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Malta’s growth opportunities for startups – Interview with Malta’s Central Bank Governor Edward Scicluna

Malta is one of the smallest countries in Europe, but with a growing startup ecosystem, which is driven by the country’s dedication to encourage entrepreneurship and innovation. With a focus on sectors like AI, Big Data, Gaming, IoT, SaaS, and Blockchain, the country is actively expanding its economy and embracing the future of technology development. Notably, Malta has been establishing itself as a global player in gaming and blockchain sector, occupying prominent positions within these market areas. This progress has made Malta an enticing destination for businesses seeking growth opportunities, and as testament to that we have recently decided host next year’s EU-Startups Summit in Malta.

In order to learn more about Malta’s startup ecosystem, we have recently started to interview major players of the country’s economy. This time, we talked to Professor Edward Scicluna, Maltas Central Bank Governor. With an illustrious career, Professor Scicluna has held various key positions, including Minister of Finance of Malta, and has been a prominent figure in shaping economic policies. In this interview, we delve deeper into his expertise and gain insights into his perspectives on current economic challenges and opportunities in the startup ecosystem.

Could you highlight some of the key benefits that Malta offers to innovators, entrepreneurs, and tech businesses in terms of having a physical presence there? How does the local ecosystem support their growth and success? 

For a country like Malta, a small open economy with limited natural resources, its prosperity rests on attracting innovators and in maintaining international competitiveness. Innovative entrepreneurs foster economic growth and increase productivity, which is the key driver of higher standards of living. 

As such, attracting, promoting, and retaining innovation is a key priority for the country, and Malta strives to provide a supportive ecosystem that nurtures the growth and success of innovators. The country has a favourable legislative framework that encourages entrepreneurship and innovation. It offers various incentives, tax benefits, and grants for startups and businesses engaged in research and development activities. These measures help reduce costs and provide a conducive environment for innovation-driven enterprises to thrive. 

Furthermore, Malta’s strategic location is advantageous for businesses. It serves as a gateway to the European Union,  providing access to a large market of over 500 million consumers. Being an EU member state, Malta benefits from the free movement of people, goods, services, and capital across the Union, as well as a harmonized regulatory framework that facilitates cross-border business activities. Malta is also a member of the Euro area. This means that businesses headquartered here can transact and book revenues in a key global currency, whose institutional foundations have been erected to safeguard monetary and financial stability. 

Finally, English is widely spoken and recognized as an official language in Malta, which simplifies communication for international entrepreneurs and businesses. This lingua franca eliminates language barriers and enables easier collaboration with partners and customers from around the world. The widespread use of English is one reason why people from all over the world find it easy to settle in Malta. Indeed, currently, over 20% of residents are not Maltese nationals, which is a testament to the dynamism and appeal of the country. 

Indeed, Malta has a positive track record of attracting innovators in various sectors, such as financial services,  gaming, and filmmaking. This success can be attributed to a range of compelling advantages for innovators,  entrepreneurs, and tech businesses. Its supportive ecosystem, favourable legislative framework, access to the EU and the euro area and proficiency in English contribute to making Malta an attractive destination for established businesses and new ventures. The conditions that prompted this success are set to remain, for Malta needs to remain at the cutting edge of innovation if the country wants to continue to prosper in the future. 

Due to the economic situation, startups are currently having a harder time raising VC funding or debt funding. Valuations are lower, due diligence takes longer. Do you consider this a short-term phenomenon or do you think it is part of a longer phase of a healthy market Correction?

The current challenges faced by startups can be seen as a combination of short-term, medium-term and structural factors.  

Current economic issues, which are overwhelmingly driven by pandemic-related disruptions and the impact of the war in Ukraine on energy prices, can be viewed as temporary factors. As energy costs affect the entire production chain,  the increase in the cost of energy over 2022 has been passed on to final consumers, leading to elevated inflationary pressures. To prevent such shocks from becoming entrenched, and in pursuit of its price stability mandate, the ECB  Governing Council began withdrawing monetary accommodation and, in July 2022, initiated a rate hiking cycle, which is still ongoing. This tightening will increase firms’ borrowing costs, adversely affecting startups’ financing. At the same time, it acts as a necessary circuit breaker meant to turn off inflationary pressures. The measures taken by the ECB  have been effective, as both headline and core inflation are now on a general downward path. An economic environment of stable prices that economic research has shown is most conducive to real and broad-based economic growth. This is beneficial to all stakeholders, including startup entrepreneurs. 

As regards the financing of startups via seed funding and the like, the euro area is at a competitive disadvantage with regard to the United States. While the euro area capital markets have developed significantly, they are generally smaller and more fragmented compared to the United States, which retains the largest and most developed capital markets in the world, offering a deep and liquid environment for various financial instruments. Indeed, the euro area comprises multiple countries which can hinder the ease of cross-border capital flows. It is for this reason that completing the Capital Market Union (CMU) is crucial. 

The CMU is set to establish a more integrated and efficient capital market across the European Union. By breaking down barriers, harmonizing regulations, and improving cross-border investment opportunities, a CMU would enhance the availability of venture capital for startups, enabling their growth and innovation. In September 2020, the European Commission adopted a new action plan to complete the CMU with three main objectives: Firstly, to support a green, digital, inclusive and resilient economic recovery by making financing more accessible to European companies; Secondly, to make the EU an even safer place for individuals to save and invest long-term; and thirdly, to integrate national capital markets into a genuine single market. Based on this action plan, the  Council emphasized that the highest priority should be given to those actions aimed towards improving the funding of the economy, particularly of SMEs.

This is relevant for startups that tend to rely more on equity financing than debt financing. At the national level, the Malta Development Bank (MDB) is contributing towards these goals by bridging financing gaps through direct loans, underwriting and advisory services to SMEs, on top of participating in equity and venture capital. Amongst several other facilities offered by the MDB, Start-up Finance 2020 aims at supporting with a financial commitment of up to €400,000 small start-up undertakings that demonstrate a viable business concept and that exhibit commitment to expand their economic activity. 

Lastly, with regard to due diligence. Regulatory issues are structural, and I believe here to stay. I think this is all for the best. Today there is zero tolerance for misconduct and mischief. The highest transparency is expected both from officials in public institutions and from private businesses. The bar is higher, and I do not see society reverting to the old ways. The evolution of the central bank’s communication is a good example: long gone are the days of “constructive ambiguity” and “Fedspeak”. Today it is all about transparency and clarity. Organizations are expected to uphold high standards of conduct. Fulfilling regulatory obligations and conducting thorough due diligence processes take time but are essential to ensure accountability and build trust among consumers and investors. Having checks in place benefits the entire economy, as they foster confidence and trust among final consumers and investors, reducing risks and promoting sustainable growth. It is a small direct cost that is vastly offset by large indirect gains.

Malta has been a hub for blockchain and crypto-related innovators, with the government supporting the industry’s growth. Does the Central Bank currently collaborate with blockchain-based solutions or platforms? Are you personally excited or concerned about the rise of cryptocurrencies?

The Central Bank of Malta, together with all central banks of the euro area, welcome innovations, including in the field of payment and finance. For the reasons outlined above, over the years Malta has been attracting businesses operating in the digital universe, creating the condition for the emergence of a domestic ecosystem that has great upside potential.  

Central banks remain, however, essential, and I reckon that the monetary and financial system of the future will digitally integrate central banks’ money with private actors. The latest Annual Economic Report of the Bank of  International Settlements (BIS) lays out a blueprint for a future monetary and financial system centred on Central Bank  Digital Currencies (CBDCs), tokenized deposits and tokenized assets. By removing the traditional separation between messaging, reconciliation, clearing and settlement, a new type of financial market infrastructure that the BIS calls a unified ledger could markedly improve the current system. Through programmable platforms, a unified ledger allows the automation of financial transactions, eliminating delays, uncertainty and increasing efficiency.  

In this regard, the Central Bank of Malta is working closely with its peers and the ECB to investigate the feasibility of a Central Bank Digital Currency in the euro area, whose primary purpose is to ensure access to public money in the digital economy, and thus enable the kind of innovations mentioned above. The exact form CBDCs will take is currently being discussed and thus it is indeed possible that collaborations with blockchain platforms will be struck in the coming years.  

What is your general perspective on the startup scene in Malta? Is it something you are excited about?

The startup landscape in Malta has witnessed impressive growth and shows great potential. The rise of innovative startups in sectors such as fintech, gaming, and blockchain testifies to the country’s commitment to diversifying its economy and exploring new avenues for economic progress.  

I am genuinely excited about the prospects that young entrepreneurs bring to the startup scene. Their audacity to challenge the status quo, combined with their ambition and enthusiasm, sets the stage for a cascade of innovative endeavours. Indeed, young entrepreneurs inject fresh ideas, disruptive technologies, and entrepreneurial zeal into the market. Their affinity with emerging technologies and digital trends, and willingness to challenge conventional norms often lead to innovations and novel problem-solving approaches. Furthermore, the collaborative nature of the startup environment fosters unexpected encounters and connections, nurturing fortuitous opportunities for growth and advancement. 

This dynamism not only enhances the competitiveness of the startup ecosystem but also attracts investments and contributes to the overall dynamism of the economy. From a macroeconomic perspective, a thriving startup ecosystem contributes to job creation, productivity gains, and knowledge diffusion. It also appeals to foreign direct investment and promotes exports. While startups offer opportunities, however, they also present challenges. It is thus important to strike a delicate balance between promoting innovation and ensuring financial stability, as startups may also introduce vulnerabilities into the financial system. 

Malta is committed to maintaining its appeal to innovators across various industries as it recognizes that its future prosperity hinges on embracing innovation. While the outcome of each experiment is uncertain, the potential benefits of new technologies are immense. By fostering an environment that encourages innovation, Malta counts on the transformative power of serendipity, allowing for unexpected possibilities to emerge. The country’s willingness to embrace the unknown and explore uncharted territories sets the stage for remarkable discoveries and breakthroughs.

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Antonio L. Escárzaga
Antonio L. Escárzaga
Antonio López Escárzaga is the Head of Content at EU-Startups, with a background in Digital Marketing, Antonio drives his passion for effective communication and entrepreneurship. He firmly believes in communication’s transformative power and strives to harness it to foster growth and innovation.

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