Liechtenstein's Parliament Approves Blockchain Act Unanimously

Friday, October 4, 2019

On October 3, the Liechtenstein Parliament passed the Token and TT Service Provider Act (TVTG) - in the past known as the "Blockchain Act." This means that the law can enter into force on January 1, 2020.

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With the new law, Liechtenstein is the first country to have a comprehensive regulation of the token economy. On the one hand, the law regulates civil law issues in relation to client protection and asset protection. On the other hand, adequate supervision of the various service providers in the token economy will be established. In addition, there are measures to combat money laundering by making service providers subject to AML/CFT rules. In addition, the law provides clarity with regard to digital securities.

"With the TVTG, an essential element of the government's financial market strategy will be implemented and Liechtenstein will be positioned as an innovative and legally secure location for providers in the token economy," says Prime Minister Adrian Hasler.

Background on the Blockchain Act

From the Impuls Liechtenstein Website

“Blockchain technology” was initially developed for Bitcoin, a private digital monetary system. Blockchain technology functions as a ledger that can securely record all sorts of transactions. The technology can be used for much more than Bitcoin. Blockchain technology has been developed by a number of people and organizations around the world and is being expanded to other application areas. The technology is important because of its ability to record “information” digitally in a decentralized manner, practically preventing this information from being copied or manipulated and ensuring that it can be transferred securely between different people. Security is exclusively ensured through mathematical procedures (e.g. encryption technology, cryptography) and defined rules. Blockchain infrastructure is typically provided online and is available to a broad range of private individuals and companies.

There has been widespread legal uncertainty regarding business models on blockchain systems that are not covered by financial market legislation but nonetheless carry out activities that are very close to the financial sector. With the new Blockchain Act, Liechtenstein defines the minimum requirements for these activities on blockchain systems and requires them to be registered with the Financial Market Authority (FMA). The new law also contains a legal classification of elements on blockchain systems. The Blockchain Act defines the term “token” as a new construct to enable the transformation of the “real” world to blockchain systems while ensuring legal certainty, thereby opening up the full application potential of the so-called token economy. The introduction of the legal construct of the “token” in Liechtenstein law requires that the legal consequences – such as ownership, possession, and transfer – must also be legally defined. Due to the great potential of the token economy for large parts of the economy, the newly adopted legislation aims at strengthening legal certainty for users and service providers in order to support the positive development of the token economy in Liechtenstein. The new law is a response to the need of market participants for greater legal certainty in connection with blockchain systems.

The applications of blockchain technology are therefore not restricted to simple transactions of coins or tokens with an exchangeable value between private individuals. Rather, they provide the option for a large range of economic services, as assets or rights can also be recorded in blockchain systems in general. This provides the possibility to create a digital recording of means of payment or assets and the possibility to conduct transactions with no direct intermediary being responsible for the execution of such transaction. Thus, companies offering financial services on blockchain systems use generally available digital infrastructure to provide their services. There are already a number of companies that offer services on the various blockchain systems today, such as digital wallets, custodial services for crypto-currencies and exchanges for virtual currencies. Blockchain technology is also used today to provide financing to companies or projects (e.g. via “Initial Coin Offerings” (ICOs) or “Security Token Offerings” (STOs)). However, it is likely that it will be possible in future to record a much broader range of assets and other rights on blockchain systems and that a number of additional services related to these rights will be offered. In particular, the low costs for digital transactions is likely to open up new opportunities beyond financial services in fields such as logistics, mobility, energy, industry, media, and many more. All these potential applications are grouped together under what is called the “token economy”.

Because of the rapid pace and broad scope of the development of blockchain technology and its areas of application, Liechtenstein’s Blockchain Act is formulated abstractly enough to ensure that it remains applicable for subsequent technology generations. That is why the law uses the term “transaction systems based on trustworthy technologies (TT systems)”. Moreover, the option of recorded assets or, more generally, rights in tokens, raises essential legal questions which must be clarified for the sake of general legal certainty for users of TT systems and TT service providers. An example of this is the legal effect of transferring tokens with regard to the represented right. Liechtenstein’s law enables the recording of the “real” world on TT systems in a legally secure manner to tap the full potential of the token economy. The increasing propagation of blockchain applications has already resulted in problematic areas, such as open questions related to customer and asset protection as well as the misuse of this technology for money laundering or other criminal purposes. Such issues need to be addressed by means of clear regulations. As blockchain technology is also actively used in Liechtenstein, the government's new law clarifies which requirements will apply for important activities on TT systems (TT services). To do so, customer protection is improved and the application of due diligence obligations is being required in order to ensure compliance with international standards and extensive and effective fighting of money laundering. The law defines a legal framework for all applications of the token economy in order to ensure legal certainty for current and future business models. In particular, this involves rules on generating and storing tokens. For securities to be represented in a token on a TT system, and transferred there, via a physical document without any detours, the legal concept of the book-entry system (Wertrecht) has now been accepted in Liechtenstein legislation, and at the same time the necessary interfaces between the securities law and the Blockchain Act have been created. Book-entry securities are “dematerialized” securities where the functions of a certificate can be replaced by an entry into the book-entry register.