Cryptocurrencies and blockchain are starting to have a major impact in multiple EU countries despite initial opposition to the technology, according to Joseph Borg, an advocate and partner at WH Partners.
With flexible laws encouraging innovation, Malta is one of the leading blockchain nations, attracting multiple cryptocurrency businesses. Indeed, cryptocurrency exchange Binance announced it was moving to Malta in March, while crypto investment trading market Coinvest followed close behind in April. Then in May, Polish exchange BitBay said it would shift its offices to the crypto-friendly country.
The companies are drawn to Malta’s relaxed tax laws. In addition, Prime Minister Joseph Muscat has shown interest in cryptocurrencies, dubbing the technology “the inevitable future of money”.
“Everything started around two years ago, when companies started showing an interest in moving to Malta,” says Borg, who is also the Co-Founder of Bitmalta. “At the time, there was almost no regulation at all. But soon, the prime minister started saying he wanted to see Malta become a hub for blockchain start-ups.”
This led Malta to create a regulatory framework. “Not only will it be regulating initial coin offerings (ICOs) and exchanges, it will also be providing improvements for technology arrangements, licensing platforms and smart contracts,” Borg explains.
Momentum is continuing to build: the government is even considering whether blockchain could form one of the pillars of the country’s economy. “Malta’s economy is currently based on tourism, financial services and gaming. But it now sees cryptocurrencies as the fourth pillar,” Borg says. “In terms of GDP and economic activity, Malta is looking at this space as an opportunity to grow its economy.”
The number of ICOs being run from the country is surging: Borg says between 50 to 60 have been started in Malta over the past six to eight months. Meanwhile, the nation has also established the Malta Digital Innovation Authority to create flexible rules and regulations for blockchain and cryptocurrency related projects.
Yet Malta is an unlikely frontrunner: several other nations embraced blockchain first. Borg points out that Estonia was quick to look into the technology, but the country failed to maintain its early momentum.
It was followed by Gibraltar, which implemented a regulatory framework around ICOs. But eventually, Malta, along with Switzerland, took the lead while Gibraltar and Estonia slowed down, according to Borg.
In addition, Lithuania is gaining ground after issuing guidelines on ICOs in June. “The money business is gaining a lot of traction at the moment,” Borg says. “Their central bank is pro-innovation and wants institutions to work closely with blockchain and cryptocurrencies.”
It is an attractive proposition, leading many nations to take the first steps towards enjoying the benefits offered by blockchain and cryptocurrencies beyond simply bitcoin transactions. But why did certain EU member states move first? “It is normal for smaller countries to be able to be more dynamic and flexible than larger nations,” says Borg.
As a larger country, Switzerland is an exception, but it has always been involved with financial markets and institutions, Borg points out. He thinks it will be interesting to see which of the larger nations will follow suit “and come up with some kind of regulation”.
“We know France seems to be in the lead in terms of the larger member states because the president was quite vociferous about this,” Borg says. He adds: “Probably, Germany and the UK are still lagging a bit behind, but it is normal for larger countries to wait and see – and act at a later stage.”
And the market is still far from mature. It will therefore be further into the future that these larger countries might push for regulatory harmonisation across the EU, says Borg. “This could be beneficial for companies, as they would be able to establish themselves and attract business from across the EU without issues.”
However, Borg points out that the EU has also been synonymous with over-regulation, citing the example of the EU Update to General Data Protection Regulation (GDPR) and the revamped Markets in Financial instruments Directive (MiFID II). “This industry is still in its infancy and requires a lot of space to be able to develop and evolve, so it will be a pity if we over-regulate,” he says.
Ideally, harmonisation will come later, Borg says – and “not in the same way as we have seen in GDPR and MiFID”. He adds: “Over-regulation might be a big blow for an industry still finding its feet and trying to grow into something mature. Ideally, it should be left with some space to develop.”
Although he initially advocates a lighter touch, Borg accepts regulation is necessary to avoid blockchain’s abuse by criminals. But he points out that oversight is already happening across the smaller nations innovating using blockchain.
“It is a slow process, but we are seeing countries already taking the necessary steps to start regulating this market as required without stifling innovation,” Borg says. “One should look at the risks that can arise to a particular industry and cater for those through the regulation.”
Overall when regulating, he says: “It’s important bureaucracy is avoided, and any tariffs are kept at a minimum. Let the industry show you when it’s ready to embark on more regulation.”
But it’s also important to consider that regulating blockchain is a new area, and there is disagreement over whether cryptocurrency transactions fall under current financial sector rules. It is a fine line, Borg says. “But authorities across the EU have come up with clear guidance as to whether current tokens being generated fall within existing regulatory frameworks. For example, Malta came up with a test published in June distinguishing between tokens that fall within MiFID and those that do not.”
He says Lithuania and Switzerland have also come up with clear guidelines outlining the areas falling under current laws. “But many other member states have yet to do this.”
Borg thinks the ideal situation would see regulatory frameworks from more open, innovative and flexible jurisdictions, while the larger countries wait, see and learn.
As one of the larger economies, it will be interesting to see how the UK takes advantage of blockchain – and indeed regulates the technology – after it exits the EU. Borg thinks it might be seen as an opportunity to bring business towards UK shores. However, he points out: “The UK is less attractive to businesses from the European market as soon as it loses its status as a member of the EU.”
As a British overseas territory, Gibraltar will be affected in the same way. “Once they leave the EU, they will be less attractive unless they find a way that they can act as an offshore jurisdiction able to attract business in advantageous conditions,” says Borg.
It is a fine balance to tread. Adding to complexity, Borg thinks there is still a lack of understanding at EU level on what these technologies mean and how they can be applied. Borg himself has spent many hours reading about the industry and learning it on his own. He points out that regulatory bodies in Malta have also invested time researching blockchain.
“There is no excuse for governments not to do it, because everyone in the industry has had to do a lot of self-learning. It is their job to keep ahead of time and constantly learn about developments to be able to regulate properly.”
Borg thinks, therefore, that education is “the most critical and fundamental barrier”.
“People need to start learning about it and have the will to do so,” he says. “Perhaps because of the price volatility created by certain cryptocurrencies, the public in general is already starting to understand it. People from all walks of life have begun to ask what blockchain is and how it works.”
So, what can be done to help governments learn more about blockchain? Borg thinks it is now up to the industry to educate authorities “in a way they can understand better how it functions and what the perks of this technology are”.
“This technology has a purpose which is very clear: To ensure middle men not giving any added value are cut out, allowing the person to deal with the other person directly. It is more beneficial than two of us having to pass one intermediary imposing excessive fees, or that is too slow and bureaucratic to allow the transaction to happen fast enough. This technology is important, especially for public registers.”
He is critical of over-regulation but in the future, Borg believes defined rules will help adoption by institutions and businesses. “I believe that once institutions and businesses get into this industry more strongly than today, it will disrupt a lot of current practices, some of which have been in place a very long time.”
Indeed, Borg says blockchain will eventually help to achieve a more efficient world. “The philosophy of this technology is to create more prosperity across mankind. Perhaps not in the same way as was originally expected, but it will improve our world to a great degree.”