The Blockchain Island – A Recap of 2018 and where we are heading

Nathan Sammut Mock, Assistant, Blockchain Advisory |

20 December 2018

Legislation

The 16th of February 2018 saw the release of a historic consultation document named ‘Malta – A leader in DLT Regulation’, and although this may seem like light years ago for some, one can appreciate how far this innovative industry and Malta has come in such a short period of time. Fast forward to the 4th of July, when the Maltese parliament officially enacted 3 bills into law namely, the Malta Digital Innovation Act, the Innovative Technology Arrangement and Services Act and the Virtual Financial Assets (hereinafter referred to as VFA) Act. This made Malta the first jurisdiction in the world to provide all encompassing regulations on operators within the blockchain, cryptocurrency and distributed ledger technology (DLT) space. The idea and driving force behind this legislation was to not compromise innovation and growth but rather, to bring legal certainty, investor protection and market integrity to an industry which has so far been riddled with uncertainty, ICO scams, AML breaches and hacked exchanges. This has also had the effect of attracting major Fintech companies to the ‘Blockchain Island’, some of which even physically expanded their operations in Malta.

Over the summer, the Malta Financial Services Authority, engaged the industry when it issued a number of consultation papers with regards to the VFA Act which came into force on the 1st of November. With effect from this date, VFA service providers and issuers of ICOs which notified the regulator of their intention to submit an application to register their company with the local authorities, were able to start offering their services and/or tokens in an unregulated manner without breaching the law. This is because VFA service providers have a one-year transitory period to become fully compliant with the laws and regulations issued by the MFSA. On the other hand, Issuers of ICOs who launched their token offerings before the coming into force of the act have a 3-month transitory period to become fully compliant with similar laws and regulations and to register their whitepaper with the MFSA.

Education

2018 was a year which saw a well-needed increase in the awareness and understanding of Blockchain Technology. When it comes to education within this space, the University of Malta has begun offering specialised Blockchain study units from October 2018 with €300,000 also being devoted in terms of scholarships. Apart from this, several seminars were organized throughout the year by the MFSA, Finance Malta and other institutions with the aim of educating local professionals on the uses of blockchain technology and how it can be applied to a number of industries. 2019 will continue to see public sector employees getting trained in this field in order to familiarise themselves with this innovative technology whilst Master Programmes will be launched in regards to Blockchain and Cryptocurrencies. Therefore, in this respect, one can clearly see that Malta is providing the tools to ensure that it will have the adequate local human resources to service this industry both from a regulatory and technical standpoint.

Summits

In the past couple of months, Malta hosted a number of highly anticipated summits. These included the Delta Summit and the Malta Blockchain Summit, amongst others. These events saw a huge opportunity for one to learn, discuss and build new connections with the thousands of delegates and hundreds of high level speakers and exhibitors in attendance from within the blockchain space. The information exchange and the positive synergies generated throughout these summits have already led to the confirmation of next years’ respective editions which are expected to be even bigger with the further emergence of Artificial Intelligence (AI) and the Internet of Things (IoT).

Banking

Certain traditional banking institutions have not yet opened up their risk appetite towards fintech businesses due to the risks they pose when onboarding them. A contributing factor to this could be due to the general negative image which has tainted the industry that came about from multiple security breaches, ‘pump and dump’ schemes and the lack of compliance and professionalism shown by some fintech based companies potentially leading the banking sector to hesitate the service the industry before the bad apples are removed and appropriate safeguards are installed to prevent malicious newcomers.

Through the regulation being imposed on fintech companies that seek to register their business in Malta, the local authorities are setting the bar high and only those who are serious enough will aim to reach the standard which is required to ensure compliance with international obligations. By complying with regulations and adopting adequate AML procedures, companies would in turn build more trust with the banking sector and this can already been seen by the steady increase in the number of banks and payment service providers that are willing to service reputable market players.

iGaming

Two of the main benefits which Blockchain technology brings to the table are its immutability and transparency capabilities. These features bring to mind immediate use cases within the iGaming industry which will sooner rather than later begin to adopt this technology into its systems.

For instance, operators are required to fully disclose gambling odds and betting results to its users, as well as guarantee that Random Number Generators (RNGs) are not being manipulated in any way. The applicability of smart contracts which are self-executing, fully automated and verifiable would reduce the need for administrators to monitor settlements within online casinos as pay-outs are released depending on the criteria coded onto the contracts.

One may have already noticed that some locally based iGaming companies are accepting cryptocurrencies as a means of depositing and withdrawing funds, through the sandbox regime introduced by the Malta Gaming Authority. This has already translated into faster transaction times and cheaper transaction costs when compared to more traditional payment methods accepted by iGaming companies which can take up to 2-3 days to process.

Conclusion

It can be said that the development of this technology is still at a very early stage and so the applicability of blockchain and true mass adoption within our everyday lives may seem to be rather distant for the time being. To add to this, the slump experienced throughout 2018 in terms of cryptocurrency prices may have very well slowed down the adoption phase as some of the earlier hype has cooled off.

However, one must also keep in mind that the strength of this technology lies in its interconnectedness between all corners of the earth. The more jurisdictions and business cases which begin to understand its concept and apply DLT into various fields, the stronger and more holistic the ecosystem will become. Therefore, agreements such as the ‘European Blockchain Partnership’ and the declaration signed on the 4th of December in Brussels by seven Southern European countries[1] to foster the use of DLT beyond cryptocurrencies can only spell good things for this industry which continues to grow at an accelerating pace and becomes recognised as an important technology for companies worldwide.

The emergence of this new industry and the proactive approach taken by the local government towards it, has definitely put Malta on the map as a potential hub for technological innovation, allowing Malta to obtain an early mover advantage. The government has already committed to exploring, during 2019, the creation of a regulatory framework for other ‘disruptive technologies’ such as Artificial Intelligence and the Internet of Things, which would complement the developments occurring in Blockchain.

 

Should you require any further information, please contact our Fintech team on [email protected] 


[1] Malta, France, Italy, Spain, Portugal, Greece and Cyprus