Liechtenstein Blockchain Act and Major Business Models – From Legal Framework to Reality
The “Alpine Malta” attracted the attention of the international and especially the European crypto-community, when it announced it was to be one of the first countries in the world to adopt special legislation on blockchain, namely the Token and Trustworthy Technology Service Provider Act (also TVTG or Liechtenstein Blockchain Act), which has been enforced from the beginning of 2020, creating one of the world’s first safe and regulated environments for token-related services.
In this context, it should be noted that Liechtenstein’s TVTG legislation follows the approach of a “token container model”, according to which tokens will be deemed to constitute whatever is “put into the container”. Therefore, for instance, if financial instruments are tokenised (“put into the container”) the token will also be classified as financial instrument. The principle of “substance over form” is applicable here.
This article will explore how the most common crypto and tokenisation business models are realised within both Liechtenstein's national and the broader European legal framework.
Major business models include:
It should be mentioned that every blockchain-related business model is individual and sometimes no licence or registration under the TVTG is required or different requirements apply as the project develops.
It is an advantage of Liechtenstein that, in any case, a project can communicate with the regulator, the Financial Market Authority Liechtenstein (FMA), in advance and submit a so-called supervision request (Unterstellungsanfrage) to be able to obtain official feedback regarding which licences and requirements are applicable to the project.
Fundraising using security or a utility token offering
After intense discussions, the Liechtenstein government has proposed including uncertified security or book-entry security with all the functions of a traditional security of public faith, by incorporating new articles into the Final Part of the Persons and Companies 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 of the Final Part of the PGR creates a new interface between the TVTG and securities law. Because the register can also be kept on the basis of a blockchain or trustworthy technology (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 tokens could be various types of traditional securities, such as registered shares, participation certificates or profit participation certificates (the Swiss and Liechtenstein equivalents of non-voting shares), bonds, collective investment scheme units and also new uncertified securities which could be created using tokenisation. Examples of these new securities include derivatives as rights to future income, rights to future commissions (eg, the Neon/Nash exchange), or derivative securities with the features of a structured bond (eg, the Crowdli project for real estate investments).
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 might look as follows:
Major requirements for token issuance
I – Registration as token issuer
Token issuer registration is needed for the following cases.
Token issuer registration requirements include the following.
II – Registration of prospectus for security tokens
In the event tokenised securities are offered publicly in Liechtenstein or if the offer is expanded to the entire European Economic Area (EEA), a securities prospectus might have to be prepared and published. An offer of securities to the public means a communication to individuals 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 and for offers on a secondary market. A securities prospectus is intended to adequately inform the interested public about the purpose of the token and the associated opportunities and risks related to it as a digital representation of a security.
In Liechtenstein, as part of the EEA, both the EEA Securities Prospectus Implementation Act (EWR-WPPDG) and the Delegated Regulations (EU) 2017/1129, supplemented by Regulations (EU) 2019/979 and 2019/980 apply to security tokens, which fulfil the three criteria of transferability, standardisation and tradability. Detailed clarifications are provided in the FMA’s instructions and communication to be found at the FMA’s website.
A securities prospectus must be prepared and published if the volume of the token issuance will exceed the CHF1 million threshold over the course of twelve months.
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 to the token offering.
Exemptions to the prospectus obligation can be found in Article 1 paragraph 4 of Regulation (EU) 2017/1129 and Article 3 of the EWR-WPPDG.
The most frequently used exemptions are private placements not falling under the description of a public offering and an exclusive approach to qualified investors.
If an exemption relating to the obligation to publish a security prospectus is used, the offer of the token is restricted to the territory of the Principality of Liechtenstein. Though it is possible to “passport” an approved securities prospectus to other countries within the EEA to offer the security tokens, exempted offers of securities to the public should not benefit from the passporting regime.
In any case, a security prospectus may also be registered voluntarily (ie, even if an exemption applies) in order to extend the offer to the whole EEA.
Some examples of security tokens in Liechtenstein include:
III – Basic information and notification for utility tokens
Article 30 of the TVTG contains an obligation to prepare, report and publish basic information, which should include 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 from a securities prospectus is that basic information according to the TVTG must be brought to the attention of the FMA in good time before the token issue; the information must also be published somewhere (eg, on the issuer's website). However, no formal approval of the information by the FMA is required.
The TVTG furthermore states certain exceptions from the obligation to prepare and publish basic information in its Article 31. Such exceptions apply if all investors waive their right to receive the basic information, if the offering is addressed to fewer than 150 potential clients or if the total volume of the issuance amounts to less than CHF5 million. However, the token issuance still has to be notified to the FMA.
It should be noted that a later resale of the token on a secondary market may trigger an obligation to prepare and publish basic information as it might be considered a public offering.
Major requirements for tokenisation platforms
A tokenisation platform is a platform that offers tokenisation services for real-world assets, bringing traditional investments to a digital sphere where they might be offered to a larger target audience. Services offered may extend from the tokenisation of alternative investments, physical goods or intellectual property to the tokenisation of stocks/stock options.
Such services developed and became more popular during 2021 as it seems that investors increasingly sought to bring their physical assets to the blockchain. Examples include tokenising cars, precious metals and stones, collectibles of all kinds and real estate.
In order to establish a platform to tokenise assets such as securities or physical goods, a token issuer registration is required. Besides that, an investment firm licence for security tokens may become obligatory. The relevant requirements, however, are determined by the circumstances of the individual case.
If a tokenisation platform provides services exclusively as a technology provider and a client issues tokens in their own name, a registration as a token generator is required. While this may ultimately seem like another additional expense, the requirements for such a service registration are rather low.
Besides the application for registration with the FMA there are no further major requirements for token generators as there is no obligation to supply additional capital in order to start the company’s operations.
Registered token issuers and/or generators in Liechtenstein include:
In cases of tokenisation of not only physical goods but also certain property rights, a so called non-fungible token (NFT) is created by the token generator. Such tokens are not interchangeable with other tokens as they feature unique elements depending on the tokenised good or intellectual right. Since each physical asset has its own properties (eg, a tokenised car features a unique identification number and milage, a tokenised diamond features an individual cuts and carat), they will also be featured in the token therefore making it inimitable. The same foes for intellectual property rights to, for example, songs. As each track features individual codes, the tokenised music will result in an NFT.
The created NFT may be displayed on an NFT marketplace. As each of the NFTs also features the corresponding property right to the respective tokenised physical good, a transaction of the token also entails the property transfer of the asset. In order for such marketplaces to operate, a registration as a crypto-exchange might be due.
Crypto-exchanges and custodians
Crypto-exchanges, depending on their technical realisation, may fall under the following service provider categories under the Liechtenstein Blockchain Act:
In addition to the above-mentioned registrations, the crypto-exchange may also fall into certain categories defined by EU legislation if security tokens are offered for trading.
Prior to the application for registration with the financial regulator, there are certain requirements which crypto-exchanges have to meet and which will be checked by the FMA.
First of all, personnel, management and shareholders holding 10% or more of the company’s shares have to be reliable in terms of bankruptcy and criminal law. Additionally, the company itself has to feature a corporate structure with defined areas of responsibility including procedures for dealing with conflicts of interest and written internal proceedings with control mechanisms.
In order for the service provider to start its operations, a certain amount of minimum capital must be raised and kept throughout the entire time of business activity. This amount of minimum capital ranges from CHF30,000 for exchange service providers conducting transactions within the range of CHF150,000 to CHF1 million within one calendar year to CHF100,000 for larger transactions. The provision of depository services, and only depository services, whether it be token or key custody, will also require a minimum capital of CHF100,000 disregarding any turnover figures.
Examples of registered service providers in Liechtenstein
Finally, it must be noted that the registrations presented above are those under Liechtenstein law. Due to the fact that there is no unified European legislation, services that are registered in Liechtenstein may in principle also be offered within the entire EEA. Therefore, the permission to offer respective services obtained pursuant to registrations under Liechtenstein law might be “passported” to further EEA member states. Nevertheless, applicable legislation and the regulator’s position in the customer’s country must be taken into account.
However, it is not possible to "passport" the actual registrations to other countries as it is the case with financial services under EU directives.
Outlook on the TVTG and European MiCA proposal
The crypto industry is constantly growing and changing and the entire industry is experiencing high demand for all kinds of crypto-related instruments. In the recent past, therefore, not only has the number of spot transactions in crypto-assets increased, but corresponding options or futures transactions as well. In addition to that, as the market grows, new businesses, for which there had not been any need in the past, become established. Examples of this include certain token and key depository services, or the tokenisation of voluntary emission allowances to name just a few.
Furthermore, it is to be expected that further new company foundations will make use of the possibility that exists in Liechtenstein to contribute the company’s minimum or share capital through crypto-assets. Since “Amazing Blocks AG”, as the first company within Liechtenstein to be established in August 2020 with a contribution in ether instead of cash, a few companies have now started to follow this example.
It is also to be expected that the market will continue to grow and the numbers of service providers will increase – especially within the Principality of Liechtenstein – since companies here experience optimal circumstances to raise and scale their crypto-business activities. The TVTG’s high level of regulatory certainty and direct communication with the FMA also contribute to this crypto-friendly environment.
Finally, the European legislature has also recognised these trends and will create a uniform legal framework for regulating the crypto industry throughout Europe with the new Regulation on Markets in Crypto-assets (MiCA) which is part of the EU’s legislative proposals for crypto-assets within the EU’s Digital Finance Package. Currently, this regulation is expected to become effective at the end of the year 2022.
This still-to-be-established regulation is, to a large extent, congruent with Liechtenstein’s TVTG legislation which has been in force since 01 January 2020.
The new MiCA Regulation aims to catch so-called “significant” and ordinary asset-referenced tokens (ART), "significant” and ordinary e-money tokens (EMT), and utility tokens. Furthermore, “crypto-assets” will be established, which are intended to catch all further tokens which involve – besides the aforementioned tokens – financial instrument tokens, algorithmic stable coins as well as “other crypto assets”. Also, MiCA’s definition of tokens is congruent with Liechtenstein’s TVTG approach of the token-container model as the type of crypto-asset related to the respective application of laws. It should be noted that security tokens are not covered by MiCA but will still be subject to MiFID II (Directive 2014/65/EU) as they feature more characteristics of traditional securities.
MiCA also regulates certain crypto-asset service providers (CASPs), such as issuers, custodians and exchanges, while not covering TVTG’s regulated activities of a physical validator, verifying authority, price service and identity service provider. Then again, MiCA provides for regulation with regard to trading platform services, the execution and placing of orders, reception and transmission of orders as well as the provision of advice. In order to obtain authorisation as a CASP, the legal person applying must maintain a registered office within one EEA member state while no physical presence is required. Naturally, its management body must enjoy a good reputation, and be able to demonstrate competence and relevant qualifications, experience and skills while complying with respective due diligence. Special obligations for specific CASPs may arise depending on the actual service provision.
Additionally, MiCA’s pilot regime will contain the possibility to request certain exemptions from specific requirements embedded in EU legislation (eg, MiFID II or the Central Securities Depositories Regulation), which will ensure a level playing field across the EU.
Overall, this sandbox approach should lead to greater regulatory certainty within the crypto space across the whole of Europe and therefore to a further increase of trust in distributed ledger technology services.