MFSA launched Consultation Paper on Security Token Offerings

Malta Financial Services Authority seeking to close the gap between traditional STOs and technology enabled STOs.

Dr. Priscilla Mifsud Parker | Published on 22 Jul 2019

Security Token Offering STO

On 19 July 2019, the Malta Financial Services Authority (MFSA) launched its Consultation Paper on Security Token Offerings (STO). Chetcuti Cauchi Advocates welcomes this policy which provides clarity to this nascent industry and will be providing its feedback to the Authority as an interested stakeholder.  

The MFSA notes: ‘Following the launch of the MFSA’s Fintech Strategy and Virtual Financial Assets Framework in 2018, and as part of its Capital Markets Strategy, the Authority is seeking to bridge the gap between traditional securities offering and technology-enabled securities offering and trading. The objective of the Consultation Paper is for the Authority to obtain stakeholders’ views on a policy which, whilst supporting innovation and new technologies for financial services, does not compromise investor protection, financial integrity and financial stability’ 

MFSA Consultation Paper on STO 

The Consultation Paper addresses the following six sections:  

1. Defining Security Tokens 

The Fintech industry is characterised by its use of buzzwords which are often used interchangeably to refer to different matters. Issuers of an asset which is based, or which utilises distributed ledger technology (DLT) shall need to undertake the Financial Instruments Test. If a particular DLT asset is categorised as a security, the Issuer shall need to understand whether it represents a ‘transferable security’ as defined by MiFID II. The MFSA is proposing to further distinguish transferable securities into those which bear similar characteristics to non-technology enabled transferable securities, hereafter known as ‘Traditional STOs’, and those which have properties akin to traditional shares and bonds, hereafter referred to as ‘Other STOs’. 

2. Applications for approval of prospectuses and/or admissibility to listing and trading of Traditional STOs 

The MFSA noted that in order to guarantee legal certainty as to the nature of the security, it may require the sponsor or the applicant to provide a legal opinion confirming whether the security qualifies as a Traditional STO. The Authority is also proposing a number of changes to the Companies Act in order to enable dematerialisation of securities using DLT. A three-pillar assessment on the applicant’s financial soundness, corporate governance, and compliance with Transparency requirements is also being proposed.  

3. Transparency Requirements 

The MFSA is proposing that an annual Type 2 systems audit as set out in Section 2 of Chapter 01, titled ‘Systems Auditor Role’ Part A of the Systems Auditor Guidelines issued by the MDIA should be carried out. It is also proposing to limit the operations of companies operating their own DLT to companies offering Traditional STOs to the public, without seeking listing and/or trading of such traditional STOs on trading venues.  

4. Secondary Markets 

Having regard to the potential problems which could arise through the use of permission-less decentralised exchanges in terms of ensuring compliance with the transaction reporting requirements contained in MiFIR, the Authority seeks to understand stakeholder’s position on the matter. The MFSA is proposing that Traditional STOs should be traded on either a centralised exchange via investment firms (with the possibility of investment firms granting direct electronic access) or on a decentralised exchange with investment firms granting Direct Electronic Access (DEA). 

The Authority is also seeking guidance from stakeholders on whether a centralised trading platform or a decentralised but permission-based trading platform (hybrid) is a workable solution.  

5. Market Abuse Regulation 

Market abuse is deemed to be a hinderance to market integrity and is prohibited in terms of the Market Abuse Regulation which prohibits insider dealing, unlawful disclosure of inside information and market manipulation. The Authority is seeking to understand the impact of the MAR regulation on decentralised exchanges which seem to create a number of issues in terms of transaction reporting.  

The Authority is proposing that Traditional STOs should only be traded on centralised exchanges since permissioned systems allow for enhanced investor protection. 

6. Post-trade settlement 

The Central Securities Depositary Regulation (CSDR) creates various obligations with respect to the post-trading settlement, including the obligation of shifting book-keeping obligations to a licensed Central Securities Depositary (CSD) where the security is being traded on a secondary market. The Authority is seeking the opinion of the industry with respect to the application of DLT vis-à-vis adherence to CSDR.  

Get in Touch 

Interested in launching your STO? Our legal advisors have ample experience assisting clients with their private offerings for experienced investors, as well as with the drafting of prospectuses for public offerings. Drawing on our traditional financial knowledge, our team brings together the perfect blend of expertise which allows us to service highly innovative and complex businesses seeking to raise funds.  

We are also licensed VFA Agents and would be able to assist you with your ICO launches, as well as the licensing of cryptocurrency exchange and VFA exchanges.  


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Dr Priscilla Mifsud Parker

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