In my previous article, I have given some historic background to the ill-fated “blockchain island” and an overview of the current situation. As promised, I am not merely setting out to point out the problems and pout at them, but rather, the whole aim of this is to put solutions on the table.
First and foremost, the costs involved in applying for a regulatory licence or certification (respectively with the MFSA and the MDIA) are too steep. This is not 2018 – multiple other countries have regulated the industry, and we are facing stiff competition from the likes of Singapore, Switzerland, Germany, Luxembourg, and the United States. The said costs, coupled with the significant reputational damage that Malta has suffered over the past couple of years along with the mishandling of the implementation of the VFA Framework, have pushed Malta several rungs down the crypto ladder. Representatives from the Ministry for Finance, Ministry for the Economy, Investment and Small Business, the MFSA, the MDIA, and the FIAU need to sit at a table with the VFA Agents and the systems auditors, and openly discuss the overall costs that are burdening the industry. Then, a comparative analysis with other competing jurisdictions needs to be carried out, in order to determine the extent to which such costs exceed those which are incurred in such other competing jurisdictions. I can, for example, confidently confirm that Malta is way more costly for regulated crypto businesses than Liechtenstein and Singapore.
Secondly, and perhaps just as important, is the need to reduce the suffocating red-taping involved in the application and post-licensing processes, without reducing the high standard of regulation that Malta now has rightly set for the industry. Starting off with the Personal Questionnaire (PQ) process that every important functionary within a VFA applicant has to undergo – why is this necessary, when the VFA Agent itself is required to carry out a Fitness & Properness assessment of the applicant, with such process being effectively a replicated PQ? One of these should be eliminated. The same can be said for the systems audit requirement imposed on effectively each and every VFA Applicant, where such systems audits need to be carried out in effectively the same way regardless of the VFA licence category being applied for, or the technical platform employed by the same applicant. A more ad-hoc approach, even case-by-case, needs to be applied in this regard.
The VFA Agents need to have their responsibilities recalibrated. There is a clear conflict of interest between their servicing the client, and acting as the lunga manus of the MFSA. They cannot be both the judge and the jury. It is perhaps time to consider scrapping the concept of a VFA Agent and introducing regulatory safeguards that aim to further ensure the quality of applicants and their applications. There are various ways of achieving this, such as: (i) introducing a strict timeline within which applications are to be processed by the MFSA and therefore leading to the proper formulation of applications prior to submission since a lack of adequate preparation would potentially lead to the application being thrown out after the time limit lapses and the forfeiture of the application fee; (ii) over and above the MFSA’s regulatory application fees (which still need to be significantly reduced as stated above), the MFSA starts billing applicants on an hourly basis for the time it spends reviewing applications; and (iii) an adequate reporting mechanism for underperforming firms servicing VFA applicants, with a public blacklist of firms/service providers whose mishaps are confirmed by the MFSA as being sufficiently grievous.
Moving on to the technical side of things, we need to recognise the fact that when analysing ITAs, the focus should be solely on the technology itself, not who devised it, their paper-based qualifications, etc. Most of the prominent blockchain-based applications that we see being devised around us are built by cypherpunks who are reluctant on divulging too much information about themselves, and simply seek recognition of the work they develop, which is why they are seeking audits by private companies rather than public authorities. Moreover, they would have little to no academic qualifications to show, mostly due to the absence of specialised courses covering blockchain-based development. We need to recognise and acknowledge this fact and make it clear that such technical audits are limited to the technology itself.
More importantly than anything being suggested above, it is the jurisdictional mentality that needs to change. In order to attract prominent start-ups to our shores – because let’s face it, most of the crypto giants nowadays were start-ups themselves just a few years ago – we need to stop focusing on feeding money to service providers and authorities alike through the exorbitant charging of fees, and keep in mind the bigger picture, which is that of establishing a proper crypto-friendly jurisdiction with a live ecosystem of prominent crypto stakeholders that are motivated to relocate their staff and resources to our shares, such as via tax incentives, and a clear structure of the grants available specifically for the crypto industry, since to date, no such industry-specific incentives exist. And to crown it all off – prioritise, over and above anything else, the digitalisation of vital processes and procedures. Start off with the full digitalisation of the incorporation process with the Malta Business Registry, all the way to allowing the issuance of fully digital shares (directly dematerialised) onto the Ethereum blockchain. It is high time to forget permissioned solutions that, unless tethered to a public blockchain, are frankly useless.
With all this being said, the thundering question that abounds is: are we too late? No, not at all. PayPal, J.P. Morgan, BNY Mellon, Morgan Stanley, Mastercard, Visa, and Rothschild Investments, amongst others, are only starting to officially jump on board and actively partake in the crypto industry. Elon Musk, one of the most prolific innovators of our time, has officially endorsed crypto, notably through the purchasing of $1.5 billion worth of Bitcoin through Tesla Inc., apart from his own personal investment. The crypto industry is now worth over $2 trillion. We must, however, be quick, as countries like Luxembourg allow for the direct issuance of shares onto a blockchain, and the state of Wyoming in the U.S. recognised decentralised autonomous organisations as legal entities with their own separate juridical personalities. These are two concepts that we have worked upon and dropped the ball on, letting other countries pick up our ideas and implement them. We must stop making such mistakes and recognise our worth as a jurisdiction that can lead the crypto industry.
And last, but not least – you will have noticed that I have used the term crypto, not blockchain. That’s where the future lies, or more specifically, in public/permissionless blockchains powering the likes of the Bitcoin & Ethereum networks.