Jonathan Galea addresses last year’s Malta Blockchain Summit Photo: Malta Blockchain Summit
A lot can change in just a few months. It was only last November that the world’s crypto community convened in Malta for the second major summit in as many months, a clear signal by this tiny island to the world that it’s ready to punch above its weight and woo an industry that no one really fully understands.
The hype was contagious, the excitement palpable, the upbeat mood one of millennials whose dreams were inches close to becoming reality.
The situation is decidedly more sombre now, as blockchain companies are coming to terms with the recent cryptocurrency crash and the stringent requirements of the Maltese authorities.
“The crash is a widespread issue, especially for blockchain companies who didn’t hedge against risks by converting their cryptocurrencies into fiat (regular currencies) or by setting up an emergency fund,” Jonathan Galea, managing director of Blockchain Advisory Ltd, told Lovin Malta. “After the crash, companies who had raised €50 million through an initial coin offering suddenly only had €5-10 million.”
The widely-documented crash impacted all major cryptocurrencies, with the most popular one, Bitcoin, slipping from a stunning high of $20,000 in December 2017 to $3,404 as of the time of writing.
Moreover, he warned that many companies were unable to convert their crypto into fiat because most banks worldwide refuse to open accounts for them.
“The cryptocurrency community was very liberal and anti-bank until around 2014/15 and the banks were well aware of this attitude,” Galea said. “Now, traditional players have started entering the industry and are realising they cannot work in a vacuum but must work with banks and governments if they want to go mainstream and cater for widespread communities.”
“However, banks are still extremely cautious to open accounts for companies which raise funds through ICOs, unless the companies can prove they conduct adequate due diligence on each and every one of their investors.”
“So many brilliant technical projects were being designed, but they were led by technical developers when the truth is you need business-minded people to run a business. Many projects managed to raise funds but didn’t know how to handle them, so ended up squandering them in a few years, accelerated by the market crash, and filing for bankruptcy.”
The tremors in the blockchain industry came to the fore recently when the Sliema-based DQR Group fired most of its staff and froze its operations, with its CEO explaining that its investor – a German Bitcoin mining company – had run into financial difficulties as a result of the cryptocurrency crash.
Prime Minister Joseph Muscat played down concerns last week, arguing that DQR was just one of 259 companies which applied for a license with the Malta Financial Services Authority since Malta passed its pioneering blockchain legislation last November.
Out of these 259 applications, 182 were from service providers, 36 by issuers of ICOs and 41 by Virtual Financial Assets (VFA) agents, ie. the local law, accounting and auditing firms which act as a go-between for blockchain companies when dealing with the authorities.
Parliamentary secretary for the digital economy Silvio Schembri recently confirmed with Lovin Malta that no licenses have been issued so far. This means all the blockchain companies currently operating on the island are doing so by virtue of a one-year transitory period that was granted to companies who moved to Malta before the law passed on 1st November 2018.
And obtaining a license is no mean feat. Crypto exchanges must have a minimum share capital of €730,000 and must prove they have a robust framework in place to defend themselves from cyberattacks, with the MFSA well aware of the recent notorious $500 million hack from the Japanese crypto exchange Coincheck.
VFA agents too must have a share capital of €150,000, or €75,000 and professional indemnity insurance, and must pass a rigorous MFSA exam, which recently failed two thirds of examinees.
“There was a massive rush of companies who moved to Malta before 1st November so that they could take advantage of the transitory period,” Galea said.
“However, most of them didn’t know what they were coming up against, and indeed some crypto exchanges decided to pull out after learning of the share capital requirements. The ones who remained here are the ones who have their resources in place, have garnered experience in the filed and have robust security frameworks.”
“We don’t want it any other way though. Companies who operate in Malta should provide peace of mind to users, regulators and their own workers.”
Indeed, although he admitted the ‘Blockchain Island’ hype has died down considerably since the law actually passed, he insisted Malta remains very much the place to be for serious blockchain companies.
“Malta remains the only EU country that offers these companies a framework to regulate themselves in, and along with Japan is one of only two countries in the world to offer a full licensing process to crypto-exchanges.”
“There was a huge hype in 2017 but then the crash followed the following year. Hopefully people will learn from their mistakes.”