MFSA Issues Feedback Statement To The Consultation Document On Security Token Offering – Corporate/Commercial Law

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Following the issue of the Malta Financial Services
Authority’s (“MFSA”) consultation document on
Security Token Offerings on 19th July 2019 which aimed
to pave the way to legal certainty for Security Token Offerings
(“STOs”) in the Maltese financial markets, the authority
has today issued a feedback statement summarising the responses
which the MFSA received and setting out the authority’s
response and position thereto.

This article shall summarise the authority’s position on the
feedback provided.

Defining STOs

The authority is of the opinion that the definition of
transferable securities in Article 4(1) (44) of MiFID is loosely
defined at EU level and is not harmonised within the laws of the
Member States. Therefore, the MFSA highlighted the need to give
guidance on the interpretation of what constitutes transferable
securities by delving into the three formal requirements that are
needed for an instrument to qualify as such, namely;

  • Transferability;

  • negotiability on the capital markets and

  • the creation of a class of securities.

Limitation of the issuance of STOs to

The MFSA’s approach to limit traditional STOs to companies
remains unchanged after not having received any viable arguments to
the contrary.

Amendments to the Companies Act

The feedback received from the industry has pushed the MFSA to
collaborate with the Malta Business Registry to explore whether any
provisions of the Companies Act require any amendments in order to
clarify whether the registers of members and debenture-holders can
be kept in dematerialised form, using DLT, although the authority
is of the view that this is already possible and that no amendments
are necessary.

Financial Due Diligence Report (FDDR)

The MFSA agrees that the requirement of a FDDR should be the
same for the same type of securities, regardless of whether these
are tokenised or not.

 Corporate Governance Requirements

The additional corporate governance requirements proposed in the
Consultation Document, including the requirement of a systems audit
have been confirmed with most respondents agreeing to such

Prospectus Regulation Requirements

The authority confirms that the Prospectus Regulation and the
relevant Annexes are sufficient in the case of STOs.

Systems Audit

The MFSA had initially proposed that where the company itself
operates the underlying DLT, the company is required to annually
prepare a ‘Systems Audit Role’. In clarifying its new
position, the authority holds that:

1. If the Issuer has an innovative technology arrangement
(“ITA”) in place, or if the Issuer operates a
technological infrastructure which interacts with an ITA in some
way or form (such as a wallet), then a System Auditor must be

2. Where a company will be operating an ITA which underpins the
storage and transactions in securities, a Systems Auditor will need
to be appointed to prepare a Systems Audit Report in line with the
MDIA’s Guidelines.

Furthermore, the authority initially proposed that in cases
where the company also operates an underlying DLT, the company is
required to prepare annually a Type 2 Systems Audit. The MFSA has
now reconsidered its proposal in relation to the requirement of a
Type 2 Systems Audit where the company operates its own native ITA.
Instead, a requirement to appoint and have in place a Systems
Auditor at all times shall apply where the Issuer has an ITA in
place, or if the Issuer operates a technological infrastructure
which interacts with an ITA in some way or

Companies operating DLT

The Authority does not intend to limit offers to the public made
by Issuers operating their own DLT from attaining the necessary
authorisation from the Listing Authority to list their securities
on a secondary market.

Permission-less Decentralised Exchanges 

Although the majority of respondents were of the opinion that
permissionless decentralised exchanges could create difficulties in
ensuring compliance with the transaction reporting requirements
contained in MiFIR, the Authority does not intend to impose an
outright prohibition on decentralised

Trading of Traditional STOs

The authority holds that full disintermediation would not be an
ideal solution and that some level of intermediation is needed.
This is in line with the majority of responses which were in
agreement with the MFSA’s proposal that traditional STOs should
be traded on either a centralised exchange via investment firms or
on a decentralised exchange with investment firms granting DEA.

Centralised or Decentralised but Permission-based Trading

In agreement with the feedback received, the MFSA believes that
both centralised as well as decentralised but permission-based
trading platforms (hybrid platforms) could provide a workable
solution. In view of the fact that the industry remains undecided
on the approach related to centralised vs decentralised exchanges,
the Authority stands by its position expressed in relation to the
MIFID framework and concludes that a case-by-case analysis based on
the proposed business model will be needed.

Transparency/ Transaction Reporting

The majority of respondents agreed that by its nature, the
prevention of financial market abuse is reliant on transaction
reporting. The Authority will examine the best way to exploit the
use of blockchain in its market oversight function in order to
prevent and detect market abuse.

Applicability of the Central Securities Depositary Regulation

A number of respondents believe that the legal requirements set
out in the CSDR are too cumbersome and will halt the application of
DLT. They believe that a number of challenges related to the CSDR
must be addressed or that the current legislation is altered in
order to embrace the use of DLT within the settlement process.

Whilst a settlement internaliser may provide a solution in
theory, it appears that the CSD cannot be totally removed from the
ecosystem of a traded STO. Nevertheless, the authority are
currently exploring this issue in order to understand the risks
which would develop and how these can be reduced if a settlement
internaliser is opted for.

In conclusion, the authority holds that the use of DLT within
the context of secondary markets will be hindered by the lack of
institutions which are capable of providing settlement for
tokenised transferable securities. Therefore, unless the European
legislator amends certain provisions of the CSDR, there seems to be
agreement that some advantages of DLT cannot be availed of due to
the need to comply with the current regulation.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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