Malta has quickly risen to prominence in the global crypto industry following the passage of three groundbreaking blockchain legislation bills which are set to come into effect this November. As a result, all eyes are on the small island country to see what effects the legislation will have on the industry.
Coinlaw recently spoke to Dr Ian Gauci – a key advisor to the Maltese government, MFSA and MDIA who played a major role in role in shaping the policy and the legislation – to tease out the thinking behind the new laws. We also wanted to ask him how Malta is succeeding in punching above its weight when it comes to regulating the blockchain sector.
Dr Gauci is a partner at GTG Advocates with a keen interest in technology, blockchain, DLT, robolaw, big data, AI, fintech and regtech. He is also a lecturer at the University of Malta, a co-founder of the Blockchain Malta Association and a legal expert for the National Blockchain Strategic Task Force within the Office of the Prime Minister.
So far things look very positive and Malta is abuzz with blockchain companies seeking to take advantage of the clarity provided by the new laws.
How did you first get involved with blockchain?
I started with Blockchain four years ago, I used to teach electronic communications at university, so I was a technology lawyer. When I started reading about blockchain, to be honest, I did not understand everything, but it intrigued me. I started realizing, that to a certain extent, this could radically change the very fabric of our society.
I started attending the first conferences and then I started reading more about bitcoin – because the first workable model of a blockchain owes its existence to bitcoin. Both of them are empowering machines, whether people out there like it or not. So I started, more than just reading and understanding, to actually build my own positions on them, build my own opinions.
I was lucky because at that time there were people wanted to do something on blockchain. It was a niche technology and they saw it as an empowering tool for the individual.
Where did you feel that groundswell of interest was coming from? Lawyers? Technologists? Politicians?
I would say that it was a combination of people, there were people like Steve Tendon and Dr Abdalla Kablan who were some of the first people here to advocate blockchain, as well as lawyers like myself and Max Ganado. I think the government’s predisposition was to be attentive and take an active part in driving and developing this legislation which was one of the first of its kind for Distributed Ledger Technology (DLT) and cryptocurrency.
You were a co-founder of the Blockchain Malta Association, how did you envision it developing?
Yes, it was started by me, along with Steve Tendon, Chris Vassallo, Max Ganado, Leonard Bonello, Loui Mercieca, Patrick Young and Leon Siegmund… I hope I didn’t forget anyone. It was our intent to develop a centrifuge of knowledge, not only about blockchain and cryptocurrencies but also about their practical applications – to build knowledge across a lot of verticals and to connect with associations abroad.
As we speak we are building the committee and lining up certain procedures, but the problem is that everyone is very busy because all the people are also advising the government and different authorities, so right now that is the main problem, which is compounded by the fact that we are invited a lot to participate in different events both locally and abroad.
It’s moving very fast, isn’t it?
Yes, it is a little bit. For lack of better words, I would say it’s overwhelming!
It seems like the Financial Services Authority was also a key force behind the push to regulate, is it because Malta is a smaller place that it’s easier to build relationships with regulators and get things done more quickly?
I think the culture here was a little bit different. Let’s go back a bit… when I used to advise on communications, I was one of the first lawyers and we built the Malta Communications Authority. At that time it was easier to build a framework because there were clear directives, so we had to line up our legislation with those existing directives. But the bulk of the work was already done by the directives, so it was more of a question of studying the directive and trying to see how that it should be adopted in the local market.
This time was a little bit different, we had no directives, we have an intersection of technology with law and well as with different financial services, so it was a very interesting intersection that we were facing. So even here, trying to come up with a coherent institutional framework, I think it was harder. The connection arose because I used to speak a lot on these topics, I still have a very big passion, so that’s why I was chosen to be the legal expert on the blockchain taskforce.
So at that point, there was already an intention to develop a framework, not only for cryptocurrencies but also for smart contracts that would empower the individual. Because if you really believe in decentralization, then the individual needs to be empowered, he needs to be sovereign in the choices he makes. So the environment of blockchain needs to be safe and able to truly empower the user, otherwise, he is not sovereign.
So that was our intent, and then we started taking different people from different industries and other lawyers as well, for example, Max Ganado, who I respect a lot, and who was the lead drafter of the laws, as well as Dr Abdalla Kablan, Professor Gordon Pace and Dr Joshua Ellul. I think we had a fantastic team, but not only that, the whole process was very inclusive, all the industries had input and we started gathering information from every possible angle. That is how you… not only learn but how you apply what you learn in a coherent way to start building a concrete framework.
What were some of the first things that started falling into place and what were the key aspects you wanted the legislation to include?
Let me concentrate on three things. With cryptocurrencies and financial assets, we realized that there were instances where these were not utility tokens and also instances where these are not securities and not financial instruments.
We realized there were abuses because when you saw ICOs in the market, there was a real onus on the investors. We were worried that this could impinge on the foundational elements of blockchain, because if somebody got burnt, particularity investors, they would say “blockchain was not a good technology, so we’d rather not use it at all”.
So if we really believe that DLT is foundational, that it has regenerative elements, transformative elements, and disruptive elements that could radically shape our society, we needed to make sure that we could protect that particular remit. We wanted to craft something specific, to regulate for something that is not catered for – and that is the virtual financial instrument.
Point two was that when you look at all of these things like DLT, like blockchain and cryptocurrencies, it is essentially just code. So we simply said “what is the issue here? Do we really need to regulate?” Because with regulations there comes other repercussions, so you need to pay attention to how and why you legislate to make sure that you avoid regulatory capture.
From that point, we started thinking about having voluntary certification measures, that were technology neutral, because in the future it may not be DLT but it might be artificial intelligence technology. So we wanted to create a certification mechanism, that would put in place auditors who could do this particular job.
We are coming into a world where technology is so pervasive that even a kid can code and the effects of that code can be not only disruptive but they can have dire repercussions. With technology becoming so personal and so pervasive, we are anticipating that in the future even coders, or companies that employ coders, will need to be licensed.
And then the third element was about smart contracts. The definition of smart contracts is quite fluid, but in many ways, a smart contract is just agreeing on a process without consideration of the parties involved. Then there is the element of evidence as well because if something happens you need to the same procedure for evidence that you have in court with a normal contract.
So there we said listen… we think we need to intervene, because this might be the future, and that could possibly lead to technology arrangements like DLT having a legal personhood. This gets very interesting because when you have legal personhood you have to cater for the element of liability from all possible angles.
Are these ruled still being hammered out or is their guidance in the legislation?
The strategy we adopted was to lay out the principals and the framework in the legislation. Then we’re are going to amplify those principals because we know for a fact that as soon as you roll them out and start experiencing the market first-hand we will need to intervene because it’s moving at such a fast pace. To a certain extent law on its own can never fully cater to this industry, the law will need to adjust. We need to make the technology safe and then technology will regulate itself.
From a law practice side, is your firm getting approached by companies seeking advice in this area, what in particular are they asking you about?
I can tell you right now there are a lot of questions. We have clients that want to establish themselves here, and even abroad, because we also advise clients who do not necessarily operate from Malta or through Malta. We are seeing a lot of interest, particularly from wallet providers, exchanges and ICOs. We also seem to have lots of people interested in having their technology certified by an authority.
I would say that by November, everything will be out and will be fully operational in Malta. I think we will have more requests, but it is going to be a harder job as well because you are putting all your principals into practice and then we will see if what we catered for is adequate or not.
Do you have an idea of how many entities are applying for these licenses?
Well, let’s concentrate on the Malta Financial Services Authority. Any activity related to a virtual financial asset, something that is not a security, not a financial instrument, and not a utility token, will need to be regulated. This regulation could come in the form of licensing or it could come as registration. An ICO, for example, will not have a license, but they will need to register their whitepaper and get it approved.
To do this we will need to appoint Virtual Financial Agents, who are responsible for making sure the licensing is written correctly. This way the authority can rely on somebody who is licensed so that they are not overburdened with the licensing procedure.
Looking ahead what would you hope the landscape in Malta will look like in five years time, what other processes will need to be put in place to help.
The only thing I can tell you is that the ministry was very forthcoming and the Prime Minister, together with Junior Minister Silvio Schembri, where pivotal in this. They saw potential and we are doing this for a very clear objective – we want innovation to prosper and we want to be there.
Because we are a small country we have always been at the forefront of gaming and maritime law because the only thing we have here is human capital. So I think that our main attention is on innovation. When you innovate you evolve as a country and as a society. So I would say, with that in mind, that I am very, very sanguine we have the right elements to take this forward and we know that there will be issues that will need to be retouched, we know there are risks, but it’s normal.
So are you finding yourself in demand with a growing industry in Malta?
I hate to say “in demand”, but yes, I’ve received an invitation from Uruguay to speak at the first blockchain conference in there. I’ve had similar invites from Portugal, Frankfurt and Amsterdam as well as from the Silicon Valley and Istanbul. It’s overwhelming, in a good sense, but you feel gratified that after all that work someone is acknowledging you.
So what you would you like to see changed by blockchain technology over the next few years?
I’m going to answer you from a purist point of view, which I am not, but we are saying that blockchain and DLT is an empowering machine – what I don’t want to see is this push about “public is good” and “private is bad” or “hybrid is bad” and so on. I think we should let the market dictate, similar to what happened with the internet, because at the end of the day it is the individual who will determine where the market will go, so I think that is the most democratic way.