June 18, 2025

MFSA’s Approach to Tokenisation in Collective Investment Schemes

The Malta Financial Services Authority (MFSA) has released a position paper outlining its views on the tokenisation of units within Collective Investment Schemes (CIS). This development aligns with broader European Union regulatory initiatives, including the Markets in Crypto-Assets (MiCA) Regulation and the Distributed Ledger Technology (DLT) Pilot Regime, aimed at guiding the integration of emerging technologies into financial services.
At the centre of the MFSA’s stance is the integration of tokenisation into fund operations, particularly within the transfer agency function. This approach is intended to improve transparency, streamline processes, and enhance investor access. Tokenisation refers to the creation of a digital version of a financial asset recorded on a secure, shared, and programmable distributed ledger, enabling the asset to be stored, transferred, or managed via blockchain infrastructure.
 

The MFSA outlines two primary forms of tokenisation:

  • Native tokens, which are newly created assets issued directly on a DLT;
  • Non-native tokens, which represent pre-existing off-chain assets, such as securities held by a custodian.
 
When applied to CIS units or shares, tokenisation involves converting traditional fund units into digital formats that can be divided, transferred, or traded on digital platforms. These digital representations can offer benefits such as fractional ownership and broader accessibility. The MFSA clarifies that tokenised CIS units fall outside the scope of MiCA, as they are categorised as financial instruments under the Markets in Financial Instruments Directive II (MiFID II). As a result, any marketing or distribution of these units must comply with MiFID licensing requirements and the MFSA’s Conduct of Business Rulebook.
 

Tokenisation Eligibility Criteria

The MFSA permits the tokenisation of fund units for the following fund types:

  • Licensed Alternative Investment Funds (AIFs)
  • Licensed Professional Investor Funds (PIFs)
  • Notified AIFs (NAIFs)
  • Notified Professional Investor Funds (NPIFs)
  • UCITS, provided they maintain core regulatory principles such as liquidity, investor protection, and transparency

Critical Role of Fund Administrators

Fund Administrators have a pivotal function in managing tokenised share classes. As outlined in the MFSA’s paper, administrators are responsible for overseeing the administration of digital fund units through the use of blockchain-based registries and smart contracts.
The smart contract serves as the operational rulebook of the fund, defining key processes such as issuance, subscriptions, and redemptions. Meanwhile, a DLT-based register records and maintains a real-time ledger of share ownership. In this system, security tokens digitally represent the fund shares, and the ledger itself becomes the fund’s official register.

In addition to managing the operational mechanics, Fund Administrators must conduct due diligence on both the digital wallets used and the individuals or entities holding them, ensuring that AML/KYC compliance standards are upheld. Their role is essential in maintaining both the integrity and the regulatory compliance of the tokenised investment structure.

Regulatory and Operational Safeguards

Even though tokenised funds are still denominated in fiat currency, the MFSA emphasises that several regulatory and operational measures must be adhered to:

a) Competency Requirements

Fund management and service providers must demonstrate a sound understanding of tokenisation technologies to fulfill their responsibilities effectively.

b) Disclosure Obligations

Offering documentation must clearly indicate the fund’s ability to issue tokenised units. These disclosures should cover:

  • AML and KYC obligations, including data-sharing practices
  • Issuance and redemption timelines and procedures
  • Transferability constraints
  • Safekeeping measures for digital units
  • Blockchain and wallet-related risks

c) Risk Management Practices

Key areas of risk and corresponding mitigation strategies include:

  • DLT Architecture: Utilise secure, standardised smart contract protocols
  • Key Management: Implement robust procedures for key generation, handling, and loss prevention
  • Privacy & Identity: Ensure GDPR compliance and protect sensitive data
  • Business Continuity: Establish and test recovery and continuity plans
  • System Reliability: Use redundant infrastructure to minimise downtime
  • Access Controls: Employ strong multi-factor authentication (MFA)
  • Risk Clarity: Define roles and responsibilities clearly in the documentation
  • Third-party Dependencies: Coordinate with external service providers using predefined protocols
  • Governance Oversight: Establish clear and accountable governance frameworks

Conclusion

The MFSA’s position marks a significant evolution in Malta’s regulatory treatment of investment funds. By embracing tokenisation within existing legal and regulatory structures, the Authority seeks to leverage the efficiency and innovation of blockchain while safeguarding investor interests and regulatory integrity.
 
As Malta strengthens its role in digital finance, stakeholders, including fund managers, administrators, and investors, must adopt a forward-looking approach that balances technological advancement with compliance, operational resilience, and investor protection.
 
 
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