The Liechtenstein Blockchain Act and Major Business Models – From Legal Framework to Reality

Introduction

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 (TVTG or the “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 a 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 legal framework and the broader European legal framework.

Major business models include:

• fundraising using security or utility token offerings;
• tokenisation platforms; and
• crypto-exchanges and custodians.

It should be mentioned that every blockchain-related business model is individual and sometimes no licence or registration under the TVTG is required.

It is an advantage of Liechtenstein that, in any case, a project can communicate with the regulator (the Financial Market Authority (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

Security tokens

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 issuance 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.

Various types of traditional securities could be behind the security tokens, 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
• 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); and
• derivative securities with the features of a structured bond (eg, the Crowdli project for real estate investments).

Asset tokenisation models for real estate, and for other illiquid and quite expensive assets such as collectable cars, art objects, precious metals and stones, might look as follows:

• tokenisation of bonds;
• tokenisation of a company’s equity;
• tokenisation of units in collective investment schemes;
• tokenisation of co-ownership in a specific object; and/or
• tokenisation of future revenue streams.

Major Requirements for Token Issuance

Registration as token issuer

Token issuer registration is needed for the following cases.

• Persons who publicly offer tokens on behalf of third parties, applicable to utility tokens only. To issue security tokens for third parties, one would most likely require an investment firm licence.
• 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 within 12 months – this could be applicable for both security and utility token issuance.

Token issuer registration requirements include the following.

• Personnel, management and shareholders have to be reliable in terms of bankruptcy and criminal law, and an organisational structure with defined areas of responsibility, including procedures for dealing with conflicts of interest, must exist.
• Minimum capital of CHF50,000, CHF100,000 and CHF250,000 must 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 but less than CHF25 million, and of more than CHF25 million are issued within a period of 12 months.

Registration of prospectus for security tokens

Where tokenised securities are offered publicly in Liechtenstein or where the offer is expanded to the entire European Economic Area (EEA), a securities prospectus might have to be prepared and published.

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 (https://www.fma-li.li/en/).

A securities prospectus must be prepared and published if the volume of the token issuance for public offering outside Liechtenstein will exceed the CHF1 million threshold within 12 months.

A securities prospectus must be approved by the FMA and published as required by law 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 within 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. Also, 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.

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.

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 issuance; 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.

Furthermore, the TVTG lists certain exceptions from the obligation to prepare and publish basic information. Such exceptions apply if:

• all investors waive their right to receive the basic information;
• the offering is addressed to fewer than 150 potential clients; or
• the total volume of the issuance amounts to less than CHF5 million.

However, the token issuance must still be notified to the FMA.

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 various alternative investments, collectable cars, precious metals and stones, real estate, other physical goods or intellectual property to the tokenisation of stocks/stock options.

In order to establish a platform to tokenise assets, a token issuer registration is required. Besides this, an investment firm licence for security tokens may become obligatory.

If a tokenisation platform provides services exclusively as a technology provider and a client issues tokens in their own name, registration as a token generator is required.

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.

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.

The created NFT may be displayed on an NFT marketplace. As each NFT 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. For such marketplaces to operate, one of the following registrations might be due.

Crypto-Exchanges and Custodians

Crypto-exchanges, depending on their technical realisation, may fall within the following service provider categories under the Liechtenstein Blockchain Act:

• a token depository – if an exchange provides a depository for users’ tokens;
• a key depository – if an exchange provides a depository for users’ private keys;
• a price service provider – if an exchange provides peer-to-peer services and price information; and
• an exchange service provider – if the exchange itself is party to trades.

In addition to the above-mentioned registrations, the crypto-exchange may also fall within certain categories defined by EU legislation if security tokens are offered for trading.

Major requirements

Firstly, personnel, management and shareholders holding 10% or more of the company’s shares must be reliable in terms of bankruptcy and criminal law. Additionally, the company itself must feature a corporate structure with defined areas of responsibility, including procedures for dealing with conflicts of interest and written internal proceedings with control mechanisms.

The 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 (only) depository services, whether token or key custody, will also require a minimum capital of CHF100,000, disregarding any turnover figures.

Finally, it must be noted that the registrations presented above are those under Liechtenstein law. Since there is no unified European legislation yet, services that are registered in Liechtenstein may not be “passported” to further EEA member states. Applicable legislation and the regulator’s position in the customer’s country must be taken into account.

Outlook on the TVTG and the MiCA Regulation

It is 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 for raising and scaling 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.

The MiCA Regulation

The EU legislature has also recognised these trends and intends to create a uniform legal framework for regulating the crypto industry throughout the EU 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. It is currently in the final stage of the EU legislative process.

The core of the MiCA Regulation is formed by “crypto-assets”. In addition to crypto-assets in general, so-called “asset-referenced tokens” and “e-money tokens” are regulated. Accordingly, general crypto-assets are assets that are neither asset-referenced tokens, e-money tokens nor significant tokens.

According to Article 3 paragraph 1 No 2 MiCA Regulation, crypto-assets are described as “digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. This definition is to be understood as a generic term for all digital assets, which is specified by the definitions of “asset-referenced tokens” and “e-money tokens”, and further by “significant tokens”.

The classification system follows the following pattern: crypto-tokens are all asset-referenced tokens and e-money tokens. Significant tokens, in turn, are certain forms of asset-referenced tokens and e-money tokens, which, according to the MiCA Regulation, require special supervision.

The MiCA Regulation defines asset-referenced tokens as assets that represent a stable value by reference to fiat currencies, commodities or other crypto-assets. Stablecoins, in particular, will be included under this heading. The issuance of such tokens is in principle subject to a reservation of authorisation, which can, however, be used throughout the EEA (“notification” or “passporting system”).

The issuance of asset-referenced tokens is reserved for legal entities that have disclosure obligations, corresponding client information and internal structures, and own funds of at least EUR350,000.

Finally, the MiCA Regulation defines e-money tokens as assets that are used as a medium of exchange with stable value in relation to a fiat currency. Furthermore, the issuance of these assets is reserved for appropriately authorised credit institutions or e-money institutions, in so far as the offer is not exclusively directed at professional investors and can only be held by them, or where tokens with a value of no more than EUR5 million are issued.

The MiCA Regulation imposes precise requirements on the categories of cryptocurrencies, so an accurate classification of the product offered is essential to meet the precise criteria required.

Crypto-Asset Service Providers

So-called crypto-asset service providers (CASPs) fall within the framework of the supervisory law created by the MiCA Regulation, and include the following services:

• exchange of crypto-assets for money/other crypto-assets;
• transfer services via crypto-assets, as well as the acceptance and transmission of orders via crypto-assets for third parties;
• placement of crypto-assets;
• custody and management of crypto-assets for third parties; and
• advice and portfolio management for crypto-assets.

In Article 3 paragraph 1 No 9 lit b) of the MiCA Regulation, the service of operating a crypto-trading platform consists of the management of one or more crypto-trading platforms that brings together or consolidates the interests of a large number of third parties in the buying and selling of crypto-assets, in such a way that a contract for the exchange of a crypto-asset either for another crypto-asset or for legal tender is concluded.

The individual requirements for the aforementioned service providers are manifold and range from certain minimum capital requirements to the reliability and professional suitability of the issuer’s managers. In each case, a case-by-case assessment is indicated.

However, the MiCA Regulation also provides for regulations concerning service providers that are already registered accordingly. Article 123 of the Draft MiCA Regulation regulates the transitional provisions. Corresponding service providers already operating under national law may continue their activities for a maximum of 18 months after the introduction of the MiCA Regulation until their licence has been obtained under the MiCA regime.

This is particularly relevant for already registered TVTG service providers under national Liechtenstein law, as they will require a corresponding licence after the MiCA Regulation comes into force. Claiming the simplified authorisation procedure according to the MiCA regime can thus prevent a long original authorisation procedure. With a corresponding registration under the MiCA regime, service providers can benefit from so-called EEA passporting – ie, they can provide their services throughout the entire territory of the EEA with only one authorisation within the territorial borders of the EEA.

Changes to National Liechtenstein Law

In light of the EU legal harmonisation through the future MiCA regime, the Liechtenstein Blockchain Act is to be adapted to the new regulations at an early stage and maintain Liechtenstein’s advantage.

Introduction of “Crypto-Assets”

In accordance with the future MiCA Regulation regarding crypto-tokens, a corresponding definition will be adopted in the Liechtenstein Blockchain Act. Accordingly, in the future “crypto assets” will be fungible tokens. This means that tokens that are not interchangeable without distinction – ie, that are not fungible – are excluded from the definition. However, parts of non-fungible tokens and non-fungible tokens that are issued on a large scale are also included.

Introduction of “Tokenisation Service Providers”

In Liechtenstein, technical service providers are not to be subject to registration. The idea behind the obligation to register corresponding service providers is that they should ensure the representation and transfer of rights through tokens. Technical service providers (eg, programmers) who are involved in the technical implementation of tokenisation and have no further obligations towards the actual owners of the tokens are to be distinguished from this.

For the purpose of easier differentiation between both activities, the already regulated activity of the token generator will be changed to the effect that the creator will only be liable for the technical quality of the token, while the so-called tokenisation service provider will be liable for both the technical and legal quality of the token. However, both activities are – in contrast to purely technical service providers – directly related to the marketing of tokens. Purely preparatory activities are therefore not subject to registration.

TT-Asset Managers

Until now, the role of crypto-advisors and crypto portfolio management was not covered by the Liechtenstein Blockchain Act. In the future, such activities will also be covered by the Liechtenstein Blockchain Act. Accordingly, such service providers shall be persons:

• who manage portfolios on an individual client basis with discretionary powers within the scope of a client mandate, provided that these portfolios contain one or more crypto-assets; or
• who offer or make personalised or specific recommendations to third parties regarding the purchase or sale of one or more crypto-assets or the use of crypto services.

It should be noted that a corresponding registration relates exclusively to services that have crypto-assets as their object. Activities in connection with financial instruments are not included.

TT-Custodian

Until now, Liechtenstein national law has distinguished between the safekeeping of TT keys and TT tokens. In addition, a so-called TT-protector held third-party tokens in his own name on a TT system. All three activities were subject to registration.

However, in the future, a single activity as a “TT custodian” subject to registration is to make a distinction superfluous as to whether the tokens are held in one’s own or another’s name, for another’s or one’s own account. Regardless of its form, custody is to be subject to registration for the protection of customers.

Token Loan Company

Against the background of considerable customer risks in the activity of commercial staking (provision of assets for the validation of the system) or lending (transfer of tokens for a certain period of time against an agreed interest rate) of customer tokens, a further service requiring registration was introduced in the form of the “token loan company”.

On the one hand, the service of staking and lending is not to be prohibited but allowed in principle and under certain conditions in the sense of a liberal economic order. On the other hand, customers should receive adequate protection as soon as possible.

According to the introduction of the Liechtenstein Blockchain Act, token lending companies are companies that receive tokens under the condition that they can dispose of them at their own discretion or on the instructions of customers, but must transfer the tokens of the same type, quantity and quality back after a certain period of time. Also included in this definition are such service providers who receive the tokens from the clients for the aforementioned purposes and with power of disposal, but who use them only in trust for clients or on behalf of clients. Not included in the definition of a token loan company are pure intermediaries or advisers who facilitate a person’s decision on staking but do not dispose of the tokens themselves.

Finally, token loan companies are placed under a special supervisory regime and must meet corresponding minimum capital requirements. The supervisory regime should ensure that the company does not use client tokens without the knowledge and explicit consent of the clients and that it regularly carries out risk assessments of its own activities. Furthermore, the minimum capital requirements (10% of the equivalent value of the tokens transferred by customers, and that does not have to be held in legal currency) are intended to establish a minimum level of customer protection against default and insolvency of the company.

Waiver of Registration for Self-Issuers

Until now, there was a registration requirement under the TVTG for issuers of a public token of more than CHF5 million in their own name. A corresponding registration requirement will soon be abolished, so that a limit on the amount of own issuance of tokens will no longer apply. However, basic information must still be published, which must be reported to the competent financial market authority of Liechtenstein, the FMA.