Malta is the Most Promising Blockchain-Friendly Jurisdiction

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This article was written by Marlene Ronstedt, a writer and journalist that is currently working for Neufund as a blockchain reporter, and André Eggert, a partner at the law firm of LACORE LLP and the legal architect of Neufund.org, a platform for primary offerings of tokenized equity. They explain why Malta is the most promising blockchain-friendly jurisdiction.

Among the handful of blockchain-friendly jurisdictions around the globe, Malta stands out with perhaps the most forward-thinking regulatory agenda.

In a testament to its success, the European island state has attracted a couple dozen blockchain businesses, such as the crypto exchange Binance and our company, the equity fundraising platform Neufund. A recent study from Morgan Stanley shows that Malta has established itself as the No. 1 spot for crypto trading.

Malta has achieved this in part by removing regulatory uncertainty. Also, in contrast to other jurisdictions, Maltese legislators understand that blockchain is much more than just cryptocurrencies. And Malta is not simply being lenient to attract business, which could be said of Zug, Switzerland – whose loose interpretation of what constitutes a non-profit attracted many crypto companies, which fundraised in the name of the social good to skirt U.S. securities law.

Instead, Malta is writing laws for tomorrow’s economy rather than trying to impose yesterday’s rules upon it. Consider the unprecedented way it is legally recognizing smart contracts and DAOs.

Malta created a legal framework earlier this year which defines DAOs (Decentralized Autonomous Organizations) as a new type of legal entity called “Technology Arrangements.” Next to the newly passed Technology Arrangement Bill and the Virtual Currencies Bill there will be also a new regulatory body: the Digital Innovation Authority (MDIA). Because why should the MFSA (the Maltese equivalent of the U.S. Securities and Exchange Commission) oversee blockchain businesses if new competencies are needed?

Instead of giving out licenses, requirements for which were established decades ago, the MDIA will audit the code of smart contracts. And in some cases, the MDIA will determine whether a business is eligible to obtain a license or not solely on the basis of code.

It is also the MDIA which will be in charge of auditing the code of DAOs and granting them the title of a “Technology Arrangement.” One can think of a Technology Arrangement as something similar to a limited company. It is a legal architecture that grants a DAO rights and duties just as a registered company would. The major difference, however, is that a DAO runs without managerial supervision.

Such a legal arrangement has never existed before and thus sparks a lot of open questions. “The task wasn’t just limited to creating an artificial legal personality, we also had to analyse how the technology has come about and predict how it might evolve,” said Maltese fintech entrepreneur and blockchain expert Abdalla Kablan who has been advising the government and wrote parts of the legislation. He added:

“The idea was to get the public to become aware and understand that it may be beneficial to society as a whole to recognize that a technology arrangement could indeed operate better and more safely if it had a legal personality allowing it to take into consideration all the rights and remedies in case of financial or even ‘physical’ harm, to all those around it.”

Whether a business can get licensed by the MDIA is determined through the “financial service test.” The test looks at whether a financial product or business falls under the European MIFID framework. If not, then the MDIA is in charge of licensing a business and auditing code. The code is audited by external parties to avoid bottlenecks since the country is expecting an influx of businesses applying for licenses with the MDIA.

Rights for robots

Beyond the crypto community, the law has some staggering implications for society: A scenario in which autonomous robots can potentially operate as legal personas.

Consider this: A DAO can do the same things a corporation can, but instead of shareholder resolutions or management actions, the decisions are made and executed by artificial intelligence and smart contracts.

Under the proposed statute, a Maltese DAO incorporated as a Technology Arrangement could, for example, buy real estate in another EU country, just like any other legal person. Furthermore, the DAO could tokenize some of its ownership as securities and sell them on decentralized exchanges to other DAOs, companies or investors made out of flesh and blood.

Suddenly, we would have a world where humans and software are both legal entities.

The moment the law was being enacted in June, a Maltese DAO could legally acquire land in all other 27 EU member states. Due to an EU treaty, member states are obliged to acknowledge the existence of legal entities or legal persons from other member states.

Meaning, for example, that Germany or France cannot forbid robots, AI, or software to grab some prime real estate or close any other business deal. Additionally, the Union cannot just wipe out legal personas from its member states.

A model for the EU

Stepping back, the European Union does not currently have a specific legal framework governing blockchain-related activities, but European regulators are inclined to get an EU-wide regulation out.

Malta’s sandbox serves as an example for these regulators in Europe and the rest of the world. The result of this adventure will most likely influence the decisions of EU lawmakers.

This raises an interesting question, however: Would Malta retain its status as the “blockchain island” once Brussels has adopted similar policies?

Definitely, we think. Beyond the law, the country is working on creating an entire blockchain ecosystem. This includes new programs and departments at universities, as well as co-working spaces aimed at blockchain companies.

The country is also thinking about reforming the banking sector to push for more crypto friendly banks for founders. Those moves cannot be easily copied by other regulators since such an ecosystem grows naturally and is more sustainable.

“Even the bravest projects, tech-related or not, require the right environment to grow bigger and stronger and we are determined to offer that environment in Malta,” said Silvio Schembri, the Maltese Junior Minister for Financial Services, Digital Economy and Innovation.

In conclusion, compared to other countries, Malta has solidly established itself as a blockchain hub (view this map in order to see and follow the status of other crypto-friendly jurisdictions around the world). But with its bold moves, Malta is kicking off an urgently needed European debate about how new technologies should be regulated.

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