“[A]fter Malta joined the EU, broad political and national consensus took the island in the direction of finance and digital technology…These two sectors now comprise over 10% of the island’s economy.”
“The country has a highly talented, young, and English-speaking workforce that is specializing to an ever greater extent in finance and technology…numerous individuals and authorities took a keen interest in cryptocurrency and DLT practically from inception.”
“[The] interest of young turks originally involved in mining and trading led to the formation of two vibrant and highly active associations, Blockchain Malta Association and Bitmalta…These two associations have also been instrumental in bringing cryptocurrency and DLT to the attention of the local authorities and lobbying for the creation of an appropriate legislative framework for this new industry.”
“ …[and] the Government of Malta revealed in April 2017…that it was working on a national strategy to promote blockchain…the strategy was not intended only to focus on cryptocurrency but to embrace all the potential that the technologies of cryptocurrency, including blockchain…”
“Meanwhile, in late 2017, the Malta Financial Services Authority (MFSA) started to publish proposed regulatory frameworks, first for cryptocurrencies, or virtual currencies (VC), as it called them, and then later on for initial coin offerings (ICOs). The community provided enormous feedback and the MFSA is currently working to bring everything together into a coherent framework, while liaising with the government to ensure that all proposals have the adequate backing needed to make it into the law.”
Here is a link to the relevant paper from the Malta Financial Services Authority (MFSA), dated November 30, 2017 . There was also an April 13, 2018 followup notice (and a related paper) to get feed-back for a financial instrument test to cover “distributed ledger technology assets” (f/k/a “virtual currencies”) and ICOs.
Malta’s lawmakers have been busy building laws for the future.
“[Prime Minister] Muscat ties Malta’s success to becoming a member of EU’s Blockchain Partnership; its three new cryptocurrency bills adopted by parliament on April 24; as well as it’s favorable crypto tax policy.”
(These three bills, published May 22, are: The Virtual Financial Assets Bill, the Malta Digital Innovation Bill and the Innovative Technology Arrangements and Services Bill . More on them later.)
Malta has made virtual currency transactions free of VAT taxation, and it would take a lot of transactions in order for Malta’s current income tax rate of 5 percent to be applicable. Open arms and no strong-arming.
The Malta Blockchain Summit should prove interesting. Imogen Heap is attending. I confess seeing the open embrace of ICO pitches as heavy indulgence of animal spirits but it’s in keeping with an ebullient embrace which is also “hands off”. Q4 2018 here we come. I wonder if animal spirits will be met and surpassed on a year-over-year basis from last winter.
Random: I wonder if Malta down the line gets co-opted as a kind of Burning Man meets Coachella meets SXSW meets Ibiza (with a fat “TH” before the letter “a”) circa 2025? Perhaps pessimists may see a Crypto Frye Festival, while optimists see Lichtenstein meets Estonia E-land. Two movies at the same time more likely.
Meanwhile thoughts return home. U.S. tax policy is unlikely to approach Malta’s benign levels.
There’s a letter from the American Institute of CPAs on the subject of “virtual currency guidance”. It touches upon something I have wondered about for those who trade and have to go through more than one transaction to change between virtual and fiat USD:
“The IRS should allow FIFO treatment under section 1012 as an election and/or option. It is not always practical to perform the tracking process for specific identification. However, although specific identification can present a tracking challenge for taxpayers, it is imperative that the IRS allow this method.”
“Specific identification is needed in order to provide a mechanism to address a double capital gain paradox that can arise due to the fact that some virtual currencies can only exchange for other virtual currencies (and not for USDs). It is unfair for taxpayers to incur gain from a series of related sales that exceed the ultimate transaction proceeds… “
There is a tug of war in animals spirits auctionland regarding the nature of “virtuals”: is it money, a commodity, or is it something else?
It’s like that scene in the old movie Chinatown, and now the infamous line uttered by Faye Dunaway’s character is “I’m a currency, I’m a security, I’m a currency, I’m a commodity…” back and forth. At the moment that line may have been nudged in one direction, just as Bitcoin-USD pair was poised to turn the 200 day price into resistance, by SEC Corp Fin Head William Hinman’s in a speech entitled, “Digital Asset Transactions: When Howey Met Gary (Plastic)” which began with a first principles question:
“Can a digital asset that was originally offered in a securities offering ever be later sold in a manner that does not constitute an offering of a security?”
I like that Director Hinman uses a phrase I keep having to use: EARLY DAYS
I don’t care how much money you have made or lost, there is more to come. It’s like the mysticism over Machine Learning’s applications. I think it was Parker Thompson (or was it Benedict Evans) who likened that to questions in the late 1970s over what would happen with SQL.
Back to “just what is it?”. It’s HOWEY storytime again.
“Promoters, in order to raise money to develop networks on which digital assets will operate, often sell the tokens or coins rather than sell shares, issue notes or obtain bank financing. But, in many cases, the economic substance is the same as a conventional securities offering. Funds are raised with the expectation that the promoters will build their system and investors can earn a return on the instrument — usually by selling their tokens in the secondary market once the promoters create something of value with the proceeds and the value of the digital enterprise increases.”
“When we see that kind of economic transaction, it is easy to apply the Supreme Court’s “investment contract” test first announced in SEC v. Howey. That test requires an investment of money in a common enterprise with an expectation of profit derived from the efforts of others. And it is important to reflect on the facts of Howey.”
“A hotel operator sold interests in a citrus grove to its guests and claimed it was selling real estate, not securities. While the transaction was recorded as a real estate sale, it also included a service contract to cultivate and harvest the oranges. The purchasers could have arranged to service the grove themselves but, in fact, most were passive, relying on the efforts of Howey-in-the-Hills Service, Inc. for a return. In articulating the test for an investment contract, the Supreme Court stressed: “Form [is] disregarded for substance and the emphasis [is] placed upon economic reality.” So the purported real estate purchase was found to be an investment contract — an investment in orange groves was in these circumstances an investment in a security.”
“Just as in the Howey case, tokens and coins are often touted as assets that have a use in their own right, coupled with a promise that the assets will be cultivated in a way that will cause them to grow in value, to be sold later at a profit. And, as in Howey — where interests in the groves were sold to hotel guests, not farmers — tokens and coins typically are sold to a wide audience rather than to persons who are likely to use them on the network.”
“In the ICOs I have seen, overwhelmingly, promoters tout their ability to create an innovative application of blockchain technology. Like in Howey, the investors are passive. Marketing efforts are rarely narrowly targeted to token users. And typically at the outset, the business model and very viability of the application is still uncertain. The purchaser usually has no choice but to rely on the efforts of the promoter to build the network and make the enterprise a success. At that stage, the purchase of a token looks a lot like a bet on the success of the enterprise and not the purchase of something used to exchange for goods or services on the network.”
More on this in a separate post, to include commentary from focused specialists who reviewed Director Hinman’s speech. Howey Storytime to be continued.
Latest developments regarding two big events in this space, Binance and EOS:
First up Binance.
“In July 2017, [Binance CEO Changpeng] Zhao launched an initial coin offering (ICO) for Binance that raised $15 mln — enabling the development of the cryptocurrency exchange powered by its own Ethereum-based ERC20 BNB token.” And Binance exploded in size in less than a year since the ICO.
This past spring, “the world’s largest cryptocurrency exchange, Binance, announced that it would be opening offices in Malta. The reason for their move was due to tighter restrictions on cryptocurrency activity in Japan and the fact that the Maltese government was legislating in favour of the cryptocurrency industry.” Japan is out, Malta is in.
From Dr. Joseph F. Borg (V.P. and Co-Founder of Bitmalta, which is a non-profit organisation with a mission to promoting and stimulating discussion about blockchain technology and cryptocurrencies in Malta, and was the Chief Regulatory Officer of the Lotteries and Gaming Authority — Malta) observed:
“On the 23rd of March, Binance announced on its medium account that it was moving its operations to Malta. From that moment onwards, Malta became the hottest jurisdiction for crypto-exchanges with dozens following the giant exchange and relocating to Malta. However, the draft framework legislation for the licensing of exchanges that deal in cryptocurrencies, was only published 2 months later.”
The three related bills are “MDIA”, “TAS” and “VFA”. Their breakdown below:
“The Malta Digital Innovation Authority Act (MDIA Act) shall establish the Malta Digital Innovation Authority (MDIA). On the other hand, the Technology Arrangements and Services Act (TAS) will set out the framework for the registration of Technology Service Providers and the certification of Technology Arrangements….”
“The most anticipated piece of legislation is arguably, the Virtual Financial Assets Act (VFA) that shall create the basis for the regulation of Initial Coin Offerings (ICOs) and Token Generation Events (TGEs) as well as Exchanges and other intermediary services relating to cryptocurrencies. This Bill together with the Financial Instrument Test (the draft of which was published earlier this year) as well as a rule book that will be published by the Malta Financial Services Authority by Q3 of 2018, will provide legal certainty to the industry at large and truly make Malta an ideal hub for Blockchain and Cryptocurrency related activities.”
Binance’s recent trading volume is roughly $1.5B daily, and it recently announced that it would support, via a separate Malta-based trading exchange, trading in Fiat-crypto pair trading. (Binance CEO Changpeng Zhao had also mentioned Uganda and Asia for future fiat-crypto trading.) In keeping with these developments a bank account has also been opened in Malta.
I love this quote of CEO Zhao in a June 14, 2018 Cointelegraph piece, “We Try Hard Not To Be Number One All The Time”. More from the article:
“CZ: We are incorporating in Malta and we have a bank account already, which is very significant. Things are going very well there. We are also in talks with the Malta stock exchange, which is the traditional equity stock exchange, for some collaboration. I can’t release details yet, but I believe certain co-operation will result from that. Things are going very well there.”
“CZ also believes that Malta is fast-becoming a hub for cryptocurrency adoption and blockchain development:”
“CZ: I think since March 23, which is the day I actually announced that we were going to Malta, Malta has already become the blockchain island. It’s become the leading place for work, at least one of the leading places for blockchain companies to go. There’s literally a few dozen companies already establishing there. The government and the regulators are very welcoming, very reasonable, so I think it is already one of the best places to establish.”
And now for a different venture facing some challenges: EOS.
$4B USD in capital was raised for EOS, to support development of a decentralized computing protocol, another “world computer” project. Or as I like to think of it: it’s another node-agnostic, all-knowing, and always-on adding machine. Right now the voting machine took center stage. Here’s the Official Subreddit.
From Paul Vigna, a WSJ June 12, 2018 story on EOS, “Inside the Chaotic Launch of a $4 Billion Crypto Project”:
“Software company Block.one raised $4 billion for its EOS project from investors on the promise that the blockchain platform could change the way the internet works. But infighting among the software’s fragmented developers shows it still has a way to go before the platform lives up to the hype.”,
“Since the Friday call, EOS’s tokens have fallen roughly 20%, cutting $4 billion off its market value, currently at about $10 billion.”
For a little more on distributed computing to help give EOS context, here’s a nifty June 11, 2018 post from Fred Wilson’s Union Square Ventures, “An Overview Of The Distributed Computing Landscape”:
“People have been trying to build distributed compute networks since the 1990’s; In 1996, GIMPS used distributed compute to search for prime numbers and in 1999, Seti@Home used volunteers’ compute power to search for extraterrestrial life.”,
“Now 25 years later, the final pieces seem to be in place. Cryptocurrency makes possible machine-to-machine payments, which allows participants to get compensated for contributing CPU. Fields such as machine learning, 3D simulation and biological computation are driving up demand for compute resources.”
For a little more on EOS specifically, from MIT Technology Review’s “Chainletter” June 14, 2018, a deeper note:
“The new blockchain system is supposed to be a much faster and more efficient alternative to Ethereum. Ethereum was designed to not only be a cryptocurrency but also a platform for running blockchain-based computer programs called smart contracts. But it’s slow to process transactions, because every node in the Ethereum network must keep track of every account balance and the state of every smart contract.”
“EOS’s developers say that by delegating the responsibility for processing transactions to just 21 “block producers,” which are to be elected by the community of token holders, the system will be able to achieve thousands of transactions per second (compared with just 15 per second for Ethereum).”
“A startup called block.one is spearheading the development of EOS’s
software. Its CTO, Dan Larimer, previously created the blockchain-based
financial services platform BitShares as well as Steemit, a cryptocurrency powered publishing platform. Each deployed a novel consensus protocol
called “delegated proof of stake,” which Larimer is also deploying with
“No miners: In cryptocurrencies like Bitcoin, nodes called “miners” spend
lots of computing power competing for chances to add “blocks” of
transactions to the chain in return for digital coins. EOS dispenses with
mining in favor of allowing token holders to elect block producers, with
voting power corresponding to the amount of tokens an individual or
organization holds. The approach should speed up transaction processing,
but it has also drawn critics. Ethereum creator Vitalik Buterin has argued
that it makes the system vulnerable to vote-buying and consolidation of
power over the network.”
“Frozen tokens: EOS tokens have been for sale and tradeable on the
Ethereum blockchain since June 2017. But they weren’t based on EOS’s
blockchain — it hadn’t been built yet, so the tokens were running on the
Ethereum network. A couple of weeks ago, Ethereum-based EOS tokens
were “frozen” so that their value could be transferred to the real chain. As
of this writing, though, they’re still locked up.”
The bottleneck at the moment for EOS: it’s like Churchill’s November 11, 1947 take on democracy, “it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.” Gathering the vote in this project has been challenging.
And as if problems of “State” were not enough (“State”, get it? “State” as in voting and… never mind) there was a problem just the other day when “multiple sources reported an issue with the EOS Mainnet, or blockchain, that led to network operations “freezing” less than 48 hours after officially going live. “ But now the blockchain for 5th largest crypto by market cap is running.
Last random notes:
Malta almost seems free and easy but it’s not really, it’s just that it’s working to establish and maintain a regulatory arbitrage in emerging technologies.
Here’s a link to a recent note on what’s going on in Canada: “Canadian securities regulators publish further guidance on token offerings”, and the original June 11, 2018 regulatory note from the Canadian Securities Administrators. (Short version, h/t Francis Pouliot: “Canadian regulators have a history of following US counterparts for close coordination. Read between lines: Howey test.”)
JD.com popped up in my feed in two interesting events:
First event is Google translated for your reading.
Short version, JD.com did an ABS (asset backed securities) deal with blockchain:
On June 13, 2018, “Jingdong Financial-Huatai Asset Management Support Project for Debt Debt Receivables on the 19th Jingdong Asset Management” was successfully established and will be listed on the Shenzhen Stock Exchange. The project is based on the Jingdong IOU account receivables as the basic assets, and Huatai Securities (Shanghai) Asset Management Co., Ltd. (hereinafter referred to as “Huatai Securities Asset Management”) serves as the plan manager. The Industrial Bank serves as the custodian institution and Jingdong Finance serves as an asset. mechanism.”
And one last random find:
This week’s Hidden Layer update includes the following music:
BUT first a great lecture by the real life Frank Abagnale, who is still with the FBI. A gracious wonderful talk filled with wisdom and perspective, poise and earnest respect for the listener. Everyone who saw the film “Catch Me If You Can” will begin with a Spielberg retelling of a fascinating 1960s story of a bold teenage fraud but this interview at Google Talks brings us right into the 2010s to wisdom from a thoughtful father and law enforcement professional.
NOTE regarding this week’s Hidden Layer title:
hap·tic ˈhaptik/ adjective technical
“relating to the sense of touch, in particular relating to the perception and manipulation of objects using the senses of touch and proprioception.”
Originally published at big-stack.com on June 17, 2018.