Malta’s Innovative Legal Response to Blockchain Technology

KMWlogo_Stacked_Session Description: Malta Digital Innovation Authority & Legal Framework

Ganado has been heavily involved in the drafting of new legislation required for the development of Malta as a financial center, including the revision of the law relating to trusts and the law on legal persons and foundations, as well as on netting, securitization and aviation.  His most recent publication is Legal Personality for Blockchains, DAOs & Smart Contracts.

Speaker: Max Ganado, Senior Partner, Ganado Advocates mganado@ganadoadvocates.com

Slides:  1100_Ganado.PPTX

[These are my notes from the new Blockchain in Government conference, which is part of the KMWorld 2018 Conference. I’m publishing them as soon as possible after the end of a session, so they may contain the occasional typographical or grammatical error. Please excuse those. To the extent I’ve made any editorial comments, I’ve shown those in brackets.]

NOTES:

  • Focus on Distributed Ledger Technology (DLT)

    • distributed
    • encrypted (private)
    • audited
  • Focus on Smart Contracts
    • These contracts are composed of smaller executory contracts expressed as a series of “if then” statements (i.e., If this happens that that must happen)
    • Used for determining consequences of flight delays, for example. So if the flight is delayed, you automatically get the agreed financial award.
  • How to approach regulation?.
    • Where there is risk to investors and consumers, make the regulations mandatory
    • Where there is a need to support innovators and investors, make the regulations voluntary
  • Malta Digital Innovation Authority Act
    • provides an enabling structure for digital innovation
    • creates an administrative authority to provide oversight for digital innovation
  • Innovative Technology Arrangements and Services Act.
    • caters to the voluntary application for certification of DLT/Smart Contracts and the registration of systems auditors nd technical administrations
    • issues certifications of validity
  • Virtual Financial Assets Act.
    • Mandatory law: addresses cryptocurrencies — token issuance and intermdiation services
    • regulates exchanges and wallet providers
    • created a test to determine if the financial asset is security, money, something in between, or a utility that is not subject to regulation.
      • if it is “like money” then it is deemed a virtual financial asset and is subject to this law
    • why implement this law? It provides more certainty in an uncertain situation.
  • Is a DLT platform a legal entity?
    • It looks a lot like a partnership that creates, stewards, and uses a key asset = their software.
    • Should the government grant legal personality to this entity?
      • option 1 = use existing legal forms
      • option 2 = vary some rules in existing forms
      • option 3 = design a completely new legal form
  • Legal Organization Qualities.
    • Activities
      • Legal Organization: Centralized
      • Blockchain: Decentralized
    • Governance
      • Legal Organization: has a governing body (e.g., board, annual meeting)
      • Blockchain: has some element of governance embedded in it
    • Accountability & Auditability
      • Legal Organization: governed by applicable
      • Blockchain:  may have accounting and auditability embedded in it
    • Legal Personality?
      • Legal Organization: depends on legal form chosen and registration with government authorities
      • Blockchain: No — it’s just a piece of software!
  • Impacts of Legal Personality.
    • Capacity to contract, to carry out contract, to comply with legal obligations
    • Liability: the right to own assets and liabilities, the ability to limit liability, PLUS recourse for liabilities
  • Proposed Solution.
    • They created a variant of a foundation — a new type of purpose foundation (similar to a civil law foundation BUT not limited to charitable purposes.)
    • The cells within the platform must be bankruptcy remote
  • Are Smart Contracts Treated as a Legal Person?
    • Simple smart contracts will not be considered a legal person with the benefits of legal personality.
    • However, if the contract has broader impacts on society then this complicates the analysis and may give rise for the need for legal personality.
  • Distributed Autonomous Organizations.
    • How are they governed? By people OR by technology?
    • Then you need registered auditors who can periodically monitor and certify operations.
    • What compliance regulation do you need to curtail misuse such as money laundering?
  • Bankruptcy Considerations.
    • Put the software in a bankruptcy-remote (i.e., bankruptcy protected) cell and then treat that software as an asset for which you have fiduciary responsibility
    • Create an asset cell that can pay damages in the event of bankruptcy. It contains
      • insurance
      • sinking fund
      • guarantee/support fund
    • Interpose between these two layers an administrative layer that manages governance and financing.
  • Smaller Countries are Racing to Regulate this Area. They can be more nimble to create legislation but need to balance this with their desire to create an attractive regime that will draw in more economic opportunities to their countries.
Share