Host: Yanina Petrovskaya
Guest: Philipp Sauerborn
Malta has become known as «Blockchain Island». In 2018 the Maltese Parliament passed tree laws establishing the regulatory framework for blockchain, cryptocurrency and distributed ledger technology (DLT).
In Ms. Yanina Petrovskaya’s interview with Mr. Philipp Sauerborn, an international tax advisor and Crypto Team Leader of Dr. Werner & Partner , discussed the situation with blockchain projects in Malta and its role in the Blockchain/Cryptocurrency revolution.
We do not pretend the text version is perfect since it is just a transcription of the conversation. Neither does it constitute any sort of legal advice.
Hello, my name is Philipp Sauerborn and I am an international tax advisor and Crypto Team Leader of Dr. Werner & Partner . It is an international consulting of tax accountants, lawyers and compliance experts, operating for 6 years and employed 26 person staff, most of them in Malta. Until last November we have been operating with international tax, assisting people, setting up operations in Malta but literally since the beginning of this year we are focusing on the consultation around the Blockchain, licenses and ICO services.
It’s just great. I think that’s what happened to a lot of lawyers. Once your jurisdiction becomes popular for blockchain projects, you are just joining the movement.
Correct. This was actually done by clients, that was pushed by clients. One of the clients is a very, very large venture capital company in the cryptosphere, crypto technology group. Every day they asked to make us familiar with this type of service because they were there and they weren’t participating in ICO, who have their target lines to launch ICO in Malta. And so far they have not referred to one which is OK for us, we have acquired many other clients on the way. This was our professional entrance. Of course, a little bit longer by way of investing in ICO, as usual Bitcoin, but professionally only one when the client pitched it on it’s what you say.
You said «usual Bitcoin» You know it sounds unusual to some people, but since we do this broadcast for this program more like for the crypto audience to them, it is might be usual Bitcoin, it is ok. So what will give us a brief overview? As Malta also launched three main Acts by the end of July. Tell us more. What are they about?
Yes. These are 3 bills and there are connected exactly in July. They will probably come into force in November. They are the Innovative Technology Arrangements and Services (ITASA), Malta Digital Innovation Authority Act (MDIA) and Virtual Financial Assets (VFA) Act. I would say the most prominent it is the VFA and I think everyone’s talking about that. However, the other one, the first Innovative Technology Arrangements, and Services Act, I think much more important going forward what’s that will be the Act to regulate smart contracts , for example, and to regulate the arrangement itself, which in the current proposal is voluntary. In the future, for example, if you are a Blockchain service provider, you might want to have your Blockchain, for example, is regulated or accredited and this is why this Act was created. The Malta Digital Innovation Authority Act (MDIA) is the act that regulates the set up of this new authority, which will be set up very soon, I hope, and in the end this authority will be able to accredit Blockchain system to some auditors and other technical personnel that are required for the Virtual Financial Assets Act, for example, and every ICO in the future that its regulators or any of currency exchange, which is regulated, they require. One member of the Board of Administration has to be a system auditor which is essentially a person who was able to audit a Blockchain system, the smart contract, whatever. Currently, I think in the world exists, maybe five. So this is a huge challenge for them to get these people trained.
OK, that’s interesting. I mean these sort of education, do you know any institution which is going to provide that?
No, I mean this MDIA (Malta Digital Innovation Authority Act) is a more traditional innovation authority. They will probably provide training and provide companies that offer training. Currently, none of it exists, as we all know . I mean this is more than one Blockchain. That’s probably the biggest challenge to have a system that is qualified for all of those because it’s an essential part of any ICO future in any way if a service provider to have this system and this platform and whatever. Currently, they would recommend you a system or a company who could have the system, I’m assuming.
Yes, it is interesting. I mean that’s you end up with opportunity, maybe also for coding people to get this sort of traditional qualification, which will be much required in the markets next year or two in Malta.
Yes, that will be essential. I have spoken to many companies, this concept is also known under companies regulators for gaming. I mean I’ve spoken to a few of them and they are trying to give up towards. They can’t because there’s no one who can train them.
Trying to get regulation over the whole Blockchain system is a challenge in general and challenge also in the details. What does it take to make ICO right now? Does Malta have a qualification for tokens right now? How will the Act be enacted in November?
The regulation more what ICO’s. They’re called VFAA issues or towards, for example, exchanges were called the latest deregulation, is going to be very tough. I think this is something else good in this context, it is not necessarily tough from where the emphasis is coming from, but from an unregulated space where everyone has an ideological soul. This is going to be very tough for them because of safety rules. There are two parts to this. It’s essential to ICO regulation. One part is, the company itself, for example, needs to have a Board of Directors, needs to have a Board of Administration, which includes this system auditor, the custodian, and the VFA agent. Compliance and governments are going into the company from a token perspective. The argument is the automated tool, it is the Financial Instrument Test, which is currently available on the website at the beta version, and the VFA agent and the promoter have it for every revenue token issuance, this can only have one resize in the end, so it can either be a virtual token which you use as a token hot-fix, or it can be a security token or other financial instrument. It can be electronic money or if it is nothing else before, it automatically is Virtual Financial Asset (VFA), this way where you want to go because you are regulated under the new Act.
How will it work by your opinion in practice? I mean it would become pretty costly to get ICO done. I think it would be like a professional service provider like your company, you do all this administration part. Because of what the ICO itself it be difficult to arrange all this setup with compliance an account and so on.
It’s not only difficult, but the VFA agent, the role that we hope will be able to assume very soon. Had you only possessed the knowledge and tools to launch, an application for an ICO official for a year? So this is an essential part. Again, this is where you come from a tradition. I see your point of view. It’s looking back to 2017, it is going to be very expensive. I think this is essential, where the ICO was ago, and they want to make ICO is more than just the ICO idea of an idea. So any company with excellent Blockchain has a working product and is doing business for them. It’s not going to be so hard, but the ICO 17, 18, 19 percent is based on ideas only, and that is probably not going so much. It’s hard because you would have to spend all this money and all compliance and that probably is turning many people off.
I mean, that’s OK, it’s turning projects off, which you know we have good products or any good idea and I think that just means that the market is getting older and it’s good sense is just throwing up.
Yes. Correct. I mean one should never forget that the most 30 is not only responsible they don’t have to be accountable, but obviously as in the European Union, obviously they cannot just invent for every one of them, didn’t do the next step of the process is not knocking on the door and say: “what’s going on?”. Plus, as we know, anyway, it is like many other small countries under constant scrutiny and they want to be the leader of that. Without understanding the community they think wealth is that is the most fruitful and that’s before starting. You just have to put more effort into it and then you as you see, I think.
I think for such small countries, let’s say like Malta or Liechtenstein, recently offshore jurisdiction, is right now competing to get a better regulation. But it’s always hard to find a balance between client slews, legal regulation and the requirements of the European Union, anyway requirements of investors protection, so they cannot say you can do whatever you want. Well is the approach that qualification, that will be already falsification of the token will be already enacted in November. Just to sum it up.
Yes, that is somewhat clear. I mean at least it is clear, this whatever comes out in the words of sorry in the Financial Instrument Test, whatever it is not clear then what if this fundamentalism enters you as a financial instrument. It’s not clear what you can do now and then. So you would probably have to get a license to tokenize whatever your token is. I can only see that those misfit license companies, for example, broken locks or exchanges. Companies are allowed to, for example, create their own derivatives. Those are the people you would have to talk to them and get a product from them, regulated through them and then tokenize it somehow. We have a few clients who are missing regulators and I spoke to them and they were thinking about this already. From what I can tell already thinking about how to market, for example, a financial instrument as a token but there’s. Only you can say for sure when you have a financial instrument, you’re out of the scope of the new Act and then you have to think of something else.
Okay, I see. A lot of brokers which exchange now in Malta. So what would you say is the main reason why they are so many, including Binance?
According to Binance, I think it is coming over on the 1st of October and we and I mean that comes to an end right now. We have massive exchanges in our client base. I think generally our growth, our corporations I mean that they are used to record things, they used to comprise the regions and they are actually actively seeking that type of strict regulation. I think anybody less strict approach would not give them the same credibility and the second obviously it is speaking country, from a very practical point of view. And I’m not sure how that maybe this process has driven with the announcement of Binance. It created a lot of trust for them to work, to come to Malta as well. So I think that would be like the main three criteria and other points include this obviously had it as it is good, if you want, you can maybe find the people, goods and the 360-degree regulations, of course, including the Blockchain regulation is something that they see. And in small countries where they do that they have something or they have more power to say something, so it is probably better for them.
Yeah, absolutely that it is one of the advantages because it’s small and it’s easier for larger enterprises which already have an international name to talk with the governments and to agree on conditions. What is about the exchanges? How long does it take for them and what is the just general procedure if some project , some of our audience would like a security token?
The security token is no proper solution that I know. So those are the license on it and issued on this for example. Collaborate with the license broker or exchange and obviously, this is the future collaboration with the stock exchange for one of the two where they went through with Binance and they want to stop this thing. I think they’re going to try to do media. IPO always for the security token. We met with a stock exchange some weeks ago. This was before Binance announced, so they have this thing planned and it’s got everything. But nothing is really set yet. So they don’t have anything concrete or timetable or anything, they just know that they want to do it. I think the next big step for anyone who commits to anything would be coming into force, is to get the people getting the licenses and then they would think about that other neighborhoods in a more concrete manner.
I think maybe these Acts will be enacted in November or maybe it’s going to take another couple of months to get total licenses may be the beginning of the next year it will be very possible to lease security tokens on Malta.
Yes, I think with the coming into force and attrition with every day passing does more and more people come in. More people find trying things out. So I think there will be a steady movement and steady improvement in those things and the number of options will increase. Currently, however, there’s so much happening at the same time, I think everyone has to go a little bit back and take a little bit of breath, wait for the door to come into force and then see what the regulator will allow.
I think basically just have access to how it will be implemented you can’t really know how every single word in this Act will be interpreted by other people, how it will be into practice. I think it was just gleefully discussing more or less everything with me into the act of the regulation. Why do exchanges choose Malta? that’s currently there is nothing be certain with exchanges would start the security token, but it is probably going to happen, somebody else already.
You know, I think it is also my madness. I think the regulation is created a lot as it was first when they announced the Acts or when they announced that they are actually doing it and then the Acts came out and the Acts are very vague and are very specific in this sound. Then they actually came out of the proposed regulation, the first one was for ICOs. This is 23 pages and it is all “Wow, this is really amazing”. I think three weeks ago the proposed regulation of the rights came out of the pages. This is how I read the piece was like “ Oh my God, what is actually happening”. So I guess the regulation is strict. There’s a lot, but again, there’s a lot to lose and obviously if you want to be taken seriously, I mean, if you want to be on one level with a bank or a stockbroker, you have to follow serious rules. And likewise people, some people are complaining that this is not for everyone or this is bad for some people, the good excuse of some entrepreneurs. But then again, I think what everyone is supposed to get a banking license or whatever stock broker license or insurance license, so, if they want to be on one level or even take those traditional things, on traditional institutions, then they have to be at least equally regulated. It’s in a business account. I would say a hundred times it is riskier than the normal institutions of finance, so therefore that’s why it has set up such as strict rules.
I understand it’s because you have to protect investors and you still have to protect your own market from fraudulent projects. We do not have any serious project and I do not have any serious aim behind. Absolutely. And I also think that is a few quite costly and therefore projects which are already grown up enough. I mean sometimes I see also from our clients it objects in Estonia or Singapore which is also a good jurisdiction or some of them start on the Cayman Islands with fewer costs, but then if everything goes well anyway they have to change the jurisdiction for proper ICO and token or even free world large serious investors. They just have to change its jurisdiction to the one which gives investors more protection.
Yes, and you know because everyone’s complaining about the other side. Those types of regulations and the things in terms of strictness would create obviously much more confidence for banks to take the business on. You always get what you are, what you want and if you complain about banks taking the business with them, then you shouldn’t complain about the strict regulations and again, even in that aspect, it makes sense for the regulator to respect because of the banks. Hopefully, if something has this name, hopefully, is willing to take this business on because it’s heavily regulated in some parts, even more, strict than it should. So no fear, come forward, please, and accept business.
And as you mentioned actually banks. We’ve already discussed lines in general something that Malta works with Blockchain projects because no one ever achieved. It’s quite an issue for every Blockchain project to find a bank all over the world, which is going to accept that. What are the main requirements do the ICO or exchanges? Do they have to do proper ICO? I guess.
Yes, that is given. I mean that is anyway a request by the regulator. There are no many banks for that, it depends on finance. So it is obviously a big cost to audit you. There was a process. They are happy to take the business on and quite flexible in their approach. However, on the same side in the current proposed regulation, as I understand it, more they don’t want you to be custodians of the business, so they’re trying to demise the financial institutions not only credit institutions. Banking, I think, is the biggest practical challenge there, but with revenues coming towards.
Well, I think with pretty much this broadcast, everything just to give our audience a short overview what’s Malta regulation is, about setting up things, about exchanges. I would like to thank you a lot for your time. I hope to see you one day in Liechtenstein or Switzerland or maybe we would come to Malta to explore the crypto island.