Malta: Fund Tokenization Mecca

Situated at middle of the Mediterranean, Malta has been known to travellers for historic buildings, stunning coastlines, and weather so fair that you would wish the vacation never lasts. But recently, a new attraction is drawing a crowd; vacationers not looking to relax, but techies looking to take advantage of latest offering of blockchain technology – Fund Tokenization.

The blockchain fever has caught in Malta. Already known for business friendly taxation policies, Malta has set itself up as one of the best locations to host the next technological iteration of investing. Already, blockchain fixtures are moving into the archipelagic country in droves.

Government backing

The Maltese government, taking notice of the development and realizing the opportunity was steadfast in mechanizing their regulatory arms. The maltese government worked to pass several legislations, namely (1) MDIA – Malta Digital Innovation Authority Act, (2) ITASA –  Innovative Technology Arrangements and Services Act, and (3) VFAA – Virtual Financial Assets Act. These prompted the formation of the a number of agencies. The Malta Digital Innovation Authority was created as the general overseer of all things blockchain. Under which are, Innovative Technology Arrangements and Services which is responsible for putting to paper the policies for DLT or Distributed Ledger Technology and Virtual Financial Assets which is tasked for creating guidelines for digital tokens such as securities, service providers for brokering and financial management, and initial coin offerings or ICOs.

Being a member of the EU in itself is already an advantage by being able to freely trade with a gigantic economic bloc. But more specifically, Malta has jurisdiction advantage for investors. The country offers more relaxed regulations compared to other states in the union. Furthermore, Malta has passed legislation to update the CIS(Collective Investment Schemes). The main reason for this is to adapt to the complexities of crypto trading and ease the burden of the investors’ legal teams.

The MFSA(Malta Financial Services Authority) heads Malta’s government in authenticating and granting legal status of assets defined in the CIS. As part of the country’s initiative to get in on the crypto market, the government, through the MFSA, broadened the definition of assets to clearly include ones that are based on crypto. Other countries, as well, use a similar scheme as the CIS. This amplifies the significance of the move taken by the Maltese government such that it could encourage other big economies to take heed and update their own laws.

Still, as a regulatory body, MFSA will take charge of policing many fund transactions. Every fund, will be reviewed thoroughly which will include multiple hearings and the submission written documents that will legibly discuss the fund’s general function, top down composition, aims, related risks, and capabilities of the fund. The MFSA will reserve judgement for either awarding of declining any prayer to start a fund in the country.

Setting up the Fund

PIF or Professional Investor Funds are ventures enacted under the ISA (Investment Services Act). These funds are made especially for upscale investors and professionals – hence the name. The regulations under them are less stringent and flexible. This makes them perfect in putting up tokenized funds than using other schemes like retail.

Since its inception in 1994, PIFs have been a favorite in setting up unconventional forms of funds such as securities. And currently, not surprisingly, it is now used to structure crypto assets.

The tokenized fund will most likely be housed under a company for legality. It may be regarded as simply an investment company but with varying equity (SICAV – Société d’investissement à capital variable).

A tokenized fund set in Malta defines an active member called promoters which are similar to general partners in that they own voting shares and it is their task to gather capital. The tokenized shares and its future profits will then be given to the limited partners.

A limit set to half a billion euros is imposed on total assets that can be acquired by any PIFs if it is not payable to another entity or no agreement for the company to re-buy the stocks they have handed out in five or less number of years.The same also applies, regardless of any buy back agreement if the assets dips below the hundred million mark.

Should the PIF peak its limit, another written document, the Alternative Investment Funds, will take effect. This is the unpreferable option as it severely limits the options of the fund. It is of the best interest of the fund to keep within the bounds set for the PIF.

The minimum amount to invest in any PIF is a hundred thousand euros. Invites are also only to be handed out to licensed investors as a requirement by law. This investor may be a person, a corporation, or any other institution that the state officially recognizes. The investor’s total worth as well should sum to at least three fourths of a million euros. If the investor, is constituted by many persons however, each constituent is considered qualified.

The management of the fund can be assigned to a third party or externally. This is opposed to internal management that is headed by the fund’s own board. If the fund is not externally managed, a hundred and twenty five thousand euros is required as start up capital.

When selecting or replacing a director, a written permission from the MFSA has to be procured first. The MFSA is tasked to curate potential directors for their capacity, capability and general background.

If management of the tokenized fund is managed externally by a Maltese manager. The MFSA requires that the manager have proper certification given only by them. If the manager is not from Malta, he is required by the MFSA to undergo scrutinization to his ability is on par with the licensing required of their Maltese counterparts.

In cases where a manager resigns, a custodian may or may not be appointed. In case of the latter, MFSA will ensure that the existing structure sans a manager suffices. Custodians as well need not be directly part of the company or a Maltese citizen. And similarly, they are to be tested for their qualification by the MFSA.