The MFSA has published its responses to the feedback on the Proposed Regulation of Collective Investment Schemes (‘CISs’) Investing in Virtual Currencies (‘VCs’). Interesting to note that the MFSA has revised its position on having a separate rulebook applicable to Professional Investor Funds (‘PIFs’) investing in VCs and has concluded that the additional requirements pertaining to such PIFs investing in VCs will instead be inserted as supplementary licence conditions

The MFSA has agreed with the industry’s suggestion that the new regulatory framework should extend to Alternative Investment Funds and Notified Alternative Investment Funds, apart from PIFs. The MFSA has also extended the proposed legal structure for PIFs making investments in VCs to limited partnerships and unit trusts, apart from investment companies with variable share capital (‘SICAVs’) and investment companies with fixed share capital (‘INVCOs’). The MFSA has also clarified that PIFs may also be set up as Incorporated Cell Companies or Incorporated Cells of either SICAV ICC or a Recognised Incorporated Cell Company.

It is worth mentioning that the new framework will be applicable to all CISs investing in VCs, irrespective of their exposure to such investments. This implies that if a PIF invests only a limited percentage of its assets under management (‘AUM’) in VCs, whether directly or indirectly through trading companies or special purpose vehicles, it would fall under the full scope of the proposed regulatory framework

Subsequent to the Discussion Paper issued by the MFSA on Initial Coin Offerings (‘ICOs’), VCs and related service providers, VCs have been given a broader definition so as to encompass tokens which are offered through ICOs. However, the MFSA has reiterated that cryptocurrencies, as a sub-category of VCs, shall not be used to replace the term VC. Furthermore, in the Discussion Paper, the MFSA proposed a Financial Instruments Test in order to facilitate the classification of VCs as financial instruments.

In view of the specific risks associated with VCs and the underlying technologies, the MFSA has chosen to reserve its original position to make the proposed regime available solely to Qualifying Investors.

In assessing the competence of the individuals involved in the PIF, the MFSA intends to adopt a holistic approach rather than base its assessment on a particular metric. It stresses that the governing body of the investment scheme should have adequate knowledge in the field of financial services, VCs and other related technologies. The same shall apply to Compliance Officers and Money Laundering Reporting Officers (‘MLROs’). MLROs will be expected to remain up-to-date with the money laundering typologies adopted within the DLT ecosystem.

The MFSA also clarified that service providers should have sufficient financial resources and liquidity at their disposal in order to be able to conduct their business effectively. The assessments for verification purposes as part of the required periodic audit procedures are still required in the case of real-time financial audits which are enabled through DLT’s inherent features.

The MFSA has also reserved its view on the quality assessment requirement in that the appointed investment manager (or investment committee in the case of a self-managed fund) should carry out the appropriate research in order to ensure the quality of the VCs being invested into.

By safekeeping arrangements, the MFSA clarified its position that the private keys referred to in the Consultation Paper are stored in the wallet and not the VCs as such. Therefore, only those who have custody and control of these wallets will have access to these private keys. The MFSA also explains that the PIFs investing in VCs should opt for a combination of cold and hot storage. A Cold storage would require the input of two out of two signatories in order to have access to the wallet and transact in VCs with the investment manager being the first signatory and the custodian the second signatory whereas a hot wallet restricts access solely to the investment manager. Subsequently, the investment manager, may, with the consent of the custodian, transfer VCs from the multi-signature (cold) wallet to the sole-signature (hot) wallet.

In the case of liquidity, the same rules applicable to other asset classes shall also apply to PIFs investing in VCs. This calls for the appointed investment manager (or investment committee in case of a self-managed fund) to employ an appropriate liquidity management policy and procedures which facilitate the monitoring of the liquidity risk of the scheme and to ensure that the scheme complies with the underlying obligations. PIFs investing in VCs should also adopt appropriate and consistent procedures so as to ensure proper and independent valuation of the assets and calculation of the scheme’s net asset value.