“Blockchain Island”

Malta’s steps towards becoming the ‘Blockchain Island’ have seen some criticism lately. Dr Joshua Ellul is the chairperson of Malta’s Digital Innovation Authority and co-ordinates UM’s Masters Degree in Blockchain and Distributed Ledger Technologies, both new enterprises. Jonathan Firbank is in conversation with Dr Ellul about Malta’s efforts.

Cryptocurrency’s meteoric rise is faltering. The value of Bitcoin and alternative projects has fallen sharply. Major world powers have legislated against blockchain technology, the means by which cryptocurrency is recorded and traded. Public figures have manipulated the market. Projects that were started as a joke, like Dogecoin, have overshadowed those with practical value. But amidst all this uncertainty, Malta is becoming a self-proclaimed ‘Blockchain Island’ in a sea of crypto-scepticism.

A False Start

However, proclaiming something doesn’t make it true. Malta’s efforts to develop a regulated blockchain industry seem fraught with problems. Investment from local banks, vital for new enterprises, has been extremely limited. Binance (the leading cryptocurrency exchange) was popularly considered to have a future in Malta — but this was dispelled by a statement from the Malta Financial Services Authority, and Binance quietly dropped Malta from its PR content. Last year headlines cast light on 70% of the companies invited to Malta’s initiative not pursuing a licence. Most importantly, Prime Minister Muscat, whose administration touted ‘Blockchain Island’, was forced to resign. As many in Malta will know, this was a consequence of the assassination of the investigative journalist Daphne Caruana Galizia. Galizia had famously cast light on Maltese political corruption, including the administration’s links to offshore accounts exposed by the Panama Papers. Cryptocurrency is celebrated as a means of concealing monetary value; ‘Blockchain Island’’ doesn’t sound as good when the phrase is coming from alleged money launderers who attempt to silence critics. But there are two sides to the coin. Malta’s engagement with blockchain may have had a disastrous start in the public eye, but it may also have a productive future.

A Blockchain Sandbox

Dr Joshua Ellul is the chairperson of Malta’s Digital Innovation Authority (MDIA), which helps regulate technology-related aspects of the new industry. He does, of course, champion the MDIA but is able to be candid about the project’s initial shortcomings: ‘Malta could have done things better in regards to licencing faster — whilst at the same time the quality of diligence processes should not sacrifice speed for quality. The strategy could have been different; perhaps to be louder later.’ 

The MDIA now has a brand new ‘flagship utility’, a residency for tech operators and startups called the Technology Assurance Sandbox (TAS). ‘Sandbox’ might sound familiar to those with a tech background. It’s used to describe a closed environment where software can execute in a safe environment, but this sandbox is a regulatory one focused on providing regulatory assurances instead. Dr Ellul describes the TAS as ‘the first technology regulatory assurance sandbox in the world’. Its goal is to nurture new, innovative tech companies in order to gradually bring them in line with Maltese and international standards and requirements, ‘sandbox residents will be required to agree to certain restrictions to ensure operational risk is kept low, whilst being flexible as every company is different.’ It’s a process that is more cost effective than retroactively bringing a project to standard. ‘For example, let’s say there’s a company that is going to process transactions, we might start them processing 100 transactions a day, and then scale up together as they reach certain milestones.’

This gives developers a level of assurance that they wouldn’t normally benefit from. ‘Once they’re in the sandbox, they can approach investors and say, “listen, a national authority is overseeing me to ensure everything’s fine.”’ Investors and consumers also get more peace of mind, something that can be hard to come by in this rapidly evolving industry. The constant change in the blockchain space means that regulators need to be flexible as well, something that Dr Ellul believes the sandbox is perfectly suited for, as ‘regulators are learning along the way as well, seeing what to adopt and adapt. I would say we’re a bit ahead of our time.’ The EU, as of June 2021, has announced that they are going to start looking into this method of regulator-developer collaboration, so it seems Dr Ellul is right.

A Fresh Start

This highly active approach, described by Dr Ellul as ‘handholding’, predominantly caters for startups. Higher risk crypto activities (such as those with money laundering potential), on the other hand, require VFA (Virtual Financial Assets) licencing under the MFSA (Malta Financial Services Authority) as well as a full systems audit from the MDIA. In the past the MFSA has come under fire for its licencing processes. But the well publicised statistic of ‘70% of firms not pursuing the licence’ could be misleading. ‘A number did leave because it was taking a lot of time to get the licence. I think Malta could have done that better in regards to either being loud about the vision later, once everything was set up, or being quicker in processing. But out of these hundreds, realistically, were they all going to be big players? Good players? Professional players? Probably not. It’s a startup market.’

It’s no secret to people familiar with crypto that a lot of startups are revealed to be scams or simply fail. Hundreds of new companies failing in Malta’s relatively small economy could cause a great deal of harm to the country. ‘We can actually see this happening elsewhere. A lot of companies went to Estonia because of its very lightweight approach to regulation. Estonia ended up having to revoke their licences because of corruption scandals.’ Malta’s regulatory regime is very strict in comparison, giving a Maltese licence credibility, a rare asset for such new technologies.

The word ‘corruption’, of course, leads us to Malta’s greatest problem. But Dr Ellul believes wider acceptance of cryptocurrency is unlikely to make things worse. A popular perception of crypto, exploited by its critics, is that it is a technology for illegal activity. But Dr Ellul brings up a counter-argument that has ‘hidden in plain sight’ throughout debates on the criminal aspect of blockchain technologies: cash and conventional banking, of course, is used for illicit activity just as much. There have even been banks set up specifically for money laundering or sheltering criminals’ funds. ‘However, cryptocurrency keeps an immutable record of transactions. Unlike cash, the blockchain keeps that record forever. This is helping investigators to do post mortem investigations and find various bad actors.’

Education is Key

In addition to his work with the MDIA, Dr Ellul also co-ordinates the Blockchain and Distributed Ledger Technologies Masters Degree. It was launched in 2019 as a direct result of the ‘Blockchain Island’ rhetoric: ‘When the government announced Malta would become the ‘Blockchain Island’, we reached out to ask what they were going to do, obviously sceptical. How do you create a blockchain island?’ After some dialogue, Dr Ellul and his colleagues were asked to help review and draft the legislation. Helping review and draft laws involved interacting with lawyers, technical specialists, and people with a background in business. A communication gap problem began to emerge: how could people with such different specialisations communicate effectively? ‘We realised that we have very different vocabularies, different lingo. We saw that the blockchain sector, the crypto sector, is bringing tech together with finance and law, and there needs to be a way to bridge the communication gap.’

They decided there was a need for a multidisciplinary masters degree that could bridge those gaps, allowing individuals to gain an understanding of the other disciplines that they would interact with professionally. But, like the Technical Assurance Sandbox, the course plays to people’s strengths, ‘digging deeper into the individual’s area of specialisation’ rather than applying the same, jack-of-all-trades approach to every student. ‘Our IT guys learn about building blockchains, our lawyers learn about regulating, and our business guys learn about tokenomics.’ If, for example, you have a tech background, you’ll be introduced to law but you won’t study it as deeply as a colleague who specialises in it. Conversely, lawyers would be introduced to programming to facilitate their understanding, but they wouldn’t be expected to become experts in it. ‘It’s the first programme of its kind, to have a multidisciplinary nature that really digs deep into specialisations but also provides introductions to the other areas. To tell the truth, I can’t find any other programmes in the world like it,’ admits Dr EllulValuing unique needs and optimising strengths takes centre stage here, the same ethos that the Technology Assurance Sandbox promotes. It seems inevitable that this conscientiousness will lead to success stories in Malta, while innovators elsewhere are held back by increasingly hostile attitudes to cryptocurrency. But if Malta truly wants to become ‘Blockchain Island’, its government may need to wholeheartedly adopt that same conscientiousness to keep pace with these new technologies. This time, ‘inevitable’ isn’t the word that springs to mind.