In Liechtenstein, the development of fintech has picked up considerably in recent years. In 2014, almost no fintechs applied for a permit in Liechtenstein but the number of inquiries has exponentially increased. In 2015, the Liechtenstein government and the Liechtenstein Financial Market Authority (FMA) created the so-called Regulatory Laboratory to help innovative fintech companies with licensing and regulatory issues. In 2016, the Ministry of Presidential Affairs and Finance decided to appoint an internal group of experts to deal with the issues surrounding blockchain technology. By 2017, the FMA had been contacted by around 100 fintech companies. Many of these companies were related to block chain technology. Initially, they were focused on payment transactions. This then shifted to initial coin offerings (ICO).
In 2018, the Liechtenstein government initiated a legislative process by consultation which eventually led to a motion of the Liechtenstein government to the Liechtenstein Parliament which was approved on 3 October 2019. On 2 December 2019, the Liechtenstein Law of 3 October 2019 on Token and Trustworthy Service Providers (Gesetz vom 3. Oktober über Token und VT-Dienstleister (TVTG), LGBl. 2019/301) was issued and became effective in Liechtenstein on 1 January 2020. Furthermore, on the basis of the TVTG, the Ordinance of 10 December 2019 on Token and Trustworthy Service Providers (Verordnung vom 10. Dezember 2019 über Token und VT-Dienstleister (TVTV), LGBl. 2019/349) has been adopted and it also become effective on 1 January 2020.
In the beginning, the focus of most fintech businesses was on payment transactions only. In the recent past, however, there has been a huge demand for ICOs where tokens have been offered for various things (eg, payment tokens, tokens linked to real estate, tokens linked to fungible assets such as currencies, commodities, etc).
Since 1 January 2020, the TVTG has been in effect and applicable in Liechtenstein.
Given that the Principality of Liechtenstein is a member state of the European Economic Area (EEA), generally, financial intermediaries licensed by the Liechtenstein FMA may provide their services to other countries in the EEA (EU-passporting). It should be noted, however, that services licensed by the FMA under the TVTG cannot be passported into other EEA countries.
The applicable Liechtenstein provisions implement the Financial Action Task Force (FATF) Recommendations. Hence, the FMA monitors whether the due diligence obligations have been observed by licensed service providers under the TVTG. According to Article 3, paragraph 1 of the Liechtenstein Due Diligence Act (Sorgfaltspflichtgesetz (SPG), LGBl. 2009/047), inter alia:
are obliged to observe the due diligence obligations according to the SPG.
The Liechtenstein Financial Market Authority (FMA) issues licences under the TVTG and keeps the register of licensed Trustworthy Service Providers.
The Liechtenstein FMA is the only Liechtenstein competent official body in relation to token and trustworthy technology service providers.
Given that the applicable TVTG has been effective since 1 January 2020 only, there are no such judicial decisions available as of April 2020.
The applicable TVTG has been effective since 1 January 2020 only. According to Article 12 of the TVTG, the following registration obligations with the Liechtenstein FMA apply.
Legal entities or individuals having their registered office or place of residence in Liechtenstein who professionally wish to provide trustworthy technology services according to the TVTG in Liechtenstein shall apply in writing to the FMA for registration in the Register of Trustworthy Technology Service Providers (Article 23) before providing the service for the first time (Article 12, paragraph 1 TVTG). Furthermore, token issuers domiciled or resident in Liechtenstein who issue tokens in their own name or not professionally in the name of the principal shall apply in writing to the FMA for registration in the Register of Trustworthy Technology Service Providers before commencing their activities, provided that tokens with a value of CHF5 million or more are issued within a period of twelve months (Article 12, paragraph 2 TVTG).
The entry in the Trustworthy Technology Service Provider Register (Article 23) requires that the applicant:
The website of the Liechtenstein FMA provides valuable information regarding the requirements which must be met in order to be permitted to offer services under the TVTG. The Liechtenstein FMA has uploaded a questionnaire which provides guidance as to whether the desired business model will be licensed under the TVTG or not. It should be noted, however, that the result of this questionnaire is only a rough estimate and not legally binding.
The Liechtenstein tax regime has not been amended because of the TVTG. The uniform corporate income tax rate for companies in Liechtenstein is 12.5%.
Prior to the TVTG, the Liechtenstein government and the Liechtenstein FMA created the Regulatory Laboratory to help innovative fintech companies with licensing and regulatory issues. Furthermore, the Ministry of Presidential Affairs and Finance decided to appoint an internal group of experts to deal with the issue of blockchain technology before the TVTG came into force.
Article 1 of the TVTG determines, inter alia, that it establishes the legal framework for transaction systems based on trustworthy technology (TT) and regulates, in particular, the civil law principles relating to tokens, the representation of rights by means of tokens and their transfer. Its purpose is (i) to ensure trust and confidence in digital legal transactions, in particular in the financial and economic sector, and to protect users on TT systems; and (ii) the creation of an optimal, innovation-friendly and technology-neutral framework for the provision of services on TT Systems.
The holder of the TT key has the power of disposal over the token. It is assumed that the person who has the power of disposition is also the person entitled to dispose of the token. Any previous holder of the power of disposition is assumed to have been the person entitled to dispose of the token at the time of its possession. If someone is the holder of the power of disposition without wanting to be the person authorised to dispose of the token, he or she can trust that the person from whom he or she received the token in good faith is authorised to dispose of it.
The following shall be deemed to be a disposition in accordance with the TVTG: (i) the transfer of the right of disposal over the token, or (ii) the establishment of a security or usufruct right to a token.
The disposal of a token requires that:
If a token is disposed of without a legal basis, or if this legal basis subsequently ceases to exist, the reversal is carried out according to the regulations of the law of enrichment (Sections 1431 et seq of the Liechtenstein Civil Code (ABGB)).
The disposal of the token causes the disposal of the right represented by the token. If the legal effect according to the preceding sentence does not occur by law, the person obliged by the disposal of the token must ensure, by appropriate measures, that (i) the disposal of a token directly or indirectly effects the disposal of the right represented by the token, and (ii) a concurrent disposition of the right represented is excluded.
The disposition of a token is legally binding and effective against third parties even in the event of enforcement proceedings against the transferor, if the transfer (i) was triggered in the TT system before the opening of the proceedings; or (ii) was triggered after the opening of the proceedings in the TT system and on the day of the opening of the proceedings, provided that the transferee proves that he or she had no knowledge of the opening of the proceedings or was not in a position where he or she should have had such knowledge if he or she had exercised due diligence.
In order to enable transfer rights represented and transferred in a token on a TT system, the legal figure of the value right (Wertrechte) is incorporated into Liechtenstein law.
The mode for the transfer of digital assets (value rights) is the entry of the (new) owner into a value rights register specifically designed for this purpose. The entry in the value rights register is equivalent to other modes in "traditional" asset transfers under Liechtenstein law.
The TVTG does not provide for a specific definition of payment token, security token, or utility token. Depending on the specification, tokens may be classified as financial instruments, though, and may therefore be subject to the respective Liechtenstein laws dealing with financial instruments. These may include, for example, tokens that have the characteristics of equity securities or have an investment character. Activities relating to financial instruments are generally subject to legal licensing requirements by the FMA and may be subject to the obligation to publish a prospectus. In any case, the concrete form and factual function of the tokens are decisive. Any anti-money laundering (AML) and "know your customer (KYC) obligations are also dependent on the respective structure of the tokens. Please refer to 4.3 KYC/AML for further discussion.
The TVTG does not provide for a specific definition of stablecoins.
Cryptocurrencies are not a legal tender in Liechtenstein. That is, one cannot be obliged to accept payment in cryptocurrency. Apart from this, anyone is free to accept cryptocurrency as a means of payment within the limits of private autonomy.
The TVTG does not provide for a specific definition of non-fungible tokens.
Currently, there is only one TT service provider registered with the Liechtenstein FMA where custodial exchanges are offered.
Liechtenstein financial market law does not recognise the term "crypto-exchange". With respect to such business models, it must therefore be clarified in each individual case whether a licence is required or not. The exchange between cryptocurrencies and legal tender does not, in principle, require a licence under Liechtenstein law. Nonetheless such exchanges are subject to due diligence provisions.
The exchange between different cryptocurrencies also does not, in principle, require a licence under Liechtenstein law but is similarly subject to due diligence provisions.
According to Article 3, paragraph 1 of the Liechtenstein Due Diligence Act (Sorgfaltspflichtgesetz (SPG), LGBl. 2009/047):
are obliged to observe the due diligence obligations according to the SPG.
These obligations encompass:
The digital assets and the trustworthy technology services are regulated in the TVTG. Depending on what services are offered in relation to digital assets, certain notifications and registrations with the FMA might be triggered.
There is no specific regulation in Liechtenstein concerning the use of crypto-assets as collateral in transactions.
If providers of storage solutions for cryptographic keys fall within the scope of the TVTG which took effect on 1 January 2020, they have to fulfil specific requirements (organisational structure, minimum capital requirements, etc), have to register with the Liechtenstein FMA, are supervised by the FMA and are subject to due diligence provisions. If such a provider is not subject to the provisions of the TVTG, its business activities may require a licence under Liechtenstein financial market law depending on its characteristics, its factual design and the nature of its business model.
Subject to subsequent exemptions, issuers of tokens shall, prior to their issue of tokens:
The above obligations do not apply to a public offer of tokens if:
Moreover, no further basic information is to be published in any subsequent public resale of tokens if (i) basic information has already been published, and (ii) the issuer or the person responsible for compiling the basic information has agreed in writing to its use.
Basic information shall include in particular the following details:
Token issuers domiciled or resident in Liechtenstein who issue tokens in their own name or not professionally on behalf of the principal must apply in writing to the FMA for registration in the TT Service Provider Register before commencing their activities, provided that tokens worth CHF5 million or more are issued within a period of twelve months.
If this service qualifies as a TT service in accordance with the TVTG, the relative applicable provisions shall be observed.
For investment funds or collective investment schemes that invest in digital assets the same provisions apply.
The TVTG defines the following persons as TT Service Providers:
Persons domiciled or resident in Liechtenstein who professionally wish to provide TT services in Liechtenstein shall apply in writing to the FMA for registration in the Register of TT Service Providers before providing the service for the first time. The relevant provisions of Articles 12 et seq of the TVTG apply accordingly.
Although Liechtenstein passed the TVTG, private contractual agreements are still subject to the traditional rules of enforcement under Liechtenstein law. Apart from specific formal requirements for some contract types, the parties to the respective private contractual agreement are free to choose its form. Within the limits of private autonomy this choice has, in principle, no effect on the enforceability of the contract.
The liability of software developers is generally determined by the provisions of Liechtenstein civil law and, in particular, product liability law.
Whether or not running a decentralised financial (DeFi) platform requires a licence and is subject to the respective Liechtenstein financial market law provisions depends on the characteristics, the factual design and the nature of the business model. Accordingly, this can only be evaluated on a case-by-case basis.
Taking an effective security interest in a digital asset (value right) requires adherence to the so-called principle of causal tradition. The latter requires a legally valid title and a so-called mode aimed at establishing the respective security interest. The mode for establishing a security interest in digital assets (value rights) is an entry of the security interest, and in particular the secured party, into a value rights register specifically designed for this purpose. The entry in the value rights register is equivalent to other modes for security interests in "traditional" assets under Liechtenstein law.
In order to transfer digital assets (value rights) an entry of into a value rights register specifically designed for this purpose is required. The entry in the value rights register is equivalent to other modes for security interests in "traditional" assets under Liechtenstein law.
If custodians for digital assets fall within the scope of the TVTG, they have to fulfil specific requirements (organisational structure, minimum capital requirements, etc), have to register with the FMA, are supervised by the FMA and have to adhere to due diligence provisions. Other custodians for digital assets may require a licence under Liechtenstein financial market law depending on the characteristics, the factual design and the nature of their business model.
There are no exemptions for blockchain-based products or services as concern data privacy. The relative provisions of data protection regulation apply accordingly. Thus, individuals have the right to have their personal data deleted. The right to deletion is not absolute and applies only under certain circumstances. These are:
The Liechtenstein data protection regulation is to be applied in full and is of considerable importance, especially when processing customer data.
At present, neither the production nor the use of virtual currencies as a means of payment is subject to special legal authorisation requirements. In individual cases, however, such a licence may be required when conducting commercial activities, depending on the structure of the specific business model.
Whether or not providing services concerning the "staking" of tokens requires a licence and is subject to the respective Liechtenstein financial market law provisions depends on the characteristics, the factual design and the nature of the business model.
Security Token Offering for Fundraising and Assets Tokenisation under Liechtenstein Blockchain Act
After over 80% of unregulated initial coin offerings (ICOs) turned out to be scams, regulated security token offerings (STOs) became more popular. It turned out that almost every asset can be linked with token as entry in decentralised register which leads to appearance of security token, tokenised or digital security.
Security tokens, together with cryptocurrencies, are a fairly new topic in financial market reality and law. The potential of the security tokens or assets tokenisation markets is claimed to be worth billions. In 2018-19 we have seen the rise of security token offering both as method of fundraising and attempt to make some illiquid assets such as real estate more liquid. Global STO research with statistics was provided by a swiss tokenisation platform Blockstate, which can be used as illustration for the above statements.
Switzerland and Liechtenstein, as countries with reputable financial markets, recognised the potential of asset tokenisation for their financial market early in its development, and have done much work to provide relevant legal frameworks. In 2018-19 around fifteen STOs were conducted in Switzerland and around seven in Liechtenstein. The Principality of Liechtenstein as possible jurisdiction for initial coin offerings (ICO) and blockchain projects in general got on the radars together with Switzerland as it published ICO fact sheet in 2017.
One of the first prospectuses on security token issue in Europe was approved by regulators starting from August 2018, ie, prospectus of the NEON Exchange by Financial Market Authority (FMA) Liechtenstein.
Also the “Alpine Malta” attracted attention of the international and especially European crypto-community, when it announced to be one of the first countries in the world to adopt a special legislation on blockchain namely the Token and TT Service Provider Act (Token and Trustworthy Technology Service Provider Act, TVTG, Blockchain Act), also called the Liechtenstein Blockchain Act, which has been enforced from the beginning of 2020, creating one of the world’s first safe and regulated environment for token related services.
This forward-thinking act creates legal security and trust for blockchain service providers as well as protects investors from fraud. The Liechtenstein Blockchain Act serves as an optimal environment for established companies as well as start-ups and investors to take their businesses to the next level by creating an excellent, innovation-friendly and technology-neutral framework.
Unique Civil Law for Tokens
Liechtenstein Blockchain Act seems to be quite a unique regulation giving first the civil law definition for token, blockchain and blockchain transactions.
The law uses the term "Trustworthy Technology" (or TT) for blockchain and possible future technologies. These are technologies through which the integrity of tokens, the clear assignment of tokens to TT Identifiers and the disposal of tokens is ensured. A TT identifier allows for the clear assignment of Tokens ("public key"), whereas a TT key allows for disposal of Tokens ("private key").
A token container model was developed alongside the Blockchain Act, meaning a token can represent rights to all possible assets.
A “token” is a piece of information on a TT System which can represent claims or rights of memberships against a person, rights to property, or other absolute or relative rights, and is assigned to one or more TT Identifiers.
Key points for effective transfer of tokenised assets are:
Security Tokens from a Legal Perspective
Though when introducing token container model the government wanted specifically not to provide any classifications of tokens, the classical swiss classification from FINMA ICO Guidelines should be mentioned.
FINMA introduced ICO guidelines with major simplified classification of tokens based on its content for the sole purpose of financial market law:
Utility tokens give access to services or infrastructure also used for crowdfunding, as donations more known as initial coin offering (ICO) (ie, Bluenote, Smart Valor, Tezos, Ubex etc). Security or asset tokens represent shares in a company, claim or financial instrument (Mt Pelerin, Healthbank, Nexo, HYGH, BlockState, Swiss Alps Mining, eLocations, BlueShare etc). Payment tokens function as a means of payment (Bitcoin, Ether, Ducascopy etc).
A more detailed classification is to be found in the Conceptual Framework for Legal and Risk Assessment of Crypto Tokens ("BCP Framework").
Intense discussions took place in Liechtenstein and Switzerland regarding legal nature of security tokens. In conclusion, the Liechtenstein government proposed to include uncertified security (or book-entry security) with all the functions of a traditional security of public faith with new articles in Final Part of the Persons and Company’s law (PGR).
The basis of a genuine book-entry security is an electronic register in which both the issue and the transfer of book-entry securities must be recorded. At the same time, Section 81a, Final Part PGR, creates a new interface between the TVTG and securities law. Because the value right register can also be kept on the basis of a blockchain or TT system, such systems are particularly suitable for this purpose because they enable a clear and seamless assignment of legal title to each book-entry security and cannot be manipulated.
Consequently, the issuing of securities and the clearing and settlement of securities transactions on TT Systems are considered to be one of the key potential applications for TT technologies.
Behind the security token could be various types of traditional securities, such as registered shares, participation certificates or profit participation certificates (Swiss and Liechtenstein equivalents of non-voting shares), bonds, collective investment scheme shares and also new uncertificated securities which could be created using tokenisation, ie, derivatives as rights to future income, rights to future commissions (Neon/Nash exchange), derivative security with features of a structured bond (Crowdli project about real estate investments), etc.
Asset tokenisation models for real estate as well as for other illiquid and quite expensive assets such as collectable cars, art objects, precious metals and stones can look as follows:
Requirements for Security Token Issuance
Services of token issuer and token generator
Token issuer are persons who publicly offer tokens on behalf of third parties. This includes not only sales, but also other forms of offering, such as an award for a fee or a gift (eg, airdrop). A possible application is trading venues that carry out ICOs or IEOs for their customers.
In addition, persons who carry out their own issuance must also register if the equivalent value of the tokens issued in one year exceeds or will exceed CHF5 million.
As far as we understand under token issuer mainly of utility tokens (ICO or IEO in case the token issue is conducted primarily by a known exchange) and security tokens (STO) fall those who issue tokens professionally in the name of a client or in their own name in the amount of CHF5 million or more to be issued within a period of 12 months.
In general, every token issuer has to be registered in the FMA register. The obligation does not apply in cases in which the issuer sells his own tokens for the amount less than CHF5 million within twelve months to the public.
Services of a registered token generator who generates tokens technically are also needed within the TVTG framework. Project planning fundraising using tokens could either seek the registration as token generator or use services of the registered token generator on site.
Requirements for token issuer registration can be summarised as follows:
Personal, management and shareholders have to be reliable in terms of bankruptcy and criminal law. An organisation structure with defined areas of responsibility, including procedures for dealing with conflicts of interest must exist. Furthermore, a minimum capital of CHF50,000, CHF100,000 and CHF250,000 have to be at the company’s disposal if tokens with a total value of, respectively, up to and including CHF5 million, of more than CHF5 million and of more than CHF25 million are issued within a period of 12 months.
Publication of basic information and notification for token issuance
Article 30 TVTG contains obligation to prepare, report and publish basic information which should contain information about the tokens to be issued and associated rights.
An issuer of tokens that are offered to the public is obliged to create and publish appropriate basic information in advance. The corresponding obligation to provide information serves to protect users and is intended to adequately inform the interested public about the purpose of the token issue and the associated opportunities and risks.
The central difference between a securities prospectus according to Securities Prospectus Act and basic information according to TVTG is that basic information according to TVTG must be brought to the attention of the FMA in good time before the token issue; the information must also be published, eg, on the issuer's website. However, no formal approval of the information by the FMA is required.
Assumingly publication of the basic information is the major requirement for ICO/IEO or an STO which does not need to publish a prospectus, ie, raising from CHF5 million to CHF/EUR8 million.
TVTG provides for an exemption to publish basic information for the case if there is already an obligation to publish qualified information about the public offering of tokens according to other laws. Additionally, token issuer must notify the FMA of any token issuance in advance.
Requirements under prospectus regulations and access to single market
Liechtenstein as part of the European Economic Area (EEA) has to implement the European Directives into national legislation, which is the case with EEA Securities Prospectus Implementation Act (EWR-WPPDG).
This section is based mainly on existing regulations, tailored to traditional securities (such as Delegated Regulations (EU) 2017/1129, supplemented by Regulations (EU) 2019/979 and 2019/980), as well as FMA’s instructions and communication to be found at FMA’s website.
In summer 2018, the FMA approved a first securities prospectus for security tokens in the entire European Union. These securities prospectuses combine the features of classic securities prospectuses on the one hand and the elements of blockchain technology on the other.
Existing regulations, tailored to traditional securities (such as Delegated Regulations (EU) 2017/1129, supplemented by Regulations (EU) 2019/979 and 2019/980) can only be applied to security tokens if their security characteristics are fulfilled. The security property is generally assessed based on the three criteria of transferability, standardisation and tradability.
When offering securities to the public or admitting securities to trading in a regulated market, information disclosure is key to investor protection as it eliminates information asymmetries between investors and issuers.
In the public offering of securities, information disclosure is of central importance to investor protection, as it eliminates the information asymmetry between investors and issuers. Offering securities to the public generally requires preparation and publication of a securities prospectus under the EEA Securities Prospectus Implementation Act (EWR-WPPDG) (Article 1, Paragraph 1 EWR-WPPDG).
A public offering of securities in Liechtenstein may therefore only take place if previously according to the provisions of Regulation (EU) 2017/1129 and the Delegated Regulation (EU) 2019/980 and Delegated Regulation (EU) 2019/979 prospectus drawn up and approved has been published.
The minimum content of the prospectuses is specified in the Annexes to Delegated Regulation (EU) 2019/980. The Annexes to the Delegated Regulation (EU) 2019/980 contain in particular the registration forms, the securities descriptions and information on the minimum content. The type of the underlying asset is decisive, ie, depending on the focus and orientation of the security, the relevant appendices must be observed.
A securities prospectus must be approved by the FMA and published as required by law in order to be considered valid. There is no obligation to publish a prospectus if an exemption applies under Article 1 of Regulation (EU) 2017/1129. In any case, a security prospectus may be published voluntarily in order to extend the offer to the whole EEA.
Exemptions to the prospectus obligation can be found in Article 1, Paragraph 4 Regulation (EU) 2017/1129 and Article 3 EEA-WPPDG.
The most frequently used exemptions are private placement not falling under description of the public offering and cases where exclusively qualified investors are approached. Offer of securities to the public means a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe for those securities. This definition also applies to the placing of securities through financial intermediaries.
However, such exempted offers of securities to the public should not benefit from the passporting regime under the regulation.
Resale of securities
It is important to mention, that subsequent resale of securities which were previously the subject of one or more of points (a) to (d) of Article 1(4) shall be considered as a separate offer and the definition set out in point (d) of Article 2 shall apply for the purpose of determining whether that resale is an offer of securities to the public. The placement of securities through financial intermediaries shall be subject to publication of a prospectus unless one of the exemptions listed in points (a) to (d) of Article 1(4) applies in relation to the final placement.
No additional prospectus shall be required in any such subsequent resale of securities or final placement of securities through financial intermediaries as long as a valid prospectus is available in accordance with Article 12 and the issuer or the person responsible for drawing up such prospectus consents to its use by means of a written agreement.
Voluntary prospectus approval
If a further public resale on a trading platform is planned, it could be recommended to obtain a voluntary prospectus approval. Where an offer of securities to the public or an admission of securities to trading on a regulated market is outside the scope of this Regulation in accordance with Article 1(3), or exempted from the obligation to publish a prospectus in accordance with Article 1(4), 1(5) or 3(2), an issuer, an offerer or a person asking for admission to trading on a regulated market shall be entitled to voluntarily draw up a prospectus in accordance with this Regulation.
Since Liechtenstein is an EEA member, the prospectus, including any supplements, is valid in any number of EEA member states without an additional approval procedure for a public offer or admission to trading (European passport). The FMA shall send the necessary documents to the competent authorities of the host Member State and the European Securities and Markets Authority (ESMA) within one working day of receipt of the application or approval.
Liechtenstein has paved the way for blockchain with the ICO fact sheet, the first security token prospectus registered in Europe and with numerous drafts of the Blockchain Act, which has now been in force since the beginning of 2020. It is a unique legislation for tokens, asset tokenisation and security tokens, which provides legal certainty for international projects looking for fundraising or more liquidity for existing assets and their investors.
Security token offering requirements in Liechtenstein look as follows in brief:
Risks related to application of blockchain technology are mostly in relation to the technology itself, the lack of security tokens trading platforms and the globally fragmented regulations.
Though potential risks of technological and economic nature exist, the potential of tokenisation to transform the assets world is quite large. For now, the market remains in its early stages, with the lack of secondary market holding back the development. Overall, only the application of the new regulations in the real world will provide proof of the success of the regulators approach.