Last week, the financial watchdog of Malta came forward with an unexpected statement. Apparently, Binance, a leading cryptocurrency exchange that had been enjoying a close relationship with local authorities, is not authorized “to operate in the crypto currency sphere,” as the regulator’s press release stressed.

While the Malta Financial Services Authority has yet to license any cryptocurrency business — and not just Binance — under the country’s widely marketed cryptocurrency framework, the statement signifies a deterioration in relations between the cryptocurrency sector and Maltese officials, who have claimed to run a “blockchain island.”

While the change of tone could be attributed to the recent resignation of Maltese Prime Minister Joseph Muscat and the subsequent arrival of his successor, it seems like the local cryptocurrency industry had started to experience difficulties even before that. Nevertheless, in a comment to Cointelegraph, the new government has reiterated its plans to operate as a blockchain island.

Inside Malta’s grand plan

In September 2018, then-Prime Minister Muscat ambitiously presented his country as a blockchain island during his speech at the United Nations General Assembly. Indeed, about two months prior to the announcement, the Maltese government had approved three crypto-related bills, aiming to establish a strong and transparent regulatory climate: namely, the Digital Innovation Authority Act, the Innovative Technological Arrangement and Services Act, and the Virtual Financial Asset Act.

Although nations like Canada, Japan and Belarus had already enacted cryptocurrency-specific laws by that time, Malta's transition toward becoming a blockchain island was unprecedentedly rapid. The term itself was coined in April 2018 when Silvio Schembri, the current minister of economy, investment and small business, commented to Cointelegraph on the news about Binance, the world’s top exchange, potentially moving to Malta after facing regulatory difficulties in Japan, where it was previously headquartered.

Binance’s relationship with the Maltese government was indeed close at the time. For instance, soon after the article announcing Binance’s interest in Malta aired on Bloomberg, Prime Minister Muscat personally welcomed the exchange via Twitter, writing: “Welcome to Malta, Binance.” Binance CEO Changpeng Zhao, also known as CZ, soon responded to the prime minister’s tweet, adding that he was optimistic about the overall possibilities for crypto in the country.

Further, at some point in the summer of 2018, the company even had a private event in Malta, which was held at the official residence of the President of Malta. “How many of you have attended a blockchain even at the presidential palace?” CZ asked while giving a speech under the ancient walls, adding, “We got very, very lucky with Malta. Malta came at a time when regulatory clarity was very much needed.”

Other foreign crypto companies looking for a friendlier jurisdiction soon followed suit, namely fellow exchanges OKEx and BitBay, which had been based in Japan and Poland respectively. Malta’s lowest corporate tax rate for international companies in the European Union — set at a modest 5%, compared to the EU average of 22% — appeared to be yet another rationale for relocating.

In October 2018, Malta continued its “pro-blockchain” politics, signing a declaration to promote blockchain usage along with seven other EU countries. Then, on Nov. 1, the three aforementioned blockchain laws came into effect — and that’s when local players started to first experience difficulties.

Slow regulations don’t go well with a fast market

The most important part of the three Maltese blockchain laws — the VFA act — essentially requires businesses to get licensed by the Malta Financial Services Authority if they conduct initial coin offerings, trade digital assets, or provide electronic wallets and brokerage activities.

The act also introduces so-called VFA Agents — entities that audit and advocate such firms. According to Christopher P. Buttigieg, the chief officer responsible for strategy, policy and innovation at the MFSA, “The role of the VFA Agent under the VFA Act is primarily that of gatekeeper,” or the first line of defense. The agency registered the first VFA agents in May 2019, six months after the act came into force. Currently, there are 20 authorized VFA agents, according to the MFSA’s financial register.

However, no businesses have been licensed under the VFA framework yet, despite the fact that it’s been more than a year since it was enacted. “This is definitely disappointing for the hundreds of companies which were lured to the country on promises of a friendly, understanding regulatory environment,” Jan Sammut, founder of ICO Launch Malta, told Cointelegraph. He went on to add:

“My impression is that the government at the time prioritised primacy to market ahead of operational readiness. Subsequently, what initially started off as an understandable desire to 'get things right' and not put the country's reputation at risk in the event of a scandal, seems to have devolved into the double whammy of an absolute overkill of a regulatory package, along with a total operational complacency in issuing actual licences.”

“Crypto startups still struggle to obtain financial services due to regulatory sluggishness,” an OKEx spokesperson confirmed to Cointelegraph, adding that the exchange is still dedicated to operating from Malta, having applied for a license after the transition period ended. The OKEx representative elaborated:

“We would like to reiterate that OKEx would continue to commit resources to Malta and embrace relevant regulation. In 2018, OKEx has received permission to operate and provide its services out of Malta under the transitory provision granted by MFSA for a period of one year until the license is obtained. Recently, OKEx has submitted an application for obtaining a VFA license.”

On top of the MFSA’s apparent procrastination with the licenses, there are other issues — namely, their potential cost-efficiency. As Leon Siegmund, a board member of Malta’s Blockchain Association and founder of Bitcoin Club Malta, told crypto news outlet Decrypt of the VFA license, “It’s too expensive; it doesn’t provide any value. As long as it’s not passportable, it’s a small market, so it’s not really useful.” Reportedly, the MFSA requires a fee of 10,000 euros to handle a preliminary VFA application.

Moreover, the local approach to crypto regulation is not that soft. As Cointelegraph previously reported, on top of Anti-Money Laundering and Know Your Customer policies imposed by the VFA framework, there is also the EU’s AMLD5 directive.

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At the time, Daniele Bernardi, CEO of Malta-based financial advisory company Diaman Group, told Cointelegraph that the stringent compliance requirements have scared local banks away, making it difficult for local businesses to find a financial partner, “The banks in Malta don’t open any kind of account for crypto companies, due to their fear of breaking the AML policy.” Wayne Pisani, a partner at Grant Thornton, one of the 20 registered VFA agents, confirmed that sentiment to Cointelegraph:

“It was never the intention to create a soft touch regulatory framework as this would have run counter to internationally accepted principles of regulatory certainty and transparency. Indeed, the framework regulating the financial application of DLT is closely modelled on EU regulatory principles and follow ESMA guidelines.”

Pisani further added that simultaneous to the enactment of the laws, a parallel project was started “to launch bespoke guidelines setting clear procedures to guide stakeholders in their AML and CFT obligations which goes beyond the standards set by the EU 5th Anti-Money Laundering Directive.” Similarly, a representative of the VFA Agent Forum, a soon-to-be-launched entity representing most VFA Agents in the country, argued in a letter sent to Cointelegraph:

“In its VFA framework, Malta has shown its commitment towards a high quality regulatory framework that does not create future inconsistencies with other international regulations. This shows that long-term strategy in having Malta establish itself as a high-quality jurisdiction in this space who is more interested in long-term sustainability rather than short-term quick wins.”

This cautious approach makes sense, given that the government of Malta has long been surrounded by corruption allegations. Back in 2016, upon reviewing the Panama Papers, local journalist Daphne Caruana Galizia claimed that a number of Muscat’s close associates, including his wife, had run firms to launder money and illegally sell passports. Eventually, Caruana Galizia’s blog, where she presented that information, became the most-read news source in Malta. In October 2017, Caruana Galizia was assassinated in a car bombing. Numerous mass protests followed, calling for Muscat's resignation, partly for his inability to resolve the bombing, which has attracted the EU’s attention.

On Dec. 1, 2019, Muscat announced he was stepping down due to the political crisis. The prime minister has been replaced with Robert Abela, a fellow Labour Party member and son of former Maltese President George Abela.

MFSA breaks it off with Binance, but the government supposedly remains pro-crypto

On Feb. 21, 2020, amid the uncertainty surrounding the VFA framework, the MFSA released a public statement, declaring that Binance “is not authorized by the MFSA to operate in the crypto currency sphere.” The agency clarified that recent media reports referred to Binance incorrectly as a “Malta-based cryptocurrency firm,” while the exchange “may not fall within the realm of regulatory oversight.”

Soon, CZ took to Twitter to label the statement as “a mix of truth, FUD & misconception.” Addressing news articles stating that Binance is not regulated to operate in Malta, the exchange’s CEO stated that Binance “is not headquartered or operated in Malta.”

According to an investigation conducted by a local anonymous blogger BugM, Binance has registered two companies in Malta, neither of which has reported any activity since their establishment. Notably, CZ has previously reassured that “any country that can attract Binance to open a branch in their location will receive a handsome tax income revenue.” According to Decrypt, Binance has a physical office in Malta but is headquartered in the Cayman Islands and Seychelles.

Sammut told Cointelegraph that this has been brewing for a while, adding that the MFSA was right to issue a clarification on the regulatory status of the exchange, elaborating:

“Bearing in mind that the company is not in fact under their supervision, the MFSA are correct in wanting to distance Malta's reputation from any potential fallout from an incident that they are unable to foresee due to the company not being under their oversight. On the other hand, if the MFSA got around to issuing licences maybe we wouldn't be here now…”

When asked to clarify its relationship with the MFSA, Binance did not reply. The MFSA also declined to comment on this story.

However, although current-Prime Minister Abela has yet to publicly comment on cryptocurrencies and blockchain, the new government is apparently still interested in carrying on as a blockchain island. Bartolo Clayton — who has been recently appointed by the Abela as the parliamentary secretary responsible for financial services, digital economy and innovation, the position previously held by crypto-friendly Minister Schembri — clarified the official position on Binance in a letter to Cointelegraph:

“Binance has never been in possession of an official license by MFSA. Such statement has been further corroborated by Changpeng Zhao, CEO of Binance, on his personal Twitter account where he also stated that Malta has not changed its position. This, therefore, DOES NOT mean that the Government has in some way or another introduced a harsher or more stringent stance towards cryptos, but merely an authority stating facts.”

Clayton went on to add that the government of Malta is still committed to following the blockchain path and that more information will be revealed soon:

“The Government of Malta is committed to consolidate blockchain together with other niche sectors. It is the Maltese government’s belief that we believe that more synergies between these emerging sectors should be explored and encouraged in order to reap and exploit their benefits. Moreover, the Government of Malta is opting for an overarching and holistic strategy for the Digital, Financial and Innovative services in Malta. More details about the new strategy will be disclosed in the coming months.”

Thereby, the new Maltese government has not officially taken a different course concerning cryptocurrencies. As for now, the regulator continues to consult with industry players on its crypto-related initiatives. Earlier this week, the MFSA published feedback on the definition of security tokens and the challenges such assets face in Maltese markets, and how these “can be tackled in a manner that does not stifle innovation."