The nation
of Malta has led the way with its blockchain regulations
and has encouraged its other major authorities to embrace the technology. The
Malta Gaming Authority is a leading regulator of online and land-based gambling
and has recently published its guidelines to move towards accepting virtual
financial assets and distributed ledger technology within the gaming industry.

The Malta
Gaming Authority announced in March 2018 that they would be creating methods of
welcoming distributed ledger technology and cryptocurrencies into the gaming
industry. They announced that a licensing system would be established alongside methods of using wallets of digital
currency at gaming websites and a way of calculating exchange rates. It was at
this time that the Malta Gaming Authority announced their plans to create a
sandbox testing environment in which developers could test their games to see
if they are in line with the upcoming regulations of the Malta Gaming
Authority.

In October
2018, the Malta Gaming Authority released its guidelines for the framework that
they had created to assist the budding technology in the gaming industry.

The Malta Gaming Authority releases
its sandbox framework

The announcement detailed the two phases of the framework. Phase one is set to commence on the
1st of January 2019, at which point the Malta Gaming Authority will
be accepting applications from bodies within the gaming industry looking to
allow the use of virtual financial assets and virtual tokens as a means of
payment. In phase two, their framework will be extended to allow for
applications from those looking to use innovative technology arrangements, such
as distributed ledger technology, within the key technical equipment of
licensees: this is to coincide with further developments made by the
established Malta Digital Innovation Authority. The Malta Gaming Authority is
expecting the sandbox framework to continue until October 2019, but the paper
is to be considered as a live document so that the regulatory requirements
initially envisioned can be changed to adapt to technological and regulatory
developments if necessary.

Even if an
applicant fully complies with the Maltese blockchain legislation, they must
still obtain a license from the MFSA before being granted access to the sandbox
framework. Furthermore, applicants can apply for the inclusion of their testnet within the sandbox framework should
their live environment go live within the three months following their approval
by the Malta Gaming Authority.

The Malta
Gaming Authority have established criteria
as to how to define virtual assets and the steps required to use assets from
distributed ledger technology. Prior to
the involvement of the Malta Gaming Authority, an operator shall need to
undergo a Financial Instrument Test that is issued by the Malta Financial
Services Authority to be able to determine the nature of the distributed ledger
technology asset, be it a virtual financial asset or a virtual token. Once this
has been established, the operator shall
submit the Malta Financial Service Authority’s findings with other appropriate
documentation to the Malta Gaming Authority as a stage of the application
process to be approved for the sandbox.

Regulating the use of virtual
financial assets

If the asset
is deemed to be a virtual financial asset, it adheres to established statutes
of Maltese law. Operators can then use virtual financial assets that are
overseen by the Malta Financial Services Authority in accordance with the Virtual Financial Assets Act. Those deemed
to be financial instruments, per the Investment Services Act, or electronic
money, per the Financial Institutions Act, can only be accepted as a method of
payment if they are specifically approved by the Malta Gaming Authority, which
shall be decided on a case-by-case basis
at the Authority’s discretion.

When users
sign-up to gaming websites with the intent to use virtual financial assets,
only wallet addresses that are specifically tied
to the individual will be permitted
within the gaming ecosystem. Once the wallet has been recognised, for a deposit
of virtual financial assets to be successful, the operator must verify the individual’s
details and their wallet. Once verification is complete, players receive their gaming
funds. Withdrawals can only be performed
to verified wallets, and if a pending transaction does not match the player’s
verified wallet address, funds will be returned to their point of origin or
shall be frozen.

The operator
must clearly identify and forewarn all players to withdrawal and deposit
transaction fees should these exist on their platform. Within the operator’s
ecosystem, virtual financial assets and fiat currencies shall be treated as separate entities, with an
exchange between the two not permitted. For the sandbox framework, the exchange
rate applied shall adhere to that of the virtual financial asset exchange
declared to the Malta Gaming Authority by the operator. The exchange rate shall
be taken for the virtual financial assets
permitted against the Euro (€) at the time of 12:00 Central European Time on
the last day of the reporting month with the taken exchange rate unable to
change throughout that same reporting
month. However, exchange rates can change from reporting month to reporting
month. Operators shall enforce a maximum deposit to the value of €1000 in
virtual financial assets per month.

Regulating the use of virtual tokens

The use of
virtual tokens shall also be decided on a case-by-case basis by the Malta
Gaming Authority: a decision which is guided by their distributed ledger
technology economics criteria as well as an evaluation of token’s technology,
the company’s structure, human resources, market applications, and security.
Registered players can acquire virtual tokens from the operator on the
operator’s platform for use on the platform. Virtual tokens can purchased with the use of fiat money as long as
withdrawals following the use of the virtual tokens can also be made in fiat
currency at the same rate of exchange as they
were initially acquired.

Regulating the use of innovative
technology arrangements

During the
operation of the sandbox framework, the Malta Gaming Authority shall be
accepting games and components of games that are
fully or partially hosted in a distributed ledger environment, but these
technologies shall also be subject to an audit. Other essential components
hosted on distributed ledger technology will also be accepted if the Malta
Gaming Authority is satisfied by the technology’s compliance with regulation
and is successful in an audit.

Approval
from the Malta Gaming Authority and inclusion within the sandbox framework is required of any operator seeking to make use
of innovative technology arrangements as a part of its key equipment, and each
element of innovative technology arrangements shall be audited by registered auditors of the Malta Digital Innovation
Authority. The technology is only accepted if the audit report concludes with a
positive outcome and the Malta Gaming Authority is satisfied that its
regulatory requirements will be adhered to by the operator.

Smart contracts will only be permitted if: the smart contract’s code is
reviewed by an audit; necessary amendments are made following the results of
the audit; necessary safeguards are put in place to protect the transferred
assets; revocation of a smart contract can occur should a flaw generated in the
code be discovered; and wallet verification is part of the player’s identity. The main focus of the Malta Gaming
Authority, with regards to smart contracts, is where the funds placed in escrow during a contract are held by the smart
contract.

According to the Malta Gaming Authority’s Guidelines on Technical
Infrastructure Hosting Gaming and Control systems, hosting architecture must be
located within the nation of Malta, a European Union member state, or a member
of the European Economic Area to ensure that the same principles are upheld,
which would seemingly exclude the use of public distributed ledger technology
platforms. But
applications to the sandbox framework using such technology will not be
scrutinised for not abiding by these guidelines. To gain a license, however, the
operator of this technology will need to establish a node in Malta to adhere to
requirements.

Once
approved by the Malta Gaming Authority, the licensee will be rewarded with a dynamic seal, acknowledging
that they are a participant of the sandbox framework.