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Postcard from Malta

The momentum of the Maltese economy shows no signs of abating. The country is well placed to become an important bridge between post-Brexit Britain and the EU, and to keep growing and diversifying. Moreover, it has embraced many of the latest digital sectors, including digital ledger technologies (blockchain) and crypto currencies, writes Ramon Bondin, CEO of Dolfin Asset Services.

31 July 2018 / Macro & Markets

For much of its history, Malta has been a bridge for international trade. When ships were still fuelled by coal, it was the primary refuelling port for those travelling between Europe, India and the Far East. Although its commercial and leisure maritime industries remain important – Malta has the largest shipping register in the EU and a particularly strong super-yacht industry – today, the island nation is more of a financial and digital bridge.

Malta’s financial services have boomed and now serve markets across Europe and beyond.

Since joining the EU in 2004, and adopting the euro in 2008, Malta’s financial services and online gaming industries, supported by a strong ICT sector, have boomed and now service markets throughout Europe and beyond. They have been key drivers of Malta’s GDP growth over the past five years, which has averaged almost 7 per cent.

Malta is working hard to maintain the momentum of existing industries and attract new ones. But being a small, densely populated group of islands – 450,000 people live in an area roughly 17 miles long by 9 miles wide – comes with constraints. So Malta has a strong focus on those areas of the digital economy that require highly skilled talent, but not in large numbers.

People first

Malta’s local population is highly skilled and is complemented by a large pool of ‘imported’ skills. Locals enjoy free schooling and undergraduate degrees, with many conducting post-graduate studies abroad, mostly in the UK. Some expats qualify for a reduced income tax rate via a Highly Qualified Persons scheme, on top of an already attractive tax system, with no inheritance, wealth, gift, or annual property taxes.

Malta has a Mediterranean culture with a strong British influence.

And people like working and living in Malta. Career development opportunities are good, in well-paid industries with significant exposure to international business. The lifestyle is also good, in a Mediterranean culture with a strong British influence. Ten years ago, many locals who studied abroad would have stayed abroad to start their career; now, they return after their studies. And many expats working in Malta stay for their retirement.

But existing skills are nearly fully utilised. At 3.5 per cent, Malta has the second lowest unemployment rate in the EU and has a limited pool of human resources.

So businesses need to import even more talent, which is becoming harder to accommodate. There is limited space for new property development and upgrading the existing road infrastructure is a challenge. Property prices have spiked with the influx of foreign talent and also as a result of Malta’s citizenship scheme, which requires property to be purchased.

And with over two million tourists every year in addition to an expanding workforce, Malta can become very congested.

Continuing the momentum in financial services

The finance sector now makes up around 13 per cent of GDP and employs more than 10,000 people, with 4,000 of these jobs being added since joining the EU. Banking, insurance, fund management and wealth management are all strong sub-sectors.

Obvious attractions for financial services companies are EU passporting opportunities and an attractive tax regime. These are not unique to Malta, which is often compared to other European financial hubs, such as Dublin and Luxembourg. However, Malta is able to differentiate itself from these centres, and is particularly suited to some UK financial services businesses needing a post-Brexit EU base. In addition to its EU membership, Malta is also a member of the Commonwealth and has strong ties to North Africa and the Middle East. English is used in all business correspondence and law, alongside Maltese. Its business culture, language, and legal system make doing business in Malta relatively easy for UK firms.

Malta is particularly suited to some UK finanical services businesses needing a post-Brexit EU base.

Furthermore, Malta has a stable political and financial environment. It was largely unscathed during the financial crisis and the eurozone debt crisis, with neither its government nor its banks requiring bailouts. The regulator – the Malta Financial Services Authority – is well regarded for being approachable, quick to make decisions, and rigorous. And operating costs for financial services companies are estimated to be 20–30 per cent lower than larger European financial centres.

But Malta is not the location for all businesses . Smaller and medium sized operations, requiring high skills, are most likely to benefit; Malta is not looking to tempt large financial operations, employing thousands of people, to re-locate.

From gaming to blockchain and crypto

In 2004, Malta became the first EU country to regulate online gaming or ‘iGaming’. While many countries clamped down on commercial gaming operators, often to protect national monopolies, Malta welcomed them.

Gaming companies gained the credibility that goes with regulatory scrutiny, and the legal framework to compete across Europe.

It was a masterstroke. There are now 275 iGaming companies in Malta, including many industry heavyweights, making up 10 per cent of GDP and employing nearly 6,500 people. And alongside the increasingly technology dependent financial services sector, it has helped to develop an advanced ICT sector.

Malta is now looking to do it all again, this time with blockchain technologies and crypto-currencies.

Malta is providing a regulatory framework to govern and support blockchain and crypto-currencies.

Once again, it’s a contrarian approach. While some countries have shunned these sectors, Malta is providing a regulatory framework to govern and support them in order to help them build credibility and grow. New legislation was approved by the Maltese parliament on the 4th July 2018.

The ‘Malta Digital Innovation Authority’ (MDIA) is to be established, which will have a mandate to promote and develop innovative technologies. Initially, it will register and license providers of technologies such as distributed ledgers (blockchain) and smart contracts, so they can roll out their services in a regulated environment, removing a barrier to adoption. In the future, the mandate of the MDIA is expected to expand to other new technologies.

There is also new legislation that will govern initial coin offerings (ICOs) and crypto exchanges. Regulatory uncertainty, such as licensing requirements, has dogged this area in many countries. It has sometimes been unclear whether some ‘crypto-assets’ qualify as formal financial instruments, and need to be governed under existing regulations (such as MiFID II in the EU).

So Malta will now introduce a ‘financial instruments test’. This will determine whether a crypto-asset qualifies as a financial instrument and should be governed by existing regulation; or should fall under the scope of new ‘virtual financial asset’ regulation; or not be regulated at all. Virtual financial asset regulation will govern the operations managing these new crypto assets and introduce consumer protections.

Several companies in these sectors have responded positively to the moves, and have already announced the establishment of new operations in Malta, including Binance, the largest bitcoin exchange.

For now, it’s good news coming out of Malta. Speedy moves to welcome new fintech sectors and a differentiated ‘bridge-into-the-EU’ offering for UK businesses bode well for continued growth.

But it will take continued innovation and effort from the public and private sectors to overcome the constraints on the economy and keep the momentum.

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