional transferable securities in terms of MiFID II e.g. a token giving only the right to profits of certain investments of a business.” The dual definition is designed to allow for innovation, especially in conjunction with the regulatory sandbox in place within the country.
The second section deals with the application for approval of prospectuses and/or admissibility to listing and trading of Traditional STOs. The MFSA outlines a number of specifications that must be fulfilled in order for an STO to be successfully registered and listed by the authority. To begin with, the STO must fall under one of the two definitions outlined in the first section. Furthermore, the issuing entity must be a body with legal standing. The MFSA will enact changes to the company law to further support the legal standing of STO issuers.
Furthermore, the MFSA will assess the financial soundness of the issuing entity in an STO launch. The issuer must provide a list of assets and liabilities, profits and losses as well as any other information pertaining to their financial position. Other factors that will be considered during the registration process are corporate governance and compliance with the transparency requirements enforced by the MFSA.
The third section focuses on any additional ongoing obligations following an offer and/or listing and/or trading of Traditional STOs. In this section, the MFSA outlines the circumstances in which an issuer may amend any of his offerings. This involves acquiring new permits from the Maltese Authority.
The fourth section delves into secondary markets. These are the platforms on which securities may be sold. Examples include centralized crypto trading platforms as well as decentralized exchanges. The consultation paper defines the legal standing of both platforms as well as further clarification on the legal standing of issues such as automated trading through Direct Electronic Access (DEA).
The fifth section is focused on market abuse regulation. The MFSA wishes to maintain fair markets and has defined three instances of market abuse. These are insider dealing, the unlawful disclosure of inside information, and market manipulation.
Both issuers and trading avenues are required to uphold these pillars or risk legal action and the cancellation of their permits. Additionally, the MFSA recognizes that other emerging parties, such as wallet creators and miners, may pose a risk to market transparency, and as such, they fall under the same legislative constraints.
The sixth and final section deals with the post-trade settlement. This refers to the rights which an investor receives once they participate in an STO.
Security Token Offerings (STOs) have been gaining in popularity in the past twelve months. The MFSA believes the rise of STOs is related to their increased transparency, reduced settlement, and intermediary risk, as well as an innovative approach to meeting investors’ needs while maintaining a healthy risk profile.
An advantage of security token contracts is that they can be written in a way that gives buyers exposure to the revenue and profits of an underlying project, and in so doing they potentially represent better digital value than has been the norm with traditional ICOs.
Secondly, because security tokens are subject to securities laws, they are seen as less risky and compliant. Furthermore, since the assets represented by security tokens already exist in the real world, they can function as a bridge between the blockchain space and the legacy financial system. This enables greater access to institutional investors, a wider potential investor base – and therefore greater liquidity.
Malta wants to position itself to take advantage of this, says MFSA CEO Cuschieri, “A Security Token Offering is an interface between traditional securities offerings and technology-enabled securities offerings and trading. The MFSA is confident that Malta is distinctively positioned to offer a conducive environment for Security Token Offerings. In this respect, we are aiming to continue strengthening the Maltese financial services industry, inter alia by enhancing our capital markets.”