Distributed Ledger Technology and Virtual currencies

We asked CBM's Banking Services Chief Officer Jesmond Gatt if he agreed that Distributed Ledger Technology (DLT) and Virtual currencies (VCs) have brought about a revolution in the financial services sector.

Jesmond: Changes to the financial services sector can already be observed. However it is still early to determine the extent of their effect. Central banks have been criticised for being too cautious in the field of DLT and VCs. They haveto be cautious, which is not to say that they have to oppose any technological innovation simply because it is born out of the box.  On the contrary, many central banks are studying the technology involved as well as issues involved in the possible application to fiat currency. We have to be open to innovation but we need to do so with our eyes wide open. Although VCs are not money - not, so far, as verifiable assets that fulfil effectively the three essential functions of money, namely as a medium of exchange, a unit of account and a store of value - regulators and legislators must watch developments closely with a view to mitigate the potential risks that growing VC business brings with it.

Clearly, regulation is a critical necessity. Do you agree?

Jesmond: Of course regulation is a critical must. Malta is amongst the first jurisdictions to enact a comprehensive legal framework covering both the technology and the financial services aspects of the matter. The Virtual Financial Assets Act regulates the field of Initial Virtual Financial Asset Offerings and Virtual Financial Assets and provides for ancillary, incidental or connected matters.  The Malta Digital Innovation Authority (MDIA) Act establishes the MDIA. Finally, the Innovative Technology Arrangements and Services (ITAS) Act provides for the regulation of designated innovative technology arrangements, as well as of designated innovative technology services, and for the exercise of regulatory functions by or on behalf of the Malta Digital Innovation Authority.

What about the application of the application of DLT to central banks' systems?

Jesmond: There is understandably cautious interest on the part of central banks in DLT protocols. DLT applications from a central bank perspective may include payment clearing and settlement systems, risk management, identification management, and trade reporting.