On 13 April 2018, the Malta Financial Service Authority (MFSA) published a circular to the industry about a consultation paper on the Financial Instrument Test. The objective of this test is to determine whether a Distributed Ledger Technology (DLT) asset, depending on its features, falls within the sphere of either the traditional European and local financial services legislation, or within the sphere of the proposed Virtual Financial Assets Act (VFAA), or is otherwise exempt from regulation. To this end the MFSA published a consultation paper on the Financial Instrument Test, with the consultation period remaining open until 4 May 2018.
The MFSA’s consultation paper on the Financial Instrument Test is a 44-page document that presents an analysis of the definitions of the financial instruments listed under Markets in the Financial Instruments Directive (MiFID), as well as their relevance and implications to DLT assets. The paper also outlines the methodology used in for the test, as well as considerations to be taken within the context of EU and national legislative frameworks. The document is divided into five sections. Apart from the introduction and conclusion, these include sections on the Financial Instrument Test, on the Financial Instrument Test and the Proposed VFAA, and on the Financial Instrument Test and the Existing Legal Framework.
The objective of the test is to determine how a DLT asset should be classified. Under the proposal, the test will consist of two stages. The first stage of the test will determine if a particular DLT qualifies as a virtual token (VT). If it does not qualify as a VT, the second stage of the test will assess if the DLT asset qualifies as a financial instrument as defined by Section C of Annex 1 to MiFID. If it fails this test, the DLT will qualify as a Virtual Financial Asset (VFA) under the VFAA.
The test will apply to issuers of ICOs conducted in or from within Malta. The purpose of this is to determine if the respective activity falls within applicable EU and respective national legislative and regulatory framework or otherwise. Moreover, there may be entities intending to provide any service and/or perform any activity related to a DLT whose classification has not been determined for any reason. In such cases, these entities will need to conduct this test on that asset.