VFA - driving the relocation
The 1st of November 2018 marked the promulgation of the world’s first Blockchain and DLT-friendly comprehensive legal framework. Fast forward a couple of months and its success has for long been lauded by various industry players with the resultant effect being that major crypto exchanges such as Binance, Bittrex and OKEx are relocating themselves to Malta with the hopes to license themselves under the Maltese Virtual Financial Assets (VFA) regime. One of the main driving forces for the legal framework’s success and the positive industry reaction that it received was because it addressed the need of legal certainty in an industry which has been plagued with various issues, such as market manipulation, since its inception.
Achieving further legal certainty should also be the guiding principle in the debate to provide a holistic legal personality and patrimony to Blockchain and DLT platforms, or rather Innovative Technology Arrangements (ITAs). Attempting to compartmentalize the myriad of DLT software, smart contracts and decentralized autonomous organizations (DAOs) into a centralized top-down legal entity with its own governance procedures will inevitably lead one to realize the incoherency of both and such centralized structures can be said to comprise one of the main raisons d’etre for DLT technology. In order to complicate things further, an ITA may have governance, accounting and auditing facilities embedded within its software which will therefore render governing bodies of persons futile.
Can legal personality and DLT technology be reconciled?
One such interpretation would be to integrate a Partnership or Limited Liability Company legal structure. This entails that some partners are to be unlimitedly or limitedly liable for the platform’s liabilities and various governance procedures need to be adhered to. These include the conducting of general meetings and voting procedures as well as having a managing partner entrusted with the general direction and day to day administration. Another solution would be to utilize a Co-Operative whereby members unite under a jointly-owned entity for a specific shared purpose. Nonetheless, similarly to Partnerships, Co-Operatives also require governance structures and restrictions which do not extensively align to the considerations and peculiarities of DLT ITAs.
Foundations - an innovative option
An innovative option, which is currently still being drafted is the creation of a new Foundation structure. A Foundation is a legal structure which consists of a universality of things to achieve a specified aim. A foundation may be constituted to attain a lawful purpose under the auspices of a ‘purpose foundation’ or suit a private beneficiary and hence constitute a ‘private foundation’. For the purposes of the topic at hand, the former foundation structure is chosen as the ideal categorization. Any person may set up a foundation provided that it is established by means of a public deed and have a valid Maltese address for information and communications purposes. Foundations provide for one level of governance in the form of a Board of Administrators with fiduciary duties. With respect to purpose foundations, these must have at least three administrators or at least one juridical person ordinarily resident in Malta. This would not be too onerous on ITAs since these requirements align with those prescribed under the VFA Act. The Maltese framework itself integrates two functionaries which are necessary both at licensing stage and on an on-going basis. Nonetheless, nothing bars certain compliance and administration procedures, which are embedded within the ITA, to be integrated in the procedures of the particular ITA should they be approved and meet the requirements of the MDIA, thus reducing the overall human intervention.
The proposed legal structure will create a modified purpose foundation and have its own distinct legal personality while retaining a tailor-made approach. The relevance of the ITA acquiring its own legal personality will entail that the ITA has achieved legal capacity as well as its own patrimony. Through the former, the ITA will enjoy various legal capabilities such as the ability to be a party in a contract, to sue a third party, as well as be sued, and with all this meaning that an ITA will be able to own assets and incur liabilities in its own name as distinct from the individuals in the foundation. A segregated cell structure is also being suggested which will prove to be a means to compartmentalize assets. Through this structure, the ITA itself can be bankruptcy remote which will ensure that the ITA itself will remain in operation and not adversely affect any of its users due to its own financial difficulties. A liability and insurance cell would also be provided for which will provide recourse for any liabilities or creditors. Through this structure, the assets of the ITA will be targeted as opposed to the assets of the individuals, be it software developers or front end designers, behind the ITA in question. Since purpose foundations are not defined to a time-period or to a person or group of persons, this will make the ITA subsist for an indefinite period of time and stand the test of time.
How will ITAs operate?
In the same way as not all ITAs will operate in the same way and industry, different ITAs will provide for varying governance and compliance features which may be automated or still require human intervention. As quoted from Dr Ganado’s article on the subject, who is one of the main proponents advocating the integration of purpose foundations within the DLT sphere, “the best solution appears to cater for a range of possibilities from 100% automation to very little automation and allow for different calibration on different topics or matters”. Bearing in the mind the foregoing, it is important to appreciate that albeit the fact that DLT technology is steadily developing and transforming the world around us, the technology has not yet evolved to a point whereby human intervention can be replicated and even more so, eliminated. Nonetheless one would expect that should this legislative proposal be enacted and eventually be adopted within the local industry, more focus will be concentrated on making ITFs fully automated and reach an amicable balance between the concepts of legal certainty and effective legal checks and balances on the one hand, and the true decentralized and automated spirit of DLT technology on the other.
Conclusion
While there is nothing concrete and established about the final version of this new form of foundation, the notion of having a modified foundation structure which will be adapted to the characteristics of DLT technology will renew Malta’s commitment to remain a ‘Blockchain Island’ and keep abreast with technological developments.
