Security Tokens Offering - Malta issue a Consultation Paper
On 19th July 2019, Malta issued a Consultation Paper on STOs which looks at the application stage, listing and post-trade settlement process. This article highlights the key areas and current MFSA position for consultation with the public. To note that this is still not Law.
Blockchain in Capital Markets
The financial services industry is constantly evolving and the MFSA is assessing how Malta’s capital markets can become more efficient through blockchain. Following last year’s regulations on the ICO market, Malta is now taking another strategic step to regulate a much bigger and sophisticated market related to Security Tokens Offering (“STO”).
The MFSA recognises that, when properly managed, technology can be of benefit to the capital markets through:
Settlement and credit risks mitigation;
Improvement in investors’ engagement with businesses in which they invest;
Development of new security types linking issuers capital needs with investors risks appetite.
Investors protection, market integrity and stability, can be achieved through:
Transferable securities registered on a single register;
Secondary trading taking place on properly registered exchanges;
Certainty of ownership recorded on a properly registered Central Securities Depository which must run the settlement systems to ensure the integrity of the entire system;
Having intermediaries in the distribution of transferable securities to retail investors.
MFSA consultation Paper
The consultation paper issued by the MFSA covers the following:
STO definition by MFSA
The MFSA is distinguishing between the so-called:
Traditional STOs – offer of securities using the Distributed Ledger Technology (“DLT”); and
Other STOs – tokens, the storage and/or transaction execution of which is intrinsically dependent on or utilises DLT.
It is proposed to initially introduce the legal and regulatory framework on the first, whilst considering a sandbox approach on the second.
Approval of Prospectus and/or admissibility to listing and trading of Traditional STOs
The securities issuance application process is quite similar to the existing one adopted by the Maltese Regulator, and in cases where the issue is a public one, it needs to follow existing listing rules, taking into account also EU regulations.
An update will be made in Maltese legislation to allow share registers to be kept on dematerialised DLT ones, without needing to list or trade such tokenised securities on a trading venue.
Directors will be responsible for Cyber-security requirements and appointment of a Systems’ Auditor.
The Prospectus, as applicable, would also need to include information on the:
Risk associated with the technology arrangements;
Investors’ safeguards embedded within any smart contracts being utilised;
Systems audit, cyber-security framework and the IT infrastructure requirements.
There is a need to have only one responsible Central Securities Depository.
Traditional STO Issuers Ongoing Obligations
There are no major changes required.
Secondary Markets for Traditional STOs
Issuers of Traditional STOs might opt to admit the securities for trading on the market.ESMA segregates traditional market models in 3:
Those that have a central order book and/or match orders under other trading models;
Those whose activities are similar to those of brokers/dealers; and
Those that are used to advertise buying and selling interests.
In case of DLT, trading venues can be technically structured to operate and function in 2 different ways, being:
Centralised exchange, whereby transactions are carried out with the assistance of third parties (brokers) and daily operations supervised by a central body (usually Exchange itself); or
Decentralised exchange, whereby transactions are carried out peer-to-peer, with the ledger updated following a consensus, and having tokens held by the users. Such exchange can be either: (a) Permissioned, through which permission must be given to the user to connect to the DLT; or (b) Permission-less, in which such permission is not required.
For Traditional STOs, the MFSA proposal is to only allow Centralised Exchanges and Permissioned Decentralised Exchanges (having intermediaries with a MiFID II license to be the users of the chain and provide direct electronic access for the DLT to their clients).
Post-Trade Settlement of Traditional STOs
Securities Issuers are already obliged to ensure that their securities are represented, initially in book-entry form and then afterwards, possibly in dematerialised form.
For the Traditional STOs, if the DLT does not qualify as a Securities Settlement System under the CSD Regulations, it will still be able to qualify as a Settlement Internaliser. In such a case, other considerations will apply, including the need to:
reconcile the securities in issue;
keep the securities under safe custody, particularly for the management of corporate actions.
In the case of DLT, the CSD is a natural anchor to which the governing law can be attached.
Another less practical option would be for the DLT participants to choose the governing law at the sign-up stage.
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