On the 23rd October 2017, the Malta Financial Services Authority (“MFSA”) launched a consultation process regarding the proposed regulation of Professional Investor Funds (PIFs) wishing to invest in Virtual Currencies by publishing the draft regulatory framework for such regulation and inviting comments and feedback from industry stakeholders.

This significant regulatory development is rooted in the confirmed legislative commitment to develop a broad national strategy that will see the jurisdiction embracing blockchain innovation.

The proposed rules are geared towards ensuring investor protection and market integrity in the context of investments in Virtual Currencies

The proposed rules, contained in a standalone MFSA rulebook which will be applicable to PIFs which have investment in Virtual Currencies as their investment objective, are geared towards ensuring investor protection and market integrity in the context of such investments and aim to mitigate the corresponding potential risks.

For the purposes of the new regulatory framework, “Virtual Currency” is defined as “a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically”, which mirrors the European Central Bank (EBA) Opinion on ‘virtual currencies’.

Whilst the proposed rulebook is expressly only applicable to Professional Investor Funds, the MFSA has confirmed that it is presently considering whether Alternative Investment Funds and Notified Alternative Investment Funds should also be allowed to invest in virtual currencies.

Moreover, given the risk associated with such an investment model, the MFSA is proposing that the available legal structures for Virtual Currency PIFs should be limited to SICAV and INVCO structures, in view of the enhanced governance inherent in having a board of directors which effectively assumes responsibility for the overall conduct of business of the PIF.

The proposed Virtual Currency rulebook imposes specific requirements on the PIFs’ governing bodies and, in certain instances, service providers with a view to safeguarding the interest of investors and the integrity of the financial market in the context of virtual currencies. The main proposals may be broadly summarised as follows:

• Competence – the PIF’s investment committee or external investment manager will be expected to have sufficient knowledge and appropriate experience relative to information technology (IT), Virtual Currencies and the corresponding underlying technologies, including Distributed Ledger Technology.
• Risk Warnings – the PIF’s offering documentation will be required to include risk warnings specific to the direct and/or indirect investment in Virtual Currencies.
• Quality Assessment – the PIF’s investment committee or external investment manager will be required to carry out appropriate research in order to assess the “quality” of the Virtual Currencies to be invested into by the PIF.
• Risk Management – the PIF will be expected to implement an appropriate risk management policy and the risk profile of any investment by the PIF in underlying Virtual Currencies must fall within the scope of such risk management policy.
• Valuation – the appointed Service Providers should have the business organisation, systems, experience and expertise necessary to conduct the required verification and valuation of the PIF’s investments.

In view of the ongoing consultation process, the proposals are clearly not yet binding and may be subject to changes prior to finalisation and publication.

The consultation closes on the 10^th November 2017.