Malta, blockchain and the prevention of money laundering

The blockchain industry is the latest industry to emerge, providing exciting new opportunities for Malta. Unfortunately, it is a segment where the risk of money laundering is not only clearly evident but concomitant media coverage is acutely high. Photo: Shutterstock.com

This is a time of unprecedented reputational risk in financial markets. From a relatively niche activity, anti-money laundering has become a massive focal point throughout the financial system.  Malta is not alone in facing the issues of how to deal with AML and the process of Knowing Your Client, albeit often the lens appears acutely focused on our islands.

Every stakeholder must deal with the issues directly, coherently… and indeed cost-effectively. Malta has found itself often in the eye of the storm – as a small nation it is an easy target for accusations from those concerned about standards. Hypocritical to the point of ignoring the planks in their own eyes and sometimes disregarding the very obvious comparatives which dwarf what is or may be happening in Malta, that doesn’t reduce the need for Malta to demonstrate high standards ensuring probity of money origins, client-funding and the transfer of assets.

Two wrongs don’t make a right and we need to ensure we clean up our infractions, regardless of whether others have larger problems still! At all levels strengthening institutional process is as potentially complex as it is vitally important.

Having fulfilled phase one of the Blockchain Island genesis, we have reached the stage where a lot of work is required to develop the national ability to truly prosper in this sector. Phase one saw an incredible effort to define a new age digital regulatory system. Now we have the process of developing the transition to practical application which follows the passing of laws and initial regulation creation.

To facilitate the transition to making the Blockchain Island function as effectively as possible, issues must be clearly identified for effective action to be taken. Right now we need to advance the forum for open expert and intellectual discussion which is evidently absent.

To deliver an upswing in deep understanding which enables a depth of strength in the nation’s digital asset ability through practitioners and experts the environment must be freed from overly- politicised positioning, courting criticism while building consensus and not division which hinders thinking and debate on how to address challenges we all face. Clearly this is a niche activity. Nobody can expect the majority of the population to be in either a position or have the inclination to engage in this discussion as it is far from the ordinary daily issues most people face. Nevertheless it is vital for our economic future.

Many things are being lumped into the political debate, often with little articulation. It is critical that we do carefully consider the opinions of local, and more importantly, of international bodies. We can then respond intelligently to their comments and provide suitable information to reduce any confusion. How long are people going to warn of the dangers of cryptocurrencies and disregard the extensive legislative and administrative actions taken by many in Malta since November 2017?

We now have recognition that the legislation is up to standard. However, critics are now pointing to the lack of adequate resources, both in terms of expertise and in terms of people. Any lack of action in this clear context gives easy credence to criticism. The Ministry of Finance, the MFSA and the FIAU have all taken action to address the resources problem, albeit maybe late.

Passing good laws without building up resources will prove insufficient

The blockchain industry is the latest industry to emerge, providing exciting new opportunities for Malta. Unfortunately it is a segment where the risk of money laundering is not only clearly evident but concomitant media coverage is acutely high. This exacerbates concerns about Malta being able to handle the challenge – hardly unreasonable given the relative size and population of the archipelago. Emergent technologies frequently facilitate new scope for abuse of prevailing regulations. Ensuring compliance for the likes of money laundering requires a consideration of regulatory infrastructure, rules and their application.

These trends are apparent in Malta and several other countries. Concerns will likely remain high, if not grow further as a certain aura of suspicion hangs over much of the activity in cryptocurrency and blockchain, particularly due to a few bad actors. Such fears are unlikely to be assuaged by news of new entrants with dubious pedigrees. Jeffrey Skilling, the former Enron CEO is apparently seeking backers in the US for a blockchain energy platform just days after his release from detention following his 2006 conviction for fraud!

Back in Malta, innovation was clearly key when the new blockchain laws and guidelines were drafted. Equally central to the process design was the vital consideration of creating a framework which can prevent money laundering, terrorist financing and tax evasion. These were addressed in a very focused and expansive manner. Both the FIAU and the IRD issued guidelines to protect the national interest.

That Malta has gone way beyond the Fifth Money Laundering Directive which limited its rules to exchanges and wallet providers is just one example where the local legislation was designed for optimal compliance above existing multinational rules. Thus Malta included all services, even issuers of tokens to the public. The MFSA, through the VFA Act, also installed a regulated professional intermediary as a filter to ensure that AML-CFT compliance takes place to adequate standards through any service provider applying for a VFA licence.

Ensuring best practice is a moving target and we can now, only a few months down the line, ask:  should issuers of tokens for private placements be caught?  Should the laws on the register of beneficial owners extend to tokens and how? Indeed, how can the rules of corporate criminal liability develop to cover this area? Should rules be developed to cater for liability of persons involved in DLT/smart contracts?

When can regtech on AML-CFT be used in blockchains, potentially upgrading the quality of AML compliance hundredfold?  What should government and stakeholders be doing to protect our reputation to give this industry a fighting chance to become an important pillar of our economy?

Passing good laws without building up resources will prove insufficient. Therefore we need to review all efforts being made to materially address this problem. The MFSA, the FIAU and the Ministry of Finance have all undertaken substantial initiatives. Nevertheless, there is clearly a key role for the private sector to take in helping address the action critically needed. The industry must disseminate debate and analyse necessary steps, while educating all stakeholders with a critical eye towards what works… and most vitally, what improves standards for the Blockchain Island and its participant entities.

These and other questions were all part of the discussion at the Blockfinance event last Wednesday. The event attracted a good audience with the participation of many stakeholders including the MFSA, the FIAU and the Police. During this event co-organised by the Blockchain Malta Association and Finance Malta, a gap analysis was tentatively carried out by speakers enabling industry players to possibly make specific recommendations for the further development of AML law in relation to blockchain.

Clearly regulation comes at a cost to potential industry growth. A sensible balance is vital. Then again, to ensure a clean flow of money unencumbered by relationships to laundering or terror financing, would anyone sensibly suggest we should do otherwise?

It is vital for this new industry to demonstrate high standards of probity to enhance the reputation of the Blockchain Island. Moreover our emerging sector must ensure through its high standards of compliance that there is no contagion risk to the existing industries which have delivered Malta’s economic prosperity to date.

As blockchain industry participants we need to contribute to the AML-CFT strategy. As operators we need to ensure sound compliance as this forms the basis of our credibility, apart from encouraging innovation which does not imply, by any stretch of the imagination, necessarily lower standards or tolerance of wrongdoing.

Without sensibly agreed standards, we risk not merely the credibility of the digital economy but the wider reputation of the nation. Without material and strategic action on the part of the nation, aimed at protecting its wider reputation and credibility, we risk the future of the innovative digital economy.

Patrick Young is chairman, and Max Ganado is administrator, of the Malta Blockchain Association.

Crypto Destroyer

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