Banking & Finance
Fintech in Malta – Q&As
Authors: Dr. Andrew J. Zammit, Dr. Kurt Hyzler and Mr. Josef Cardona
What are the sources of payments law in your jurisdiction?
In terms of Maltese law, payment services may be provided in and from Malta by:
- Credit institutions which are licensed by the Malta Financial Services Authority (“MFSA”) in terms of the Banking Act, Chapter 371 of the Laws of Malta; and/or
- Financial institutions which are licensed by the MFSA in terms of the Financial Institutions Act, Chapter 376 of the Laws of Malta.
In addition to these principal laws, there are several regulations and directives issued by the MFSA which regulate the provision of payment services in and from Malta. It is also relevant to note that in terms of article 34A(1) of the Central Bank of Malta Act (Chapter 204 of the Laws of Malta), the Central Bank of Malta is empowered to make directives in respect of, inter alia, the provision and use of payments services and of payment systems. In virtue of these powers the Central Bank of Malta has issued the following directives of specific relevance to payment services: Directive No. 1 which relates to the provision and use of payment services and Directive No. 13 which regulates the approval of payment systems
Can payment services be provided by non-banks, and if so on what conditions?
Yes- the Financial Institutions Act effectively implements the Payment Services Directive (as updated by PDS2) and the E-Money Directive, so any entities obtaining licensing under the provisions of this law may effectively provide payment services.
The main difference between a credit institution (bank) and a financial institution is essentially that whilst a bank may take deposits and apply those deposits by granting loans, a financial institution cannot apply any client funds (say on an e-wallet) towards its commercial activities.
What are the most popular payment methods and payment instruments in your jurisdiction?
While the MFSA has licensed entities providing a plethora of diverse payment models and payment instruments, the most popular payment methods and payment instruments in Malta are traditional payment methods in the form of cash and cheques, with bank transfers and credit/ debit cards gaining a larger share of transaction volumes each year. At the time of writing (August 2018) the Central Bank of Malta has begun an exercise to facilitate credit and debit card payments and to reduce the volume of cash transactions.
Data / open banking
What is the status of open banking in your jurisdiction (i.e. access to banks’ transaction data and push-payment functionality by third party service providers)? Is it mandated by law, if so to which entities, and what is state of implementation in practice?
The Central Bank of Malta’s Directive No. 1 which relates to the provision and use of payment services served to transpose the main provisions of PSD2 into Maltese law and pave the way for open banking. One of the main objectives of PSD2 is to regulate Third Party Providers (TPPs), new market players (mostly technology service providers) which have been classified as Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs). AISPs provide a consenting client with an aggregated view of all the client’s payment accounts held with different banks., whilst PISPs are able to initiate a payment on behalf of a consenting client from the client’s payment account held with a particular bank. Additional provisions of the PSD2 will be implemented through various amendments to the Financial Institutions Act which are expected to be implemented by the end of Q3 2018.
Although the regulatory framework exists, we are not aware of any up-take of open banking services in Malta by any TPPs. At the time of writing (August 2018) we understand that several Maltese banks are in the process of finalising their API technologies that will support the open banking infrastructure, however we do not have any reliable indication as to when such technologies will be rolled out by the respective local banks.
How does the regulation of data in your jurisdiction impact on the provision of financial services to consumers and businesses?
With the coming into force of the General Data Protection Regulation (GDPR) (EU) 2016/679 on the 25th May 2018, those entities which provide financial services and process personal data relating to EU residents are subject to stricter rules when processing such data and face stiffer penalties in case of any breach of such rules or failure to correctly handle a data breach. As with any other EU jurisdiction, Malta-based financial services providers and TPPs carry significant responsibilities in respect of their data processing activities.
What are regulators in your jurisdiction doing to encourage innovation in the financial sector? Are there any initiatives such as sandboxes, or special regulatory conditions for fintechs?
The Maltese government and also the MFSA have regularly expressed their intention to be at the forefront of financial innovation. As part of this vision, in July 2018 the Maltese Parliament approved three separate laws intended to form the backbone of a regulatory framework for Distributed Ledger Technologies (DLT) and virtual financial assets.
The Malta Digital Innovation Authority Act provides for the establishment of an Authority which will have the role of granting formal recognition to innovative technology services providers or arrangements, such as smart contracts, by certifying them. This will give users, as well as service providers, the necessary legal certainty regarding their use of a DLT platform.
The Virtual Financial Assets Act (VFAA) aims to regulate the field of Initial Virtual Financial Asset Offerings and Virtual Financial Assets. Essentially, this Act provides the regulatory framework for cryptocurrencies and initial coin offerings (ICOs) and it also caters for the service providers which will be involved in activities related to ICOs. The VFAA will also outline the regulatory regime which will be applicable to cryptocurrency exchanges.
The third piece of legislation, entitled the Innovative Technology Arrangements and Services Act, was promulgated with the intention of providing regulation for the designated innovative technology arrangements referred to in the Act, as well as of designated innovative technology services referred to in the Act, and for the exercise by or on behalf of the Malta Digital Innovation Authority of regulatory functions with regard thereto. The Act introduces the registration of technology service providers and the certification of technology arrangements, such as software and architectures used in designing and delivering DLT, smart contracts as well as concerning system administrators and auditors.
Insofar as fintech and innovative distribution channels for traditional financial services are concerned, the MFSA has also taken a very pro-active approach to accommodate such models, and is in the process of developing a sandbox environment for the testing of such models to foster more innovation.
Do you foresee any imminent risks to the growth of the fintech market in your jurisdiction?
From a macroeconomic perspective, risks could be competition risks from other jurisdictions, who like Malta are willing to invest in the industry. From a microeconomic perspective, the sourcing of talent and banking services for cryptocurrency related services could be major challenges, particularly in an economy which has experienced significant growth over the past eight years and has close to zero unemployment.
What tax incentives exist in your jurisdiction to encourage fintech investment?
Malta does not provide direct tax incentives specifically to fintech operations setting up in Malta. However certain tax incentives exist for expatriate talent relocating to Malta to work in the financial services industry and holding a key executive function within such operation. Persons qualifying for this programme (Highly Qualified Person programme) effectively benefit from a 15% personal income tax rate on their employment income.
Malta also offers corporate tax rebates to non-Malta residents receiving dividends from a Malta company, subject to the satisfaction of various qualifications.
Which areas of fintech are attracting investment in your jurisdiction, and at what level (Series A, Series B etc)?
The fintech industry is still in its infancy and hence most of the investment is sourced from founders and “friends and family” investors, eventually leading to Series A investment. It is rarer that firms establishing in Malta are already at the Series B or C investment stage.
If a fintech entrepreneur was looking for a jurisdiction in which to begin operations, why would it choose yours?
Malta’s track record as a financial centre has developed over the past 25 years and has proven to be a valuable base for start-ups and value-driven business, providing world-class professional services on very competitive terms when compared to other EU financial centres such as Dublin or Luxembourg. Besides, the thrust that has bene made by the Government fo Malta to invest further into more technology and human resources to ensure that regulation is both effective and efficient bodes well for additional growth in this space. It is also relevant to mention other “soft” factors that have driven further investment into Malta such as the Mediterranean climate, a cosmopolitan population, solid IT infrastructure, and excellent education and healthcare facilities.
Access to talent / immigration
Access to talent is often cited as a key issue for fintechs – are there any immigration rules in your jurisdiction which would help or hinder that access, whether in force now or imminently? For instance, are quotas systems/immigration caps in place in your jurisdiction and how are they determined?
The sourcing of the right talent is a challenge in Malta, yet the Authorities have introduced specific programmes to attract talent to Malta. In 2011 Malta introduced specific tax rules (Highly Qualified Persons Rules – HQP) intended to attract top expertise and skill in the financial services, remote gaming and aviation sectors, enabling operators in these sectors to attract and recruit the highest qualified, experienced and senior professionals available globally. Whilst Malta is a premium location to live and work in (regularly voted one of the best and safest places in the world), such highly qualified, experienced and senior personnel may also be entitled to benefit from a favourable Malta tax rate of 15% chargeable on employment income derived from his/her Malta employer.
Senior employees engaged by licensed / recognised operators in the financial services, remote gaming and aviation sectors may benefit from a flat rate of 15% on employment income derived in respect of work or duties carried out in Malta (or in respect of any period spent outside Malta in connection with such work or duties).
If there are gaps in access to talent, are regulators looking to fill these and if so how? How much impact does the fintech industry have on influencing immigration policy in your jurisdiction?
The development of Fintech forms part of Malta’s diversification strategy and currently, the best IT job opportunities are offered within the iGaming industry. Fintech will bring new opportunities to IT and Finance professionals and the major challenge will be to source candidates that are both IT and Finance savvy. Thus, attracting foreign talent is critical. Over the past four years individuals working in the financial services industry increased by over 20% with a sizeable amount of the increase coming directly from foreigners relocating to Malta.
What protections can a fintech use in your jurisdiction to protect its intellectual property?
Malta’s intellectual property law framework provides all of the protections one would expect in an EU jurisdiction, including copyright protection on software, and EU-wide protection for registered Community Trade Marks. Structured protection mechanisms are also widely used, with IP assets being placed in separate bankruptcy-remote vehicles and also source code escrow arrangement to protect software licensees in cases of insolvency of the software owning company.
Cryptocurrencies and blockchain
How are cryptocurrencies treated under the regulatory framework in your jurisdiction?
Cryptocurrencies are regulated under the Virtual Financial Assets Act (VFAA) which will come into force on the 1st October 2018. The VFAA defines a Distributed Ledger Technology (DLT) asset to include virtual tokens, virtual financial assets, electronic money, and financial instruments, that are intrinsically dependent on, or utilise, Distributed Ledger Technology.
Under this law, some key definitions have been provided. A Virtual Token is defined to refer to “a form of digital medium recordation that has no utility, value or application outside of the DLT platform on which it was issued and may only be redeemed for funds on such platform directly by the issuer of such DLT asset”. This definition is also made to exclude electronic money. A Virtual Financial Asset, on the other hand, is defined to refer to “any form of digital medium recordation that is used as a digital medium of exchange, unit of account, or store of value and that is not electronic money, a financial instrument, or a virtual token.”
The Malta Financial Services Authority is introducing a Financial Instrument Test which will serve as the litmus test to determine whether a DLT asset should be classified as (i) a virtual token, or (ii) a traditional financial instrument regulated by the Markets in Financial Instruments Directive (MiFID and MiFID II). It is being proposed that the Test will consist of two stages. The first stage would effectively determine whether a DLT asset qualifies as a Virtual Token. If a negative determination is reached during this first stage, the second stage will determine whether the DLT asset would qualify as a financial instrument under Section C of Annex 1 to MiFID.
Should a negative determination be reached again during this second stage, then the DLT asset would qualify as a Virtual Financial Asset under the VFAA.
These legislative developments, coupled with some other related legislation intended to lay down the foundations for the better regulation of crypto currencies and other DLT assets, mark Malta’s objective of bringing these activities within the regulatory sphere to protect consumers and create a balanced environment for bona fide operators in the space to establish themselves and develop their business models.
How are initial coin offerings treated in your jurisdiction? Do you foresee any change in this over the next 12-24 months?
Certain initial coin offerings (ICOs), and VCs fall within the scope of existing legislation and would therefore be governed by existing EU legislation (such as Markets in Financial Instruments Directive (MiFID and MiFID 2), the Prospectus Directive, the Alternative Investment Fund Managers Directive (AIFMD), and the Financial Instruments Directive and also Maltese national legislation (such as the Investment Services Act and the Financial Institutions Act).
Those ICO offerings that fall outside the scope of such financial legislation would most likely be regulated under the Virtual Financial Assets Act (VFAA) which enables regulations and directives to be issued to better regulate the minimum requirements for the issuing of ICOs based on each coin’s defining features. Coins or tokens can have features of electronic money, payment systems, membership or privilege cards, and/or single- or multiple-use vouchers.
This first step undertaken by the Maltese Government and MFSA paves the way for various new developments in this space over the next 12-24 months.
Are you aware of any live blockchain projects (beyond proof of concept) in your jurisdiction and if so in what areas?
Currently renowned operators, like the crypto-exchanges Binance and Bitbay, are setting up their operations in Malta. At this stage most of the projects being attracted to Malta are targeting the Crypto industry. However, the Innovative Technology Arrangements and Services Act (ITAS Act), has been introduced with the intention of creating a regulatory framework for designated innovative technology arrangements and services, and for the creation of a Malta Digital Innovation Authority to exercise regulatory powers over such arrangements and service operators. In the context of this specific law, it is possible for operators to obtain certification of technology arrangements, such as software and architectures used in designing and delivering DLT and smart contracts.
Whilst we are unable to comment about specific blockchain projects undertaken by operators, there are several initiatives that have been undertaken locally which we expect to be launched in 2018 and 2019.
Artificial Intelligence (AI)
To what extent are you aware of artificial intelligence already being used in the financial sector in your jurisdiction, and do you think regulation will impede or encourage its further use?
At this stage there is no publicly available statistical information with regards to the adoption of AI within the Malta financial sector. We anticipate that with the increased sophistication of AI, there will be some take-up particularly in the areas of regulatory technology (RegTech).
Insurtech is generally thought to be developing but some way behind other areas of fintech such as payments. Is there much insurtech business in your jurisdiction and if so what form does it generally take?
Whilst there is no publicly available information classifying operators according to their technology distribution channels, we are aware of operators that have launched technology platforms aimed at the insurance market, providing user-customised preferences for insurance needs ranging from health and life to travel, home contents and vehicles.
Are there any areas of fintech that are particularly strong in your jurisdiction?
Payment services providers (PSPs) and electronic money institutions (EMIs) are the most common form of fintech models that we see in Malta, both as a firm and as a jurisdiction. These models initially picked up as an offshoot of the significant iGaming industry that has been developed in Malta over the past 20 years and which now includes around 250 – 300 operators.
Fintech vs incumbent
What is the status of collaboration vs disruption in your jurisdiction as between fintechs and incumbent financial institutions?
There has been little or either collaboration or disruption between fintech companies and incumbent financial institutions in Malta to date. There are however some young and dynamic operators that have already created technology infrastructures and business strategies to capitalise on their fintech offering, particularly in investment services and payments. We expect these pioneer operators to disrupt some parts of the investment services and payments market, particularly for financially sophisticated customers between 30 and 50 years old.
To what extent are the banks and other incumbent financial institutions in your jurisdiction carrying out their own fintech development / innovation programmes?
A couple of the local banks have publicly stated that they have set up for e.g. cryptocurrency and blockchain think tanks within their banks. However it appears that the various legacy systems currently in place within such institutions is a principal cause of delays an effective obstacle to the timely adoption of new and sophisticated technologies.
Are there any strong examples of disruption through fintech in your jurisdiction?
A major disruption could be the establishment of what is being tipped as being the world’s first decentralised and community-owned bank. The proposed bank will focus on serving tech and crypto businesses. Users will be able to access their accounts from both mobile phone and desktop web application and use them directly with physical and virtual payment cards issued by the bank. The bank is currently awaiting its Malta banking license and we understand that it is estimated to launch its business activities in the first half of 2019, most likely also issuing its own Equity Token Offering.
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