Financial

Sandbox Environment for DLT and VC

On 29 March 2018, the Malta Gaming Authority (MGA) issued a public document providing guidance on Distributed Ledger Technologies (DLT) and the acceptance of Virtual Currencies (VCs) through the implementation of a sandbox environment.

The purpose and objectives of the MGA is to regulate the remote gaming industry while facilitating innovation. DLTs and VCs are highly exciting and truly disruptive technologies that have the potential to completely revolutionise every field and area of life that depends on information technologies. However, this very quality of disruption brings with it risks that need to be addressed in a prudent manner.

In particular, the MGA is working to address these risks in order to ensure that there are comprehensive safeguards to protect consumers, to prevent crime, money laundering and/or funding of terrorism (in compliance with the 4h Anti-Money Laundering Directive, and to protect the reputation of the Maltese jurisdiction.

In this consultation document, criteria are set out for the establishment of a sandbox environment in which the adoption of VCs is tested for adoption by the remote gaming sector. Moreover, it also drafts guiding principles for the application of DLT and its various adaptations in the industry. This document consolidates the perspectives of fellow stakeholders, including the online gaming industry, and key experts in these technologies. As Malta commits itself increasingly to distributed ledger technology and to virtual currency, such initiatives are essential in building the infrastructure necessary for what may be termed virtual currency revolution of Malta.

Distributed ledger technology is a revolutionary and rapidly evolving technology that decentralises the old style of ledger. The term is often used synonymously with “blockchain”, although in the rapidly evolving environment of today, DLT appears to be embracing more technologies than simply the blockchain. Essentially, a DLT is a type of ledger a guaranteed, shared, synchronised and identical copy of which exists not just on the books of a centralised authority but on every machine that forms part of the peer-to-peer network on which the DLT is operating. To ensure that each copy of the DLT is guaranteed, shared, synchronised and identical across every machine on the peer-to-peer network, the network uses consensus algorithms to protect the integrity of the DLT. A DLT can be public or private, but in both cases needs to run on a peer-to-peer network with the abovementioned features.

                

The crucial problem with running a DLT, in particular a public one as the problem does not arise with a private DLT, is how to incentivise individuals to join that DLT’s peer-to-peer network and carry out the extremely energy-intensive computation required by the consensus algorithm. This problem is solved by distributing units of a virtual currency to individuals belonging to such a network. Virtual currency is a unit of information carrying most of the qualities of money that are generated by the process of running the consensus algorithm of a DLT peer-to-peer network. Once earned by participants in such a DLT network, these currencies can then be sold and bought, traded, speculated upon, and spent at merchants accepting such currencies. Perhaps the most famous example of such a virtual currency is Bitcoin. Although it is a general impression that virtual currencies serve to incentivise DLT, and that DLT is somehow separate from virtual currencies, the fact is that DLT was invented as part of the infrastructure necessary to produce and maintain a digital, peer-to-peer, global cryptographically protected virtual currency independent of governments and central banks that are traditionally the institutions responsible for the issuance of currency.