Future regulation is intended to ensure uniform regulation for all European countries and covered participants.
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 the international and European crypto communities alike since the early days of the industry.
In 2019, Liechtenstein became one of the first countries in the world to adopt specific legislation on crypto and blockchain, 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 been increasing, as companies find optimal conditions there to establish and develop their crypto business. The TVTG’s high level of regulatory certainty and direct communication with the local financial market regulator, the Financial Market Authority (FMA), have also contributed to this crypto-friendly environment.
What else makes Liechtenstein special and attractive for 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 businesses like FTX, Celsius or Three Arrows Capital?
To get a betting 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 digitalization issues within the Ministry of Finance and was the project leader and co-author of the Blockchain Act.
The first comprehensive national token law
From 2016 to 2018, the blockchain and crypto industry faced a tremendous amount of uncertainty as governments around the world had only begun to develop regulatory concepts for digital assets. Amid this uncertainty, the announcement that the Liechtenstein government considered blockchain as 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 to classify tokens differently based on how they function (utility token, security token or payment token).
According to Dünser, this clarification alone that not all tokens are to 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 groundwork for the use of tokens by established financial institutions” like custody services, banks or exchanges. Moreover, Dünser emphasized the importance of the “semantics” of the Blockchain Law:
“It created a common language space, which was crucial for technical and regulatory discussions about crypto and blockchain between authorities and market participants
The ability to innovate is critical
The Blockchain Act was designed in 2016 and passed back in 2019. At that time, there were no decentralized finance applications or nonfungible tokens (NFTs) on a scale like now, which calls for faster legal development.
How is Liechtenstein dealing with this scale of innovation?
Neither the trend toward decentralization nor toward NFTs was unexpected, said Dünser. “With our national token law, we have created the basis for a broad range of tokenizations, even going beyond NFTs. We have deliberately 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 anytime soon.”
Liechtenstein regulators have also taken the trend of decentralization into account in the Blockchain Act. The TVTG is “open for 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 regulatory requirements if they pose risks to users, regardless of the business model in which they are provided. In doing so, service providers themselves have to consider how to mitigate the risks, whether with technology or human resources. Dünser said:
“Given the rapid pace of technology-driven innovation, the ability of the legal system to innovate is critical. Without it, we not only slow down innovation but also face considerable legal uncertainty. Neither of these can be in the interest of states.”
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 the European level, analogous structures would be necessary for the whole regional regulatory system.
Similarities between the TVTG and MiCA
MiCA is an important step toward a unified European regulatory system, and the TVTG served as a sort of model for MiCA. In particular, the MiCA draft adopts the Token Container Model of the TVTG, the licensing requirement for offering certain blockchain-related services, and also the information requirements for public offerings.
So, there shouldn’t be any major changes to the existing practice in Liechtenstein after MiCA enters into force, and both laws will be well-compatible, noted Dünser.
Crypto service providers newly regulated under MiCA will no longer need to be regulated under the Blockchain Act.
“Like Liechtenstein, the EU Commission sees the token economy — in addition to financial market applications — as a great opportunity for Europe.”
Liechtenstein’s experiences were, therefore, relevant for European lawmakers, and there were “lively discussions” between both sides that are reflected in many regulatory philosophical similarities between the TVTG and MiCA: the token container model, the role-based and, to some extent, principle-based regulation, and openness to innovation.
“However, we need to distinguish between the civil law and supervisory law parts,” Dünser noted, adding, “MiCA includes only the prudential components. Each member state has to clarify the civil law foundations itself. With the Blockchain Act, Liechtenstein already has a comprehensive and robust legal framework for all types of tokenization, from equity tokens, and other crypto assets to NFT and other tokenized rights.”
“We are prepared to act”
As to whether Liechtenstein will tighten rules for the crypto market after the FTX crash and other big collapses in 2022, Dünser said it would better avoid overregulation. Moreover, the Blockchain Act already regulates the custody of tokens and also prescribed legal separation in the event of bankruptcy.
Nevertheless, Dünser agreed that certain adjustments are necessary. “I see greater challenges in staking or borrowing and lending of customer tokens by crypto exchanges, which is not regulated in many jurisdictions.”
In the European Union, for example, regulation for credit institutions, which is set up for similar activities involving money, does not apply to crypto service providers. MiCA also does not cover this issue, at least not yet.
“In my view, this regulatory gap should be closed urgently. We are following and monitoring this development closely and are also prepared to act.”