For many investors, the financial crisis is a great investment opportunity - various asset classes are becoming less expensive or returning to favour, therefore it is not surprising that investors are looking for alternative ideas to invest their funds and are turning to growth industries.
It is important to check the state of play in the cryptoassets market and whether there are any new legal developments in this area.
Current market situation
Cryptoassets hit a big time in November 2021. Over this period, cryptocurrencies reached the highest valuations in the history of these instruments. However, the happiness of virtual assets supporters did not last long.
In 2022, the market witnessed the collapse of LUNA tokens, which resulted in huge losses in the portfolios of many major market players. This caused global declines in cryptocurrencies, including Bitcoin, and investors suffered a spectacular market collapse. This caused a crisis that is not the first of its kind, but the first after which so many investors lost confidence in cryptoassets.
Notwithstanding the above, a number of investors, including institutional investors, are treating cryptoassets as a separate alternative asset class that has become part of their investment portfolio and are maintaining or even increasing their exposure in it. Young investors are also actively seeking new business opportunities and solutions in the area of cryptoassets and blockchain technology.
Just a reminder that, according to some economic forecasts for 2030, the blockchain technology industry has a very high growth potential, thus contributing to the global economy and being one of its essential component.
Case study – Malta
The investment fund market is eager to take advantage of new asset classes within its investments and continues to look for opportunities - particularly in certain EU countries.
In light of the above, it is worth pointing out the interesting case of Maltese investment funds, which were established and operate in the Maltese legal environment.
In recent years, the Maltese government has created a favourable conditions for the development of the FinTech sector, including the regulation of the legal framework related to cryptoassets investment, making Malta an attractive jurisdiction for the formation of crypto funds.
This type of funds wish to exploit the economic potential by investing in cryptoassets, e.g. cryptocurrencies or investment tokens, as well as in DLT (distributed ledger technology) related technologies, including the most notably blockchain technology.
Under the current legal framework, the establishment of a crypto funds in Malta is possible in one of the following forms:
- in the form of NAIFs (notified alternative investment funds), which do not require authorisation by the Malta Financial Services Authority (the "MFSA") but are required to have a professional alternative investment fund manager,
- in the form of PIFs (professional investors funds), i.e. self-managed investment entities, which however, require authorisation from the MFSA to operate.
What is important in both cases the titles of Maltese cryptoassets funds can only be promoted to individuals or entities which are classified as a qualifying investors and satisfy certain eligibility criteria.
Main legal requirements
Although the NAIF and PIF are regulated entities, their legal structure is quite flexible and the available organisational arrangements allow for adjustment to the planned investments.
The main feature and advantage of NAIFs is their short time to market. They do not require to go through the entire licensing process, but are subject to a notification process to the MFSA.
The MFSA should include the NAIF in the List of Notified AIFs within 10 working days from the date of filing of the notification request together with the required documentation.
It should be noted that NAIFs are a special category of alternative investment funds and are subject to the following requirements:
- NAIF cannot be self-managed, but are managed by an AIFM that has been authorised to carry out this type of activity in one of the EU countries in accordance with the AIFMD regime (separate regulations apply for non-EU third countries),
- the appointment of a depositary is mandatory,
- AIFM shall ensure that it has the required knowledge and experience in the area of cryptoassets, including hiring qualified persons for positions such as compliance officer, money laundering reporting officer, among others,
- NAIF is supervised by the competent supervisory authority of its AIFM.
Importantly, following the amendment of the rules governing NAIFs in 2021, NAIF can also invest in cryptoassets, as there are no restrictions on the type of asset classes in which a NAIF may invest in, with the exception of loan origination.
To the best of our knowledge, there are no NAIFs investing directly in cryptocurrency in the market, due to the difficulty in finding service providers of such funds, in particular depositaries.
Under Maltese law, PIFs that intend to invest in cryptoassets can be established in the form of:
- an investment company, generally in the form of investment company with variable share capital (SICAV),
- limited partnerships,
- unit trusts.
– moreover a PIF may be created as a stand-alone fund or as an umbrella fund structure.
Basically there are no requirements restricting the investment policy of PIFs in the area of cryptoassets, however, the Maltese regulator assesses the overall investment assumptions and risk diversification criteria of the fund in the licensing process.
In view of the above, it is important to highlight the key organisational and legal requirements of Maltese crypto funds operating as PIFs:
- Minimum investment - EUR 100,000,
- investment managers must have the sufficient knowledge and experience in the field of cryptoassets and their underlying technologies,
- a board of directors consisting of at least three members, one of whom should exercise his/her functions directly in Malta,
- appointment of an external valuer with expertise in carrying out valuations of cryptoassets,
- implementation of a risk policy adapted to the specificities of cryptoassets,
- fund documentation, including offering documents, should include information on the risks associated with investing in cryptoassets.
PIFs have to go through a licensing process and be authorised by the MFSA, however in practice, the Maltese regulator's approach is cooperative and supportive allowing investors to remain flexible and develop optimal legal solutions.
The current legal framework does not regulate the issues related to the cryptoassets sector at EU level.
Although the EU institutions have reached preliminary agreements on the proposal for a regulation on Markets in CryptoAssets (MiCA) as part of its digital finance strategy, it is still unclear when it will come into force.
Therefore, before deciding to enter the cryptoassets market, it is worth reviewing the regulations of various EU jurisdictions and select opportunities that suit our investment plans.
For investors who are looking for different legal options, the Maltese legal system seems an interesting alternative.
Legal assistance in the area of formation of investment funds and legal structures using investment funds is one of MWW's core areas of activity.
Our team can guide you in every aspect of the fund formation process.
If you would like any further information or need advice on investment funds, please contact us.