Earlier this year, during a conference in Dubai, Parliamentary Secretary for Financial Services, Digital Economy and Innovation Silvio Schembri announced that a legal framework to regulate services in the sectors of artificial intelligence, blockchain and Internet of Things (IOT) devices will be launched soon, making Malta the first country in the world to do so.
‘Blockchain’, ‘Cryptocurrencies’, ‘Bitcoin’ and ‘virtual currencies’ are but a few terms that repeatedly made headlines in local and international news of late, at the same time that virtual currencies, such as Bitcoin, were taking the investment world by storm. Mr Schembri agrees that virtual currencies have indeed flooded the market in recent years, and asserts that while this space is constantly evolving, and being monitored closely, one thing is for sure: “Whether one likes it or not, it is very difficult to imagine a future without cryptocurrencies. In whatever shape or form, they are here to stay.”
“Different virtual currencies come with slightly varying features, but the majority of them exhibit, fully or partially, one of three characteristics: a means of payment, a store of value, or a utility value,” he explains. “Even if, in theory, they have all three properties, in practice, one property tends to dominate over the others. For example, in the case of Bitcoin, it is rarely used for exchange purposes – mostly because of its volatility, but instead viewed as an asset.”
Virtual money can be defined as a digital representation of value that is issued and controlled by its developers, and used and accepted among the members of a specific community. Unlike regular money, it relies on a system of trust and is not issued by a central bank or other banking authority. Bitcoin, for instance, uses peer-to-peer technology, and the processing and spending of bitcoins happens collectively through a network. Every payment gets encrypted by a unique secret key and is sent from one address to another over the blockchain, which is a decentralised public register that tracks everyone’s bitcoins. This system by-passes the need to involve an intermediary, like a bank, for the transfer of ‘money’.
The surge in interest in cryptocurrencies has also raised eyebrows about its lack of regulation. Mr Schembri asserts, however, that cryptocurrencies are not the first attempt to create digital currencies. “Prior to the emergence of cryptocurrencies, attempts were made to create digital cash but none of them were successful, mainly because they were based on a centralised system. Bitcoin, the first cryptocurrency, was developed as a completely decentralised currency, where transactions are an open source, controlled by a code, and that relies purely on a network. No third party can affect the currency, which may explain why cryptocurrencies have surged despite the lack of regulation.”
What Government is aiming to do is not regulate the technology as such, but rather give certainty to the whole space, the parliamentary secretary adds. “When we say that Malta will be the first country to regulate cryptocurrencies, we mean that we intend to create a transparent and robust legislative framework that will facilitate innovation while at the same time tick all the boxes in terms of compliance, such as consumer protection and Know Your Customer (KYC). The Malta Financial Services Authority (MFSA) will deal with the regulation of cryptocurrency. However, we will also be setting up a national regulator to oversee the technological side of things, and will cover the registration on a voluntary basis of System Auditors and Administrators of DLT platforms. These entities will be subject to initial and ongoing supervision by the new authority.”
Last November, the MFSA issued a consultation document proposing a policy to the industry on the regulation of virtual currencies and Initial Coin Offering (ICOs). “What we are proposing is that, in order to achieve the objectives of financial regulation, certain virtual currencies and activities pertaining to them would be licenced and regulated under a new legislative regime,” he asserts. “This new Act, and any relevant subsidiary legislation, would regulate the carrying on of business associated with virtual currencies falling outside the scope of the existing EU and national financial services legislation. It is important to highlight that the Act will apply a principles-based approach to regulation rather than detailed rules which would possibly stifle technological innovation.”
What about the value of cryptocurrency – how does it hold against non-virtual currencies as we know them? “If we approach the valuation of a digital currency as we would approach other financial instruments, we would first examine its fundamentals, such as the growth of the number of transactions as well as new users and merchants supporting this currency,” says Mr Schembri. “However, it is obvious that there is a large discrepancy between the fundamentals and the market price. It is easy to conclude that current prices are mainly driven by expectations due to current growth momentum of prices. Therefore, some currencies are being used for their value function, and the fact that they exhibit low or almost non-existent correlation with the real economy gives them properties considered as ‘desirables’.”
Underpinning virtual currencies such as cryptocurrencies is blockchain technology, the scope of which extends beyond virtual currency alone and which could be applied more widely. “Blockchain, as a technology, provides a more secure and transparent way of processing all kinds of data. While it is not a silver bullet that will solve all our problems, blockchain still represents a new multi-purpose technology in the digital information toolbox, which is gaining a degree of traction across many industries and business processes.”
Mr Schembri asserts that the private sector has already started to recognise the full benefits that blockchain can offer, and in the last few months, several private initiatives have been put forward. “As Government, we have long recognised the benefits of shared ledgers and smart contracts. The opportunity to lead in this area will result in benefits that will be enjoyed by many. Of course, there are risks. Some aspects of blockchain, such as immutability, may represent challenges with regards to certain data protection aspects, in particular the upcoming General Data Protection Regulation (GDPR). However, the technology may also arguably facilitate the protection of personal data in that it is embedded with characteristics which inherently increase the protection of data, such as encryption.”
Government has a number of key duties that could be impacted by blockchain technology, particularly in the areas of privacy and data portability. Its applications to Government services include the use of smart contracts and registry of ‘assets’. “By registering assets on a distributed ledger, all property could effectively become ‘smart assets’, providing a robust and trustworthy proof of record for a broad variety of services that currently cost time and money. Examples include registering IP and patents, wills, notary services, health data and social security benefits.”
With the adoption of such specialised technology, however, often comes a sheer shortage of human resources equipped with the right skills for the job. Are there plans to address this gap? “The pool of people with profound expertise in this area is limited, not only for Malta but also worldwide. Let’s not forget that this is a new technology and has entered the mainstream only in the last two or three years. But this also presents an opportunity for Malta, which can offer leadership in this space.”
Just as other industries locally have benefitted from overseas human resources which helped contribute to Malta’s economic success, so too will this specialised industry, which can gain from specific expertise while continuing to diversify the country’s workforce, says Mr Schembri. “The new regulatory authority will serve as a centre of excellence in this regard. Part of its remit will be to serve as a consultative body for all other entities in Malta in the application of this technology, thus helping to avoid duplication of work and optimise the use of expertise,” he adds.
“Government is being proactive in this regard. Later this year, a blockchain hub will be launched. This will help attract expertise to Malta as well as foster local expertise as well. We are also actively exploring the possibility of collaborating with the University of Malta in order to start offering specialised courses in blockchain, both at degree and master levels.”
Government also recently announced the imminent setting up of a task force with the aim of attracting Fintech and Regtech companies to our shores, after setting up a blockchain task force for the same purpose. Mr Schembri says that the reason for doing so is due to the fact that the Fintech and Regtech sectors are expanding at a rapid rate, where new companies are being set up in order for the needs of the industry to be met.
“The function of such task forces is to assist in enticing investment, exploring new markets, as well as obliging financial institutions to make the required amendments to compliance. If we look around us, we can see that funding for Fintech companies is on the rise, support for the industry from governments is increasing and an abundance of both incubators and accelerators are offering start-ups the means and assistance to grow within the industry. We aim to be at the forefront of this new wave of innovation.”
This article originally appeared in The Commercial Courier