Why I worry about Malta regulating cryptocurrencies

Malta’s government has stated it wants to regulate blockchain technology and cryptocurrencies. Last week they published draft bills that Parliament is discussing. Are they serious about wanting to be on the cutting edge, or is this a scam under a different name?

BACKGROUND

Blockchain and cryptocurrency aren’t as complex as you might think. In summary:

  • A blockchain is a series of blocks of records chained together. Distributed ledgers across a network store these blockchains. There’s a fair amount of encryption and security in place too.
  • A blockchain lets me transfer digital assets to someone else. An example of a digital asset is an electronic image. Or money. We call money based on a blockchain system a cryptocurrency. It’s not that different from physical money, despite what headlines say.

All clear?

With cryptocurrencies, things are not as complex as you’d expect

No country has tried to regulate blockchain so far. In that respect we now hear people describing Malta as being at the cutting edge of fintech.

Or is it?

THE MODEL

Malta’s model is a straightforward regulatory model. The government wants to create a new quango called the Malta Digital Innovation Authority. This Authority will grant licences to operate Distributed Ledger Technology (DLT) systems like blockchain. It will also grant licences to companies wishing to operate cryptocurrencies.

This means a company in Malta can create a cryptocurrency and get it licensed by the Maltese government. Then it can declare that an EU Member State licences its product.

The regulatory model is one used all over the world. It works in telecommunications, in energy and various other sectors. The principle is simple: You pay me a licence fee. After careful examination, I will grant you a licence. I will also define the environment within which you operate.

Governments like this approach because licence fees tend to fund the regulator so this is a cost-neutral task for them. Industries like it because they work with the regulator to avoid shocks in their line of work.

The regulatory model breaks down as soon as you stop trusting the people doing the regulating

It sounds like a winning formula.

Until it doesn’t work.

THE REGULATOR

The banking industry’s regulator in Malta is the Malta Financial Services Authority (MFSA). In recent history, the MFSA granted a licence to a small outfit called Pilatus Bank. The capital used to start the bank came from laundered money. People, including in government, allegedly used the bank to launder much more. And the regulator claims it didn’t know about these criminal activities until the story broke.

This is where the regulatory model breaks down. It works well as long as you trust the people doing the regulating.

Malta no longer has a good reputation for this.

Imagine this happening in the cryptocurrency world. The government licenses a cryptocurrency and people use it to hide funds. If foreign jurisdictions try to look into this, the Maltese Police will continue ignoring them. The Police would not investigate these things themselves, of course. As the Police Commissioner says, the police “have limited competence” to investigate corruption.

I’m not being hysterical either.

Former government minister John Dalli spoke about blockchain last week in New Delhi, India. He stated, “Every single person in today’s world is spied upon, monitored and controlled. All our movements, all our transactions, all our utterances are registered and logged. A well-structured, functional and protected blockchain environment should put a stop to this.” (Emphasis mine)

A former minister thinks we should use blockchain to stop registered transactions

A former minister thinks we should use blockchain to stop registered transactions. If he were talking about people spying on my emails, I’d sympathise with this statement. If he’s talking about banking transactions belonging to politicians, that’s a different matter.

(Note: John Dalli also had accounts at Pilatus bank)

Does this mean the new laws are completely useless?

THE LAWS

Yes and no.

Like any law, the bills proposed by the government are not perfect but they have some excellent points.

The Malta Digital Innovation Act includes:

  • Provisions for proper standards (Article 3(c))
  • Clauses to prevent money-laundering (Article 4(2)(j))
  • Points about a minimum level of quality (Article 6(3)(f)).

The Virtual Financial Assets Act:

  • Treats advertising for cryptocurrencies in the same way adverts for financial services are treated (Article 6)
  • Covers market manipulation (Article 36)
  • Empowers auditors to reveal misuse or crime (Article 50).

These are all good points.

Do you trust the government that’s been accused of money laundering on a grand scale?

But then the Virtual Financial Assets Act points out that its competent authority is the MFSA. The same MFSA which did such a great job with Pilatus bank.

CONCLUSION

As a result, my conclusion is simple:

If you trust the MFSA and the Maltese government to regulate the banking industry then you’d want them to regulate blockchain.

Do you?

When you share this article with someone you think trusts the government too much, they’re going to start thinking twice about things.

References

  1. Malta has big lead over other countries due to proposed blockchain regulatory framework – Tim Draper; Rebekah Cilia; The Malta Independent; 2018-05-22
  2. Malta Digital Innovation Bill; Malta Parliament; 2018-05-22
  3. Pilatus Bank ‘Set Up With Dirty Money’: Jailed Banker Faces Fresh Accusations From American Prosecutors; Tim Diacono; Lovin Malta; 2018-05-24
  4. If Pilatus Banks winds down all evidence will be lost, Efimova warns; Jurgen Balzan; The Shift News; 2018-04-28
  5. How Maltese Online Gambling Became an ATM for the Italian Mafia; Matteo Civillini and Cecilia Anesi; Organised Crime and Corruption Reporting Project; 2018-05-10
  6. Former Finance Minister of Malta to Join Advisory Board of QuickX Protocol; BusinessWorld India; 2018-05-22
  7. John Dalli Confirms He Had A Pilatus Bank Account; Tim Diacono; 2018-01
  8. Virtual Financial Assets Act; Malta Parliament; 2018-05-22

All references were valid and correct when this article was published. Changes to referenced websites or web pages may render some references invalid. If this is the case, please leave a comment below.


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