Is Legislation Stifling Security Token Development in Malta?

Is Legislation Stifling Security Token Development in Malta?

On February 25th, 2020, the Malta Financial Services Authority (MFSA) released feedback it had gathered from Maltese security token industry participants. Ultimately, many believe regulation is holding back security token innovation — not at the national level, but at the level of the European Union.

The MFSA’s Feedback on Security Tokens Explained

Yesterday, the MFSA publicly released a feedback statement regarding a previously issued consultation document on security tokens. In July of 2019, the MFSA published the document which sought feedback on the regulator’s stance regarding STOs.

The MFSA received feedback showing how many market participants continue to experience regulatory ambiguity when it comes to the use of security tokens. Regulatory authorities want to protect both investors as well as the capital markets industry. Yet innovators wanting to implement the emerging technology have their hands tied. That’s what the feedback suggests, at least.

18 market participants, ranging from technology providers, law firms, consulting agencies, and national agencies all provided feedback as part of the consultation. The MFSA originally launched the consultation period in an effort to clarify a legal framework for STOs and identify challenges for security tokens in Malta.

Throughout the consultation period, a high number of respondents told the MFSA that legislation beyond Malta — at the European Union (EU) level — needs to change. A primary issue revolves around Central Securities Depository (CSD) rules.

According to existing EU regulations, a CSD must maintain records of “transferable securities” listed on a trading platform. Yet those who push for security tokens advocate one of its benefits include a reduction of costly middlemen — including CSDs.

As a result, market participants are pushing for an update to existing legislation. Blockchain technology, including the integration and use of distributed ledgers, ought to be accounted for in regulations, they claim.

Security Tokens in Malta

Security tokens first arrived on scene in 2018. Since then, regulatory ambiguity has clouded the industry.

In the United States, Securities and Exchange Commission (SEC) Chairman Jay Clayton has said security tokens must abide by the commission’s existing securities laws.

In Malta, the situation has been a bit different. Malta initially established a strong reputation as a regulatory friendly jurisdiction when it comes to tokenized securities. As far back as 2018, Malta drafted and passed a number regulations allowing for the use of cryptocurrencies and digital assets throughout its jurisdiction.

From the experience of the industry’s existing participants however, regulations need to change. At the EU level, legislation ought to account for blockchain technology in the use of securities transactions and settlement.

What do you think about the feedback statement released by the MFSA? Do you think regulations at the EU level will be amended to account for blockchain-powered securities? We want to know what you think in the comments section below.

Image courtesy of RetireeDiary.