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February 7, 2020

Since this year the widely debated Liechtenstein Law of tokens and organizations providing services based on Trusted Technologies (Token and TT Service Provider Act (TVTG)), also known as the Blockchain Law, has entered into force.

This law is a serious step in the legalization of the blockchain; not only market participants, but the state itself are interested in it. As a member of the EEA, Liechtenstein has created a law that fully complies with the codified directives and EU / EEA rules.

It should be noted that Liechtenstein, through its openness to the blockchain, will provide any registered TT (Trusted Technologies) service provider with the opportunity to carry out transactions with digital assets or tokens on the markets of European countries.

In addition to taking into account European directives related to the blockchain, Liechtenstein went further and legislated for minimum standards for issuing tokens, but most importantly, it devoted the majority of TVTG to Trusted Technology (TT) service providers. In order for the new law to fit into the existing regulatory framework, legislators had to amend the Due Diligence Act (SPG), the Financial Market Supervision Act (FMAG), the Persons and Companies Act (PGR), and the Act on Entrepreneurial Activity (GewG).

It is worth noting that TVTG gives quite abstract definitions, however, one should not be afraid of some uncertainty in terminology. Primarily because in developing legislation in the field of technology, the risk of obsolescence of legislation is extremely high. That is why the Law of Liechtenstein through neutral terminology and streamlined formulations provides ample scope for new developments and discoveries.

The value of TVTG is that it recognizes the existence of the blockchain, gives it the opportunity to develop, while providing minimal protection to users and takes control of the activities of TT service providers.

Token-container model

According to TVTG, a token is part of the information in the TT system (it can represent claims or the rights of participants to another person, property rights, other absolute, or relative rights) that are transferred to one or more TT identifiers.

The technologically neutral definition of tokens is fully consistent with the concept of token = container or Token Container Model (TCM). So, you can put any asset into a token: stocks, real estate, rights, obligations, currency, metal, as well as put nothing and leave it “empty” in the form of a digital code. This approach makes the legal certainty of the token dependent on its “content” and thereby helps to determine the place of tokens in the legal sense.

TT Service Providers

Speaking about the topic of blockchain, cryptocurrencies such as Bitcoin or Ethereum, which are the digital contents of a token container, come to mind first. However, few people ponder over that in this container we can put any object of the physical world, whether it be a picture or a house. Aware of such a misconception, the legislator envisaged and legally fixed new roles in the blockchain sphere, for example, the role of a physical validator.

The main task of a physical validator is to digitalize objects of the physical world by placing such objects in tokens in compliance with all requirements of the law. So the Blockchain Law was created to impose liability on TT service providers in case of non-compliance with the requirements for identification of the object (serial number, certificates, etc.) during digitalization. In addition to the physical validator, TVTG names other suppliers (section 3.2; p. 66-77), namely:

  • Token Generator: A person or organization that generates tokens.
  • Token issuer: an individual or legal entity offering tokens to the public on its own behalf or on behalf of another person or organization.
  • TT Key Depository: an individual or legal entity acting as a custodian, owning keys on behalf of the principal.
  • TT Token Depository: an individual or legal entity owning tokens on behalf of another person or at the expense of another individual or legal entity.
  • TT Defender: an individual or legal entity that owns tokens in its own name in the TT system in the interests of third parties.
  • TT exchange service provider: an individual or legal entity exchanging fiat (legal tender) for tokens or vice versa.
  • TT Inspector: A person who checks the legal capacity and compliance with the token requirements.
  • TT price service provider: an individual or legal entity that provides TT system users with aggregated price information based on purchase and sale offers or completed transactions.
  • TT identification service provider: a person who identifies a person authorized to manage a token in the TT system, enters or registers such a person in the catalog.

As already noted, the state takes control of the blockchain sphere under its wing. Therefore, those who wish can submit their applications online to the Liechtenstein Financial Market Authority (FMA), where an audit is conducted against money laundering, organized crime and financing of terrorism. After successfully registered organizations will be published on the FMA website.

The TVTG also contains a broader list of requirements for registering TT service providers (Articles 13–17), such as no fraudulent bankruptcy, minimum capital (depending on different TT service providers), special internal controls, and most importantly, headquarters or place of residence (e.g. CEO) in Liechtenstein.

The analysis of TVTG leads to the conclusion that most of the requirements apply to service providers, namely, obligation to obtain a license for their activities, submit reports, and also to register in specially created state registers. Responsibility for violation of the requirements of the Law is also present and described in sufficient detail.

Analysis of the legal regulation of the blockchain in Liechtenstein

As already mentioned, Liechtenstein has included a large number of EU directives in its legal system as well as on blockchain issues. Today, the adoption of the above Law would not have been possible without EU legislation, which played a significant role in the rapid development of the blockchain in Liechtenstein. So, in order to realize the value of the new Law, it is necessary to analyze the already existing at that time basis of legal regulation in the field of blockchain.

It is not surprising that TVTG amended at least four existing laws, tokenization occurs at all levels and areas of law. These laws already mention DLT, tokens and their legal regime.

For example, in § 81a of the Persons and Companies Act (PGR) of 1926 and in the additional provisions, it clarifies the following:

  • PGR recognizes (but does not regulate) dematerialized shares.
  • Although the registry format for storing uncertificated rights is not defined by law, under “Trusted Technologies” is directly understood DLT.
  • Transfer of uncertificated rights is only valid if it is done through DLT.
  • The law also excludes a possible conflict between the obligation of the “real world” or the transfer of uncertified rights outside the blockchain and the transfer of a token representing such rights on the basis of the blockchain.
  • Any person acquiring undocumented rights on the blockchain must be protected, even if the seller did not own the implied rights of the “real world”.
  • The debtor making payments to the creditor entered in the DLT registry is also released from his obligations in the real world.

Thus, the Liechtenstein Law is recognized as one of the most advanced in Europe: it focuses on important matters and legal issues that are still to be considered in the future.

Types of tokens regulated by the Liechtenstein Law

  • Service tokens represent access to a product or service of a company, or more precisely, to products or services provided by a network. They are intended as (future) purchases, and not as investments. A service token is the own currency of a blockchain or blockchain-based application (DAPP), it is implemented to create a unique token economy for a blockchain or DAPP.
  • Payment tokens, or transactional cryptocurrencies, are blockchain-based digital currencies created as an alternative to traditional currencies for financial transactions.
  • Securities tokens are very similar to traditional ones, which include stocks, bonds and options, but with a technological update that effectively gives them the potential to transform the financial industry. They have an income generating element and potential rights for the holder of a securities token, such as dividends, interest, and voting rights. Such tokens are already actively used by global companies, for example, the French financial services giant Societe Generale Group last year issued bonds worth about $ 112 million in the form of token-shares on the Ethereum blockchain.

Token Licensing Requirements in Liechtenstein

The regulatory requirements for ICO and STO in Liechtenstein vary depending on the type of token issued. Thus, the Liechtenstein Financial Markets Authority (FMA) currently distinguishes between securities tokens, service tokens and payment tokens.

It is worth noting that jurisdictions around the world take different approaches to classify tokens. However, Liechtenstein adheres to the classification of legal status of tokens recognized in the EU. Thus, securities tokens qualify as a financial investment instrument in the framework of MiFID II (Markets in Financial Instruments Directive II). Service tokens are not recognized as financial investments and are generally not regulated. Payment tokens serve as a means of payment. To issue securities tokens and service tokens, usually no licenses are required.

Let's consider some features of token issuance:

  • If a company plans to issue tokens, it should clarify whether the issue is an unregulated ICO (service tokens), or is it STO (securities tokens), and whether financial market laws apply.
  • If a company issues a token of securities for the purpose of debt financing or raising capital, it does not need any special licenses. However, in this case, national and European prospectus rules may apply.
  • If the company issues the service tokens and the ICO is not currently regulated, this means that issuers also do not need any special licenses. However, regulations may change due to the already enacted Blockchain Law, which imposes rules on ICOs leading to better protection for investors.
  • Companies issuing payment tokens (usually such tokens contain real currency) need an electronic license or a banking license.
  • Tokens can take various forms, and the issuer must always clarify the exact legal requirements for its token. In some cases, issuers may still need special licenses due to the nature of the tokens.
  • Payment of tokens is a completely different process. Companies can issue them only with an electronic money license or a banking license. The electronic money license, as specified in the EEA directive 2009/110/EU, allows enterprises to issue and transfer electronic money. Consequently, a business in Liechtenstein with a license for electronic money can offer services in other EEA countries without additional approval requirements (this directive also applies to Liechtenstein, despite the fact that the country is not in the EU, but in the EEA).

Equally important is the FMA decision to create the FinTech team in June 2018, which provides advice and recommendations.

Thus, companies wishing to start issuing tokens in Liechtenstein need to study both national and European legislation. This work will be worth it because a business based in Liechtenstein and licensed will have access to the entire EEA market.

Additional information about Token Securities

STO has two key features: its functionality and the ability to negotiate. Monetary assets will help simplify the processes of exchange and trade, since they are interchangeable with other individual goods and assets that have the same value and have the same form. A “security” is nothing more than a financial instrument backed by a tangible real class of assets, for example, company income or operating profit. Therefore, it provides information on the ownership of the product in which it is invested.

Securities tokens are very similar to traditional securities, but with one key difference - the tokenization of such assets. It is very interesting, because the technological updates that were made possible thanks to blockchain technology can significantly improve the dynamics of the turnover of traditional securities, taking the rather outdated infrastructure on which this industry works to a new level. Potential benefits of securities tokenization include:

  • Programmability of securities (automated dividend payments, integrated voting protocols, regulatory compliance such as reporting, KYC and AML procedures).
  • Increased ability to transfer ownership.
  • Compatibility of unrelated securities.
  • 24/7/365 securities trading.
  • Significant reduction in costs due to the reduction of most intermediaries.
  • Fragmentation of securities and the assets they represent.
  • Significant increase in the targeted (global) pool of investors.
  • Permanent transparency.

As we move from service tokens to securities tokens, we simultaneously move from ICOs to STOs, which is an abbreviation for the offer of securities tokens. Without the exchange of securities tokens, STO launch is not possible.

Crypto Securities Emission and Issue: Securities Token Offers (STO)

Given the market's penchant for high-quality, compatible cryptocurrencies, there is a good reason to believe that the STO model will be of great importance to the blockchain ecosystem. Considering that the assets represented by STOs have already exist in the real world, they act as a bridge between inherited finances and the blockchain world.

The following are seven reasons to use STO:

  • Programmable ownership and compliance. STOs are programmable in nature, in other words, conformance protocols can be embedded in a real asset and change over time.
  • Reduce corruption, fraud and money laundering. The likelihood of corruption and manipulation will drop rapidly and may be excluded from the investment process, as the number of intermediaries will decrease significantly.
  • Improvement of the crypto-ecosystem. Strengthening regulation and trust will put an end to most of the arbitrariness covering cryptocurrencies among ordinary investors. It can improve the ecosystem with new market and capital players.
  • Return of trust. Following the number of unregulated Initial Coin Offers (ICOs), STOs that follow the federal protocol, approved by the SEC, must gain credibility. This means that investors can spend less time studying the dossiers of project participants in order to verify the legality of the project and devote more time to assessing the merits of the business model.
  • Decentralized assets remain decentralized. According to the SEC, the rules affecting the offerings of securities tokens do not matter for assets that are “fairly decentralized,” such as Bitcoin and Ethereum. Decentralized currencies will remain, but now the harm associated with cryptocurrency and digital assets will disappear.
  • Actual ownership of underlying assets. Although these so-called “service tokens” were intended to provide investors with access to a product / service in the future, the security token illustrates the actual ownership of the underlying asset. If you are investing in real estate, your assets reflect the actual shares in this tangible property, and not future bond receipts.
  • Increased innovation. A regulated ecosystem for tokenization will open the door to greater recognition and new innovations in the blockchain field. A more innovative environment means more investment opportunities and wealth creation. This trend is already well traced as startups and institutions continue to take advantage of decentralized ledgers.
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