The recent rise of cryptocurrencies such as Bitcoin has presented the idea that the world’s financial supply could soon be controlled not by central banks, but by computer code.
And, while Bitcoin is a type of cryptocurrency that allows transactions to be carried out seamlessly and without third-party interference, blockchain is the technology that underpins it – hyped for adoption in countless industries. Blockchain, however, is a type of Distribute Ledger Technology (DLT) – and although both terms tend to be interwoven when discussing disruptive technologies, their differentiation is crucial.
Put simply, DLT is a decentralised database that is distributed across several locations, or among an array of participants. The database exists on several devices on a peer-to-peer network, where each one of these devices replicates and stores an identical copy of the ledger, updating itself independently. The main benefit of this technology resides in the fact that it provides control of information and transactions to users – promoting transparency – while also minimising transaction time and associated costs; potentially saving businesses billions of euros.
A blockchain is a type of DLT where entries must be confirmed and encrypted, and information is recorded in blocks. Each block includes a timestamp, transaction data and cryptographic signatures. And while blockchain may have been the buzzword of 2018, it’s important to remember that not all DLTs are a blockchain, not all blockchain is a cryptocurrency, and the application of DLT goes far beyond digital currencies and the financial services industry.
The Blockchain Island
Nonetheless, the most prominent application of DLT to date is, without any doubt, the virtual Bitcoin currency. And in response to this burgeoning tech-led revolution, cautious questions have been raised ranging from whether it would be in society’s interests to embrace a completely digital money system in favour of more regulated fiat currency, or – and most importantly for the case in point – what set of rules and regulations companies within the DLT space should be bound by.
While it is true that most jurisdictions around the world that have benefitted from the application of DLT are not currently adequately regulated – either through blockchain-enabled cryptocurrencies or the technology’s countless other uses – Malta is a country that has bucked the trend and welcomed the technological revolution with open arms, earning itself the moniker “Blockchain Island”.
It has done this by doing what most other jurisdictions have so far failed to achieve: laying out a comprehensive regulatory framework that covers blockchain and other so-called Distributed Ledger Technologies – a rare feat even amongst other so-called tech-hubs.
Last year, under a newly-formed Malta Digital Innovation Authority (MDIA), the island nation enacted three regulatory laws – the Innovative Technology Arrangements and Services (ITAS) Law, the Malta Digital Innovation Authority Law, and the Virtual Financial Assets (VFL) Law – that today form the cornerstones of DLT regulation in the country and are designed to govern companies operating within this nascent technological space.
“MDIA (…) was set up in 2018. Basically, for the prime reason that the government wanted to show that it is embracing and promoting innovative technology”, says Stephen McCarthy, the inaugural CEO of the MDIA, which is the first authority of its kind in the world.
Quite unsurprisingly, Malta’s DLT sector has since boomed, finding itself chosen as a jurisdiction of choice for many blockchain operators and financial asset businesses, including the world’s largest exchange, Binance. However, besides looking to DLT and cryptocurrencies to help further diversify its economy, Malta likewise believes the application of blockchain technology could also potentially transform the country’s services.
“One very important factor which one must point out, is that blockchain is not equal to cryptocurrency and it is for this reason that we have a VFA act addressing virtual financial assets (which includes cryptocurrency), and a separate ITAS act addressing the technologies themselves”, explains McCarthy.
“The Malta Digital Innovation Authority is giving a sign that government wants to take this technology, Distributed Ledger Technology, in a serious manner. The prime objective of MDIA is that we will provide a framework to review the software and the technology that there is in this type of innovative technology.”
“Serious operators want [to] work within a legal framework, want that their work is recognised and accepted and embraced. Basically through this legislation, that is what we are doing. We’re making sure that this type of technology is not only there, but that it is there to stay.” Stephen McCarthy, CEO of Malta Digital Innovation Authority
Setting Industry Standards
Together with new policies put in place and Malta’s favourable tax laws, the mandate of the MDIA is not only to promote DLTs in order to boost investor confidence and position Malta as a leading hub, but also to help maintain strict industry standards through the application of regulation and certification.
“The government wants to protect end users by increasing due diligence applied to innovative technologies”, emphasises McCarthy. “The objectives of MDIA are several, one of them is to promote innovative technology, another one is to certify this type of technology – certification for users to feel safe in using this innovative technology. Up until now there is nothing of this kind, but now, with MDIA ,we’re changing that.”
As a result, prospective service providers and ITAS applicants wishing to operate in the DLT sphere in Malta must first be reviewed by a Systems Auditor, in order to become registered and certified on the island.
Accredited Systems Auditors, which include the likes of international auditing firm KPMG, carry out system reviews and will come up with an opinion on the management, security and functional correctness of ITAs. These ITA applicants may approach the MDIA on a voluntary basis to certify that their products are fit for purpose and meet the required standards.
In implementing this world-first certification procedure, the MDIA hopes to create a virtuous cycle of instilling greater trust and certainty in systems governed by innovative technology, in turn fostering safer usage and thus more adoption by the public, and therefore increasing the prospects for investment in innovative technology on the island.
“This is another step in positioning Malta at the forefront of technological innovation and in creating a cutting-edge-hub for digital economy”, says McCarthy. “I expect the first certificates to be issued in few months’ time. Our scope is widening in a sense that we have other national competent authorities which we work with. The Malta Financial Services Authority and the Malta Gaming Authority – with whom we work closely.”
The MFSA, in particular, has been keen for MDIA’s assistance when it comes to DLTs, especially in seeking assurances over the types of automation that should be licensed within the Maltese financial sector.
“The importance about the certification is not only for the fact that we will review the software, which is already a big step forward, but we also appoint a technical administrator”, explains McCarthy. “This technical administrator is very important, he plays a pivotal role. Why? Because if that software is doing something wrong, or if that software is breaching the law on a daily basis, we have the right to instruct the technical administrator to switch off this software.”
“We could not afford to come up with something easy, we wanted something robust.” Stephen McCarthy, CEO of Malta Digital Innovation Authority
The feedback received from the establishment of the MDIA and the regulatory framework has so far been “very encouraging” says McCarthy, not only from operators and users, but even neighbouring EU countries who have requested shared knowledge in regulatory implementation.
“The feedback is positive”, says McCarthy. “I mean they [operators] were working in an environment which was totally unregulated.”
“Serious operators want to work within a legal framework, they want their work to be recognised and accepted and embraced, and basically through this legislation, that is what we are doing. We’re making sure that this type of technology is not only here, but it is here to stay.”
It is clear to see that Malta’s enthusiastic adoption of blockchain and DLT over the past twelve months is allowing the country to make significant strides with its digital economy, which bearing in mind the island’s geographical limitations, is seen as a key sector for its future prosperity.
Going forward, Malta therefore looks to continue leading by example in the EU as a trailblazer for sensible DLT regulation, and to be recognised as a posterchild when it comes to the use of digitally disruptive technologies for sustainable economic growth.
In the short-term, McCarthy says he envisages “a smooth operation of this legislation” in which the MDIA has “done everything possible” and “used the best guidelines possible to have a robust system.” – citing that the authority expects to have ten accredited Systems Operators by the end of the year that will facilitate a much greater number of entrants to the market.
However, looking further down the line, once this regulation is well-established, the MDIA expects there to be much less focus on cryptocurrencies, and more on how the authority can encourage blockchain for a far wider range of uses, leveraging this technology to have a transformative effect not just in finance, but across its whole economy.
“But what we’re hopeful for is that in the coming months and years, we’ll see a slight change from the exchanges and ICOs, to other blockchain users, I’m referring to education, health, shipping, import and export. Blockchain technology has huge potential. Blockchain technology is being used, yes, by cryptocurrency, but it has huge potential in many, many other areas.”