Liechtenstein Adapts Blockchain Laws to Evolve Cryptoscape

The blockchain and crypto industry is constantly growing and changing around the world, and the Principality of Liechtenstein is no exception.

The sixth smallest country in the world, located in the middle of Europe between Switzerland and Austria, has attracted the attention of both international and European crypto communities since the early days of the industry.

In 2019, Liechtenstein became one of the first countries in the world to adopt specific crypto and blockchain legislation, namely the Token and Trusted Technology Service Providers Act (also known as TVTG or the Liechtenstein Blockchain Act), which has been in force since the beginning of 2020 and established one of the world’s first regulated environments for token-related services.

Since 2020, the number of crypto service providers in Liechtenstein has increased, as companies find optimal conditions there to establish and develop their crypto business. TVTG’s high level of regulatory security and direct communication with the local financial market regulator, the Financial Market Authority (FMA), has also contributed to this crypto-friendly environment.

What else makes Liechtenstein special and attractive to crypto service providers? Will the upcoming Markets in Crypto-Assets (MiCA) regulation be compatible with Liechtenstein’s Blockchain Act? Or is Liechtenstein’s government planning to tighten the law after the collapse of major crypto companies such as FTX, Celsius or Three Arrows Capital?

To get a gaming understanding of crypto’s future in the country, Cointelegraph sat down with Thomas Dünser, Director of Liechtenstein’s Office for Financial Market Innovation and Digitization. Dünser is a senior adviser to the Prime Minister of Liechtenstein, responsible for innovation and digitization issues in the Ministry of Finance and was project manager and co-author of the Blockchain Act.

The first comprehensive national symbol law

From 2016 to 2018, the blockchain and crypto industry faced a huge amount of uncertainty as governments around the world were just beginning to develop regulatory concepts for digital assets. Amid this uncertainty, the announcement that the Liechtenstein government considered blockchain a promising technology was already something of a sensation.

With the publication of the draft law, it also became clear how Liechtenstein would treat tokens. In particular, Liechtenstein was the first country in the world to regulate the token as a legal instrument with the Token Container Model (TCM) and classified tokens differently based on how they function (utility token, security token or payment token).

According to Dünser, this clarification alone that not all tokens should be considered financial instruments has triggered “enormous positive feedback” from the industry and created “greater legal certainty” in the application of financial market laws.

He explained that the definition of the token, the regulation of ownership and possession of the token, and the delegation and transfer rules have not only clarified basic legal issues, but have also “laid the foundation for the use of tokens by established financial institutions” such as depository services, banks or exchanges. Moreover, Dünser emphasized the importance of the “semantics” of the Blockchain law:

“It created a common language space, which was essential for technical and regulatory discussions about crypto and blockchain between governments and market participants.”

The ability to innovate is crucial

The Blockchain Act was drafted in 2016 and passed back in 2019. At that time, there were no decentralized finance applications or non-fungible tokens (NFTs) on a scale like now, requiring faster legal development.

How does Liechtenstein handle this scale of innovation?

Neither the trend toward decentralization nor toward NFTs was unexpected, Dünser said. “With our national token law, we have created the basis for a wide range of tokenizations, even beyond NFTs. We have consciously tried to think far beyond the current use cases of blockchain in our legislation. So I don’t expect that we will have to re-regulate here with the first.”

Liechtenstein’s regulators have also taken into account the trend of decentralization in the Blockchain Act. TVTG is “open to innovation” and flexible, “principle- and role-based – as a counter-model to the otherwise usual rule- and business-model-based regulation” and “technology-neutral.”

In the Blockchain Act, activities are subject to official requirements if they pose a risk to users, regardless of the business model they offer. In doing this, the service providers themselves must consider how to reduce the risk, whether with technology or human resources. Dünser said:

“Given the high pace of technology-driven innovation, the legal system’s ability to innovate is crucial. Without it, we not only slow down innovation, but also face significant legal uncertainty. None of these can be in the state’s interest.”

In Liechtenstein, regulators have therefore established an innovation framework with the aforementioned state innovation process and the Regulatory Laboratory at the FMA. In Dünser’s view, it has proven to be “very successful”; However, since the important financial market laws in the European Economic Area are defined at European level, corresponding structures will be necessary for the entire regional regulatory system.

Similarities between TVTG and MiCA

MiCA is an important step towards a unified European regulatory system, and TVTG served as a kind of model for MiCA. In particular, the MiCA draft adopts the Token Container Model of TVTG, the licensing requirement for providing certain blockchain-related services, and also the information requirements for public offerings.

So there should not be any major changes to the existing practice in Liechtenstein after the MiCA enters into force, and both laws will be well compatible, noted Dünser.

Crypto service providers newly regulated under MiCA no longer need to be regulated under the Blockchain Act.

“Like Liechtenstein, the European Commission sees the token economy – in addition to financial market applications – as a great opportunity for Europe.”

Liechtenstein’s experiences were therefore relevant to European legislators, and there were “lively discussions” between both sides that are reflected in many regulatory philosophical similarities between TVTG and MiCA: the token container model, the role-based and, to some extent, principles-based regulation, and openness to innovation.

“But we have to distinguish between the civil law and supervisory law part,” noted Dünser, adding, “MiCA only includes the supervisory components. Each member state has to clarify the civil law basis itself. With the Blockchain Act, Liechtenstein already has a comprehensive and robust legal framework for all types tokenization, from share tokens and other crypto-assets to NFTs and other tokenized rights.”

“We are ready to act”

As for whether Liechtenstein will tighten the rules of the crypto market after the FTX crash and other major collapses in 2022, Dünser said it would be better to avoid over-regulation. Moreover, the blockchain law already regulates the custody of tokens and also prescribed legal separation in case of bankruptcy.

Nevertheless, Dünser agreed that certain adjustments are necessary. “I see greater challenges with staking or borrowing and lending customer tokens at crypto exchanges, which are not regulated in many jurisdictions.”

In the EU, for example, regulation for credit institutions, which are set up for similar activities involving money, does not apply to providers of crypto services. MiCA also does not cover this issue, at least not yet.

“In my view, this regulatory gap should be closed as soon as possible. We are watching and following these developments closely and are also prepared to act.”