Few places contrast the ancient with the modern as sharply as Malta, where the cryptocurrency industry has found a spiritual home amongst the ruins of Phoenician and Roman civilisation.

With former Prime Minister Joseph Muscat at the helm, Malta pushed ahead of EU competitors like Gibraltar and Liechtenstein to become 'blockchain island' — the European domicile of choice for top cryptocurrency exchanges and forward-thinking blockchain businesses.

The unique regulatory regime behind this transformation has created a thriving local industry, and now serves as a test case for the regulation of cryptocurrency across the whole of the EU.

Becoming 'Blockchain Island'

Despite being the EU's smallest member state with a landmass only around five times larger than Manhattan, Malta has consistently topped the region's economic growth charts.

As it is unable to rely on natural resources, the barren Mediterranean island has adopted an economic growth strategy of latching onto fast moving technological developments—from online gambling, which accounts for 12% of Malta's GDP,  to iGaming, and even medical cannabis. Before welcoming cryptocurrency, Malta built a dynamic economy by offering businesses in these innovative industries the lowest taxes in the EU, a business-friendly political environment, and a 'regulatory passport' granting instant access to the EU's internal market of over 500 million people. 

With experience of dealing with these fledgling industries, Malta was then well-placed to capitalise on the arrival of cryptocurrency, which suffers from the same regulatory uncertainty that afflicts many new technologies.

By assuring legality with pioneering regulations, Malta has appealed to cryptocurrency and blockchain companies around the world concerned that their home jurisdiction might turn around and criminalise their business.

So while most of the West has been languishing in regulatory uncertainty, Malta has opened its doors and offered businesses the shelter of legal assurance. 

Three blockchain bills

This certainty comes in the form of three bills passed in July 2018, which as minister Silvio Schembri said, had the explicit goal of bringing “legal certainty to an environment that is currently unregulated.”

The first law, known as the Malta Digital Innovation Authority Act (MDIA Act), established the Malta Digital Innovation Authority—a government body responsible for creating crypto policy, providing certification for blockchain platforms, and ensuring they are all held to the same standards.

The second law—the Innovative Technology Arrangement and Services Act (ITASA)—concerns the registration of exchanges and other companies operating in the cryptocurrency market.

And the third law, known as the Virtual Financial Assets Act (VFA Act), implemented stringent requirements for cryptocurrency exchanges, ICOs, wallet providers, custodians, and other service providers.

These three bills, which were prepared in cooperation with Binance's Changpeng Zhao, represent the broadest set of policies for the crypto industry in the western world, and have transformed Malta into a magnet for cryptocurrency exchanges and blockchain businesses.

So much so,  that more cryptocurrency trading happens on Malta-based exchanges than anywhere else in the world, according to a study by Morgan Stanley in April 2018.

The promised land

Malta's appeal only intensified when Joseph Muscat, who served as Prime Minister from 2013 to 2020,  preached to the UN in October 2018 that cryptocurrencies were “the inevitable future of money—sending the clear message that Malta was open for business.

Since then, the Malta Financial Services Authority (MFSA) is said to have received Letters of Intent from 34 prospective VFA Service Providers, 21 of which are from crypto-asset exchanges. 

These include the biggest exchange by volume Binance, which setup what it has referred to as a "spiritual headquarters” on the island in March 2018 after facing regulatory obstacles in the Far East.

Binance's office sits alongside other large exchanges like Hong Kong's OKEx, and a broad range of other crypto-related businesses. These include Brazilian broker Bleutrade, London exchange BeQuant, and the payment processor BitPay which moved from Poland. 

Working within a few miles of each other in Malta, these businesses not only benefit from legal certainty, but also from community projects.

As many crypto businesses struggle with accessing banking services, Binance and other big players on the island are backing a tech-focused shared bank—the Founders Bank— which is currently in the process of obtaining a full EU banking license under the regulation of the MFSA and the European Central Bank. In the same vein, Token project Chiliz aims to build a 'blockchain campus' that will connect all cryptocurrency companies in the neighbourhood to help incubate new business.

Setting a regulatory precedent

Though it has been quick to welcome cryptocurrency firms, Malta is now strengthening the oversight of cryptocurrency firms operating on the island.

Following a warning from the International Monetary Fund that the cryptocurrency and remote gaming sector could be a vehicle for money laundering, the MFSA released a three-year strategic plan in September 2019. This details how the authority will work with international and national authorities, and employ artificial intelligence, to combat illicit transactions.

This may have caused a stir with some exchanges, as Bittrex announced the same month that it would be moving operations to Liechtenstein, whose parliament had just approved its own Blockchain Act.

Even more recently, the relationship between Binance and Maltese regulators has been cast into doubt. On February 21st, the MFSA released a cryptic statement denying that the exchange is "subject to regulatory oversight by the MFSA"—contradicting multiple media reports that the exchange is headquartered on the island.

Nevertheless, even without the largest exchange by volume, Malta has now firmly established itself as a go-to destination in Europe for cryptocurrency companies. And its pioneering regulations are likely to be the first example considered when authorities around Europe eventually come to create their own regulatory framework.