VFA Agents: protecting market integrity and operational challenges

Helena Grech - 19th October 2019 

‘Since Malta is at the forefront in regulating blockchain and cryptocurrency ventures, traditional but important service providers, such as the banking sector, are yet to catch up with the VFA service providers’ needs,’ says BDO Malta partner Josef Mercieca.

Last April saw the much-anticipated licensing of Malta’s first Virtual Financial Asset (VFA) agents, paving the way for companies seeking to issue virtual tokens through Initial Coin Offerings (ICOs) or to act as service providers, to apply for licensing with the Malta Financial Services Authority (MFSA).

According to the MFSA, as at August 2019, a total of 17 VFA agents are accredited locally, which should serve to reinvigorate companies based in Malta seeking to make use of virtual assets as part of their business model. Indeed, VFA agents assume the role of gatekeepers with the aim of preventing persons who are not fit and proper from gaining access to the financial system.

Under local legislation, a VFA is defined as “any form of digital medium recordation that is used as a digital medium of exchange, unit of account or store of value and that is not (a) electronic money, (b) a financial instrument, or (c) virtual token”, while a Virtual Token (VT) is defined as “a form of digital medium recordation that has no utility, value or application outside of the DLT platform on which it was issued and may only be redeemed for funds on such platform directly by the issuer of such DLT asset, provided that electronic money shall be excluded from this definition.”

Josef Mercieca BDO Malta

Following the licensing of VFA agents, Blockchain Island reached out to an accredited agent to gain a deeper understanding of what the role really entails, and what to expect in the future.

Josef Mercieca, a partner at BDO Malta which has achieved accreditation as both a VFA agent and a Systems Auditor, explains “as a VFA agent, our role is ensuring clients’ preparedness prior to seeking MFSA approval and guiding our clients on all matters relating to their responsibilities and obligations to ensure compliance with the VFA framework, whilst taking advantage of one of the most advanced crypto regulatory regimes.”

He adds that since the start of the transitory period, that is the period between the day the VFA Act came into force in November 2018 and the day VFA agents first became accredited in April this year, “BDO Fintech – the entity within BDO licensed to carry out VFA agent duties – has been assisting both token issuers and VFA service providers intending to establish their crypto business in Malta.” The company also works closely with colleagues in technology assurance on the Malta Digital Innovation Authority (MDIA) System Audit process. BDO is the only firm to be licensed both as agents as well as to perform Systems Audits by the MDIA.

Systems Audits are mandatory for issuers and service providers applying for a licence under the VFA Act. Additionally, it’s possible for entities utilising Innovative Technology Arrangements (ITAs) in their business model to apply for a voluntary certification under the MDIA’s certification process and guidelines. Mr Mercieca sheds light on the requirements for the role of VFA agents, explaining that it necessitates “the dedication of important human and technological resources, since we are the first main point of contact with the MFSA.”

Describing such agents as gatekeepers, Mr Mercieca stresses that it is the company’s responsibility, as registered agents “to protect public interest and market integrity. Therefore, when choosing to represent a client, we must ensure that the client is a fit and proper person, and its business is run decently.”

Indeed, the aim of regulating VFAs, and more so the introduction of VFA agents, is to regulate an unregulated world and to provide investors with peace of mind that the ICO they are buying into, or the service provider they are engaging with, is genuine.

Blockchain

In view of Malta’s economy relying heavily on the financial services industry, Mr Mercieca notes that “the island has grown from a strong and reputable financial services jurisdiction to a prime hub for the FinTech industry.”

He believes that the interest from foreign investors will continue to grow, and that “it is rewarding to be in pole position in an innovative market and be among the first to hear of disruptive ideas, particularly within the financial services industry.”

Turning to the greatest challenges of being a VFA agent, Mr Mercieca explains “since Malta is at the forefront in regulating blockchain and cryptocurrency ventures, traditional but important service providers, such as the banking sector, are yet to catch up with the VFA service providers’ needs, thereby presenting an operational challenge for our clients.” However, “despite the challenges for the industry, we believe that blockchain technology creates opportunities which will lead to a more efficient, organised and secure business environment.”

The process of becoming an accredited agent, which includes a written assessment, is a complex one, and Mr Mercieca says it “was the result of several months of hard work by BDO Fintech’s team, who were fully dedicated to achieving this milestone.”


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