The Responsibilities Of The Virtual Financial Assets Agent

As of the 1st of November 2018, the three (3) pieces of Maltese legislation which crystallise and regulate the digital economy law in Malta, namely the Malta Digital Innovation Authority Act (the “MDIA Act”); Innovative Technology Arrangements and Service Act (the “TAS Act”); The Virtual Financial Assets Act (the “VFA Act”), become effective.

An important key functionary which emanates from the VFA Act is the Virtual Financial Assets Agent (the “VFA Agent”). Its role is indispensable for an interested applicant who wishes to conduct an Initial Coin Offering (ICO) or offer a VFA service. The VFA Act requires, amongst other things, the appointment of a VFA Agent in order to submit an application to the Malta Financial Services Authority (the “MFSA”) on behalf of an interested applicant desirous to obtain a licence in order to carry out an ICO or conduct a VFA service, in or from Malta.

The responsibilities and liabilities faced by a VFA Agent are rigorous and a proper risk assessment should be carried out before offering such service. In order to assist and guide VFA Agents, the MFSA published its first chapter out of three (3) chapters of the Virtual Financial Assets Rulebook, entitled Virtual Financial Assets Rules for VFA Agents. Such chapter is applicable to VFA Agents appointed in terms of the VFA Act and to applicants seeking registration as VFA Agents thereunder.

Any person who is providing the services of a VFA agent within the meaning found under the VFA Act, shall, within one (1) month from the date of coming into force of the VFA Act i.e. 1st of November 2018, apply to the MFSA for registration

1. High Level Principles

To begin with, the VFA Agent is obliged to abide by certain high-level principles. VFA Agents must act in an ethical manner and in the best interest of Malta, taking into consideration investor protection, market integrity and financial soundness in carrying out their activity. Moreover, VFA Agents must act honestly, fairly and professionally and must comply with, the relevant provisions of the VFA Act, the regulations issued thereunder, and the rules published by the MFSA, as well as with other relevant legal and regulatory requirements. VFA Agents are obliged to co-operate with the MFSA in an open and honest manner and must provide the Authority with any information it may require.

2. Substantive Responsibilities

In the context of an issuer wishing to conduct an ICO, the VFA Act identifies certain key functions and substantive responsibilities which are expected from a VFA Agent, namely:

a). advise and guide the issuer as to its responsibilities and obligations to ensure compliance with the provisions of the VFA Act and of any rules or regulations issued thereunder;
b). receive and retain all documentation and information to demonstrate how, and to what extent, the issuer has, in the VFA agent’s opinion, satisfied the requirements as prescribed in the provisions of the VFA Act and of any rules or regulations issued thereunder, including inter alia how the issuer is considered to be a fit and proper person and to demonstrate how the issuer has complied and, as far as it can determine, will comply with its continuing obligations under the VFA Act;
c). advise and guide the issuer as to its responsibilities and obligations to ensure compliance with the provisions of the VFA Act and of any rules or regulations issued thereunder;
d). advise and guide the issuer on all matters relating to the admission of the issuer’s virtual financial assets to trading on a Distributed Ledger Technology (DLT) exchange and their ongoing trading thereon, and submit all documentation and information in relation thereto;
e). submit to the MFSA all required information and documentation in terms of the VFA Act and of any regulations made or rules issued thereunder in a timely manner;
f). disclose to the MFSA without delay any information or explanations that the MFSA may reasonably require for the purpose of verifying any information which should be taken into account in considering an application for registration of a whitepaper;
g). not be an employee or otherwise engaged with the issuer in a manner which prohibits him from exercising independent professional judgement and for the avoidance of doubt, persons connected to the VFA agent shall not be considered as prohibited from exercising independent professional judgement only because other persons in the same organization or activity, including their partners or employees, have been simultaneously engaged to provide legal advice or financial or consultancy or accounting or administrative support services to an issuer;
h). act as liaison between the issuer and the MFSA on all matters arising in connection with the registration of the whitepaper or the trading of the issuer’s virtual financial assets on a DLT exchange;
i). advise the MFSA in writing without delay of its resignation, its intention to surrender its registration or if its appointment is terminated giving details of any relevant facts or circumstances thereto;
j). review and submit to the MFSA on behalf of the administrators of an issuer on an annual basis a certificate of compliance;
k). be considered as a subject person in terms of Anti-Money Laundering regulation;
l). comply with any other conditions as the MFSA may require or as may be prescribed.

3. On-going Obligations

An important note to mention is that the obligations of a VFA Agent are not time-barred and such are on-going, thus making VFA’s agent role even more arduous. The VFA Agent must at all times have adequate business organisation, systems, experience and expertise to act as VFA Agent and must take reasonable steps to ensure continuity and regularity in the performance of the services of a VFA Agent. In order to ensure the aforementioned obligations, the VFA Agent must employ appropriate and proportionate systems, resources and procedures. Furthermore, the VFA Agent must maintain sufficient records to be able to demonstrate compliance with its obligations. It is naturally expected that, the VFA Agent will co-operate fully with any inspection or other enquiry, or compliance testing carried out by the MFSA, or an inspector acting on its behalf.

With respect, to the procedural and administrative aspect to the VFA Agent, the VFA Agent is required to establish, implement and maintain decision-making procedures and organisational structure which clearly specifies the reporting lines and allocates functions and responsibilities. Furthermore, the VFA Agent must establish, implement and maintain effective internal reporting and communication of information at all relevant levels of the VFA Agent and maintain adequate and orderly records of its business and internal organisation.

The VFA Agent is also expected to establish, implement and maintain:

i. systems and procedures that are adequate to safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question;
ii. an adequate business continuity process. The business continuity policy must be aimed at ensuring, in the case of an interruption to its systems and procedures, the preservation of essential data and functions, or, where that is not possible, the timely recovery of such data and functions;
iii. accounting policies and procedures that enable it to deliver in a timely manner to the MFSA upon request, financial reports which reflect a true and fair view of its financial position and which comply with all applicable accounting standards and rules; and
iv. Due diligence systems and controls in order to enable it to conduct fitness and properness assessments on clients.

In general, the VFA Agent must monitor and, on a regular basis evaluate, the adequacy and effectiveness of its systems, internal control mechanisms and arrangements established in accordance with this sub-section and take appropriate measures to address any deficiencies.

Where applicable, the VFA Agent is expected to have an adequate professional indemnity insurance cover.

4. Conduct of Business Obligations

VFA Agents are required to adopt appropriate and transparent reporting lines within its organisation in order to ensure that issues involving risks of non-compliance with conflicts of interest rules are given the necessary priority. Furthermore, the VFA Agent must establish, implement and maintain effective organisational and administrative arrangements appropriate to the size and organisation of the VFA Agent and the nature, scale and complexity of its business, to prevent conflicts of interest from adversely affecting the interests of its Clients. Moreover, a VFA Agent must keep and regularly update a record of the situations or service carried out by or on behalf of the VFA Agent in which a conflict of interest entailing a risk of damage to the interests of one or more Clients has arisen or, in the case of an ongoing service, may arise.

The VFA Agent is also required to draw up and implement conflict of interest policies as well as remuneration policies.

5. Administrative Penalties and Sanctions

A VFA Agent shall at all times observe the rules published by the MFSA which are applicable to it, as well as all the relative requirements which emanate from the VFA Act and regulations issued thereunder. In terms of the VFA Act, the MFSA has various sanctioning powers which may be used against a VFA Agent which does not comply with its regulatory obligations. Such powers include the right to impose administrative penalties.

To find out more, please contact Dr. Christian Farrugia

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