MFSA’s Position Paper on Tokenising Collective Investment Scheme Units and the Role of Fund Administrators in Tokenised Structures

Introduction to MFSA’s Tokenisation Framework

The Malta Financial Services Authority (MFSA) has issued a position paper detailing its current stance on the tokenisation of units within Collective Investment Schemes (CIS). This initiative is part of a broader push to align with European Union frameworks such as the Markets in Crypto-Assets (MiCA) Regulation and the Distributed Ledger Technology (DLT) Pilot Regime. These developments aim to harmonise the use of advanced digital technologies in the financial sector.

Integrating Tokenisation into Fund Operations

Central to the MFSA's approach is the integration of tokenisation into CIS operational workflows, especially within the transfer agency function. Tokenisation involves digitising financial assets on a distributed ledger, allowing these assets to be securely managed, transferred, and stored via blockchain. This process enhances operational transparency, simplifies fund management, and broadens investor accessibility.

Two Tokenisation Models

The MFSA distinguishes between two types of tokens:

 
• Native Tokens: Digital assets issued directly on a blockchain network.
 
• Non-Native Tokens: Digital representations of existing off-chain assets such as securities.

When traditional fund units are converted into digital tokens, they become more divisible, transferable, and tradable. Despite this innovation, tokenised CIS units are classified as financial instruments under MiFID II, placing them outside the scope of MiCA and subjecting their distribution to specific licensing rules under the MFSA’s Conduct of Business Rulebook.

Eligibility for Tokenised Units

Tokenisation is authorised for the following fund types, provided they comply with applicable regulations:

 
• Licensed Alternative Investment Funds (AIFs)
 
• Licensed Professional Investor Funds (PIFs)
 
• Notified AIFs (NAIFs)
 
• Notified PIFs (NPIFs)
 
• UCITS, if core principles like liquidity and transparency are preserved

Role of Fund Administrators in Tokenised Structures

Fund Administrators hold a critical role in managing tokenised fund units. Their responsibilities include:

 
• Operating blockchain-based registries
 
• Enforcing fund rules through smart contracts
 
• Maintaining real-time ledgers of share ownership

Security tokens act as digital stand-ins for fund shares, with the DLT register serving as the official shareholder record. Administrators are also tasked with ensuring anti-money laundering (AML) and know-your-customer (KYC) compliance, especially regarding digital wallet verification.

Regulatory and Operational Compliance Measures

Although these digital assets are still denominated in fiat currencies, the MFSA outlines several safeguards to ensure legal and operational robustness:

a) Knowledge and Competency

Service providers must possess the necessary technical understanding of blockchain and tokenisation.

b) Mandatory Disclosures

Fund documentation must include transparent disclosures on:

 
• AML/KYC obligations and data management
 
• Subscription/redemption timelines
 
• Token transferability limits
 
• Digital asset safekeeping measures
 
• Risks related to wallets and blockchain

c) Risk Management Requirements

Key areas of focus and mitigation strategies include:

 
• DLT Architecture: Use proven and secure smart contracts
 
• Key Management: Protect against key loss with secure processes
 
• Data Privacy: Adhere to GDPR and ensure data protection
 
• Business Continuity: Have tested recovery plans in place
 
• System Availability: Ensure high uptime through redundant systems
 
• Access Security: Implement strong MFA protocols
 
• Defined Responsibilities: Clearly outline duties in fund documents
 
• Third-Party Risk: Coordinate using agreed frameworks
 
• Governance: Set up clear accountability structures

Conclusion

The MFSA’s guidance marks a pivotal moment in Malta’s evolving financial landscape. By incorporating tokenisation within established legal and regulatory frameworks, the MFSA is embracing innovation while ensuring regulatory compliance and investor protection. As Malta continues to build its digital finance infrastructure, fund managers, administrators, and investors are encouraged to adopt practices that align technological advancements with operational diligence and regulatory integrity.

For full details, you can read the MFSA’s official position paper here.

For further inquiries, contact: info@ccfundservices.com