Dr. Max Ganado, partner at GANADO Advocates, gave a presentation on legal personality for blockchain platforms at the BlockFinance event, jointly organised by FinanceMalta and Blockchain Malta on the 18th of September. This presentation addressed the issue from the angle of funds and assets management. Dr. Ganado started by noting that some commentators were speaking about tokenising units in collective investment schemes, which is a great example in favour of the argument particularly in view of the urgent need for legal certainty in the context. Malta is working hard on resolving some of the more evident legal challenges through specific legislation. In the case of tokens issued in the context of investment funds, we are seeing the combination of a corporate issuer of tokens (usually an SPV), the scheme structure (usually a SICAV or other corporate form of open ended schemes) and, finally, the DLT arrangement which is a combination of software programmes. The SPV has a ledger for its token holders, the SICAV has a share register and the DLT platform is a ledger par excellence. We immediately see the difficulty of trying to understand how to deal with the tokens issued by the SPV as though they were units in the collective investment scheme, and how these can be transacted on the blockchain ledger. Having three ledgers clearly poses a problem of identification, ownership, security of transfers or pledges and the like. Solutions are needed if we are going to take advantage of the new technology in a secure manner. Just stating something in the token issue white paper is probably not enough as that would not bind the SICAV. Acknowledgements might work, but how will that affect ownership rights in the tokens?
Max reviewed the progress made in Maltese law so far and then described the project relating to legal personality for DLT arrangements under Maltese law. This addresses issues of capacity and liability, which are critical for funds to acquire and deal in assets as well as to unit holders who, under current DLT contexts, are potentially liable for losses on the platform, even though the SICAV itself may protect them from liability. The details of the Maltese proposal on legal personality and the justification of the choice of a foundation, as opposed to an association of persons – the basis of the potential liability of users – were shared with the audience.
Finally, it was explained that in the proposed foundation solution, all software would be bankruptcy remote, as would be client assets. This would be possible through a segregated cell solution. It would be permitted for administration, governance and compliance to be automated, or not, provided the software passes the tests of legal compliance and a mandatory systems audit. These are conditions for the DLT platform and the relative smart contracts to be certified. There would be a liability cell which would hold an insurance cover against reasonably foreseeable risks, further supported by a sinking fund or a guarantee which would need to be transparent and accessible to all users at all times.
How does one solve the issue of the three separate ledgers? Maltese foundations are allowed to issue tokens under current law, can operate as a collective investment scheme if authorised by MFSA and the DLT platform under the name of an innovative technology arrangement, and may be owned or controlled and operated by the Maltese foundation. This will result in one ledger of tokens administered by one entity with one issuer reflecting user rights in one structure.
The Maltese proposal should solve the problem.