In this regard, the VFAA provides that a VFA can be “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 (a) electronic money; (b) a financial instrument; or (c) a virtual token.”
The key question that arises is therefore whether a DLT asset falls within the definition of a virtual financial asset, as contemplated by the VFAA. In this connection, article 47 provides that the Malta Financial Services Authority, as the competent authority in terms of the VFAA, “shall introduce a test applicable to issuers, VFA agents and licence holders for the purpose of determining whether a DLT asset qualifies as electronic money, a financial instrument, virtual financial asset or virtual token.” The test referred to in article 47 is known as the ‘financial instrument test’ and is of central importance in order to determine which piece of legislation is relevant to that particular DLT asset.
The financial instrument test represents a two-layered set of mandatory tests set out under the VFAA which determine the regulatory regime to which a DLT asset is subject. The first layer of the test focuses on virtual tokens under the VFAA, and will be referred to herein as the virtual token test; while the second layer of tests focus on the various financial instruments under MiFID, and will be referred to herein as the MiFID tests.
As mentioned, the first layer of the financial instrument test is the virtual tokens test. If, after being subjected to this test, it is determined that a DLT asset qualifies as a virtual token under the VFAA, then it will be out of scope of regulation, since, as stated, virtual tokens fall outside the definition of VFAs under the VFAA. If, on the other hand, a DLT asset does not qualify as a virtual token in terms of the virtual token test, then the asset will be subject to the second layer of tests, being the MiFID tests, in order to determine the appropriate regulatory regime applicable to that particular asset.
In terms of the MiFID tests, a DLT asset will be deemed to be a financial instrument, falling within the scope of MIFID if it qualifies as (a) a transferable security, (b) a money market instrument, (c) a unit is collective investment scheme, (d) a financial derivative, or (e) an emissions allowance under MiFID. If, on the other hand, the DLT asset does not fall within the scope of MiFID since it does not qualify as any one of the above, and is not electronic money, then that asset will qualify as a virtual financial asset, subject to light-touch, principles-based regulation in terms of the VFAA.
It is important to remember that for the sake of transparency the outcomes of the financial instrument test must be confirmed through an external, independent review.