Why Malta? ICOs and the Application of Extraterritorial SEC Regulations

Ever since the United States Securities and Exchange Commission (SEC) , and other government organizations started to clamp down in earnest on initial coin offerings (ICOs), companies planning their ICOs have been running away from the United States in droves.  Where are they going?  Top choices have included Gibraltar, Cayman Islands, Switzerland, Estonia, Singapore, Bermuda, the British Virgin Islands, and Malta.   Every jurisdiction is happy to accept an influx of new innovative companies, especially to the extent they bring jobs and money.   Some of these countries may even start offering tax incentives, the way they do in the film industry.

But what are the considerations for cryptocurrency companies?   Taxes, costs, language barriers, access to addressable markets, access to talented employees, and a wide variety of others.  However, one consideration makes Malta compelling for blockchain companies who wish to sell tokens to investors in the US; the extraterritorial application of US securities laws.

The SEC has asserted the right to apply US law outside the borders of the United States against fraudsters whose scams have affected US citizens.   Since the SEC has also asserted in public statements that all token offerings should be considered securities under US law, technically, any token offering not registered as a securities offering, or taking advantage of an exemption has violated US law.  As a result, in countries which do not have statutes specifically referencing cryptocurrencies, the SEC would be able to, and historically has brought enforcement actions against people located in foreign lands.

However, under the international norm of comity, or respect for the laws of other nations, the SEC might be compelled to refrain from applying US law where such law would be in conflict with local laws.  This would be especially true in the case of a country which had promulgated a body of regulation specifically governing token offerings and cryptocurrencies.

In May, Malta is expected to adopt new cryptocurrency statutes that define key legal terms for cryptocurrencies, create a new re-engineered corporate structure for use with decentralized business entities addressing liability concerns unique to them, and empowering a commission to promulgate and enforce regulations governing the trade of digital assets, including cryptocurrencies.

So it would seem that if you are looking for a safe place to launch a blockchain company or ICO, Malta is it.

However, by going to Malta, you are not dodging regulation.  You are probably signing up for more of it.  Malta’s idea is to make cryptocurrencies and ICOs legitimate, which means clear definitions of terms and clear rules for what you can and cannot do.  Furthermore, Malta is a member of the European Union (EU), which means you will have to comply with all EU rules, not only financial industry rules, or anything the EU may adopt with regard to crypto, but also privacy regulations like the new GDPR rules.

There will also be practical considerations.   The statutes have not been adopted yet, and the new governing commission will still need to be funded, staffed, and then start operations.  That could take some time.  Also, our clients report difficulties in opening bank accounts.  The banks are becoming increasingly wary of opening accounts for companies they know will be launching ICOs considered “illegal” in some countries, which will also likely be converting cryptocurrencies into fiat currency and depositing it for use in their operations.  As a result, rock solid KYC and AML compliance will become increasingly important for everyone in the value chain.

Conclusion?   It’s still a game anyone could win, but Malta is currently one of the leading innovators in the approach to adopt workable statutes for cryptocurrencies.