Liechtenstein – it would seem that in this small alpine state of Western Europe the legal development in the field of technological modern innovation in the financial sector has not yet taken hold, but this is only a misleading impression that might be received by the uninitiated. The well-versed are well aware of the open approach to technology presented by this small inland state, where there no prohibitions on the use or trading of cryptocurrencies apply, and above all of the fact that Liechtenstein is a pioneer in the legislation - is the first country in the world to have a safe and comprehensive regulation for the blockchain industry (cryptocurrencies, utility tokens, payment tokens, stable coins, and digital securities like security tokens) in the form of Blockchain Act.
Such a strongly taken step meant that at present Liechtenstein offers a broadly diversified, stable business location with more than 4,300 active FinTech companies. What is more, promoting innovation is a central issue for the government and this is one of the reason why Liechtenstein is business-friendly and creates good framework conditions for entrepreneurs.
What else can the crypto environment in Liechtenstein surprise us with? Is this inconspicuous country currently showing a constant development trend in the FinTech industry or is the mentioned innovative approach only a temporary manifestation of following market needs, which may be subject to disruption? You will find the answer to these and many other bothering doubts in the text below.
On 3 October 2019, the Liechtenstein Parliament has unanimously voted for the Tokens and Trusted Technology Service Provider Law (the „TVTG” or because it’s blockchain-friendly legal framework also known as the „Blockchain Act”). The law entered into force on 1 January 2020, providing a comprehensive framework while remaining technology neutral. Similar to the French law, the Blockchain Act is the achievement of more than three years of intensive work by the government and experts from a wide variety of fields (supervision, science and practice).
The objectives of the Blockchain Act are to ensure trust in digital legal communication, in particular in the financial and economic sector, and the protection of users of trustworthy technologies („TT”) systems and to create an optimal, innovation-friendly, and technology-neutral framework for rendering services on TT systems.
The Government has chosen a broad regulatory approach in order to cover as many ways to shape the token economy as possible. The legislator was well aware that a too narrow regulatory approach would lead to (new) discussions and thus to legal uncertainty. It is a framework law, alongside which other legal rules remain applicable, depending on the design of the token (company law, financial market law, etc.).
The TVTG improves investor protection and transparency but also gives rules and clarity for any token sale or crypto business. The Blockchain Act also creates legal certainty for users and service providers of blockchain applications. It contains minimum requirements for all TT service providers in Liechtenstein. Trustworthy technologies are defined as technologies through which the integrity of tokens, the clear allocation of tokens to a TT identifier, and the transfer of tokens can be ensured.
Lichtenstein has decided to define the token in a neutral manner, which turned out to be the right solution. Accordingly, tokens are information that may represent claims or membership rights, rights in property, or other absolute or relative rights and that is assigned to one or more trustworthy technology identifiers. The Lichtenstein Government intended to primarily capture crypto currencies, like Bitcoin, with this definition, but the definition is also open to include, for example, real estate ownership rights, etc.
What is more, to cover all aspects of tokenization, including the different functions of tokens and at the same time, define the term “token” technologically neutral, the Blockchain Act created the “Token Container Model” (“TCM”). Within the new framework, a token serves as a container, where all types of rights may be placed within. To assure that the right represented by the token is actually enforceable and that items hold by the token actually exist, a new role was created: The “Physical Validator” - a trusted third party in the middle of the contracting parties who confirms that the tokenized right represented online exists and the person who claims to possess the right offline is the lawful owner.
In Liechtenstein, the connection between the asset and its holder is not defined by ownership, even though the holder still has the exclusive right to dispose over the asset. In other words, to dispose of the tokens, the new owner needs to be registered in the blockchain all involved parties need to agree that the tokens should be transferred and the disposer needs to be entitled to dispose of the token. Tokens can be acquired through bona fide, in case the disposer was not entitled to rightfully dispose of the token. In case a token or the access to this token has been lost, the owner can file a petition to separate the underlying right from the token. The underlying right can subsequently be disposed of independent from the token.
Blockchain Act defines that blockchain companies and companies handling cryptocurrencies have to register and have to be approved by the Liechtenstein Financial Market Authority („FMA”) - the official body authorized to grant financial market licenses upon application, if all regulatory requirements are met. It is worth emphasizing that the FMA is generally very open to blockchain-related projects. The FMA adopts an approach of using and designing regulations in such a way that established financial service providers and new firms can pursue their business models. It should be mentioned that every blockchain-related business model is individual and sometimes no license or registration under the TVTG is required or different requirements apply as the project develops. The law also implements the FATF recommendations, which provide for supervision under the Law of 11 December 2008 on Professional Due Diligence to Combat Money Laundering, Organized Crime, and Terrorist Financing for such services. Natural and legal persons who have a registered office or place of residence in Liechtenstein and who wish to provide one of the following services on a professional basis in Liechtenstein must register with the FMA as:
- Token Issuers: Persons professionally offering tokens to the public in the name of third parties. This includes, for example, trading venues that carry out ICOs for their clients. In addition, persons who publicly offer tokens in their own name (own issuance) or who publicly offer the tokens in the name of third parties, but do not do so on a professional basis, must also register if the value of the tokens issued during twelve months exceeds or will exceed CHF 5 million. Both services: offering assets in the name of third parties and offering on their own name must be applied for separately.
- Token Generators: Persons who create original tokens on behalf of third parties;
- TT Key Depositaries and TT Token Depositaries: Persons who safeguard tokens or private keys for third parties, e.g. in a safe or a collective wallet. This also includes the execution of transactions for third parties. These services are typically provided by crypto exchanges or wallet providers;
- TT Protectors: Persons who hold tokens on TT systems in their own name on account of third parties (note: a licence under the Professional Trustees Act is obligatory in this case);
- Physical Validators: Persons who ensure the enforcement of rights in accordance with the agreement, in terms of property law, to goods represented in tokens on TT systems;
- TT Exchange Service Providers: Persons who exchange legal tender for tokens and vice versa as well as tokens for tokens. Typically this includes ATMs at which cryptocurrencies can be exchanged, but also persons who offer exchanges against their own book exclusively online;
- TT Verifying Authorities: Persons who verify the legal capacity and the requirements for the disposal over a token. This includes, for example, services that ensure that only persons of legal age or those with a specific authorisation can purchase certain tokens;
- TT Price Service Providers: Persons who provide TT system users with aggregated price information on the basis of purchase and sale offers or completed transactions. This includes persons who publish independently calculated prices for tokens;
- TT Identity Service Providers: Persons who identify the person in possession of the right of disposal related to a token and who record it in a directory;
- TT Agents: Persons professionally distributing or providing TT services in the name of and for the account of a foreign TT service provider in Liechtenstein.
The registration obligation exists regardless of whether another licence has already been granted by the FMA. That authority must decide on the application within three months. The duration of the registration process depends substantially on the quality of the materials submitted. The costs for carrying out or rejecting a registration amount to CHF 1,500. If several services are to be registered, an amount of CHF 1,500 must be paid for the first service and CHF 700 for each additional service.
All TT service providers also must meet a variety of requirements and obligations, including: having professional qualifications; being trustworthy and capable of acting, proof of having the necessary minimum capital, proof of having an appropriate organizational structure with defined areas of responsibility, having written internal procedures and controls and introducing special mechanisms of internal control and documentation.
What is more, all TT service providers must publish publicly and accessibly information on the TT system used, a declaration on how the TT system is suitable for the respective application; and information on a possible change of TT system, including an explanation.
One must bear in mind that the scope of all pre-existing capital markets, banking and finance, corporate, civil laws (e.g. consumer protections laws) and other laws remain applicable, provided that a given project falls into an area subject to regulation. In other words, this means that a variety of national and international regulations can apply to a particular venture with a crypto-asset, which implies the need to conduct an individual legal analysis for a given project. Taking the above into account, the Blockchain Act should also be treated as a supplement to the existing legal regulations.
CRYPTO TAX REGULATIONS
According to the PwC Annual Global Crypto Tax Report 2021, Liechtenstein has the clearest crypto tax regulations among the many countries included in the report. The individual countries were assessed on the basis of 19 criteria. All of these aim to make the taxation of crypto assets understandable. While no specific laws are in place on the taxation of digital assets or participants in the digital economy and electronic commerce in Liechtenstein, the tax treatment of income from such activities can be derived from existing tax rules supplemented by guidance in relations to the tax return filing (namely guidance for legal persons and individuals on the tax return). In general, only natural persons resident in Liechtenstein and legal entities with a seat in Liechtenstein are subject to Liechtenstein tax laws. Given the small size of the country and the position as a financial hub, the corporate tax laws are more relevant.The above clearly proves that the cryptocurrency environment in Liechtenstein is also beneficial from the point of view of tax law.
The Blockchain Act in Liechtenstein regulates a wide range of cryptocurrency activities and operators. As such, it could apply to a company set up as a cryptocurrency fund, but also to other fintech companies, blockchain developers or initial coin offering activities. In Liechtenstein, such operations are all included under a broad term, known as trustworthy technology. Persons involved in any operations related to the term trustworthy technology have to comply with a set of basic requirements (on matters such as the minimum capital investment, the business model, the company’s organizational structure and numerous others). Based on the Blockchain Act, investment funds can now – in addition to investing in digital assets as alternative investments – also be set up on blockchain or DLT systems and thus tokenize their fund shares. Nevertheless, requirements according to the AIFM Act and UCITS Act must be met anytime. This includes inter alia that the head office of the AIFM or Management Company must be situated in Liechtenstein. The requirements for the fund manager result not only from the above-mentioned legal acts, but also from the general legal regulation generally applicable in Liechtenstein.
A landmark in the crypto industry was the FMA approval of three alternative investment funds (“AIF”) for crypto assets in March 2018. The first legalized fund whose assets are based on blockchain technology is Postera Fund – Crypto I. It is worth emphasizing that the Postera Fund (the managing company of IFM Independent Fund) is considered not only the first regulated cryptocurrency investment fund in the country, but also in the world. With the Postera Fund, assets of €50,000 or higher can be invested from 51 per cent to 100 per cent in cryptocurrencies. The fund in question invests in a portfolio of five to eight crypto assets with a market capitalisation of over EUR 1 billion each, including the most popular Bitcoin and Ethereum crypto assets.
The remaining crypto funds that received the green light to operate in the same month are: Incrementum Crypto One Fund and Coinlab Digital Asset Fund. The Incrementum Crypto One Fund (the managing company of IFM Independent Fund) is designed to allocate at least 51% of its holding to cryptocurrencies, with a maximum cash buffer of 20%. The cryptocurrency exposure has been broken down into two strategies: a long position in liquid coins that have been on the market for at least a year, such as Bitcoin, Ethereum and Qtum, along with a 30% active position that will increase or decrease based on signals. Incrementum fund manager said: „The FMA was very open. They saw the disruptive potential of this technology. They had to get permission from higher levels of government to allow an AIF structured product to directly invest in cryptocurrencies.”
CRYPTO PERSPECTIVE FOR THE FUTURE
The conducted analysis clearly proves that Liechtenstein stands out among other countries active in the fintech industry. In addition to the advanced regulatory framework, this state can boast a stable political environment and a dynamically developing banking sector, which means that can definitely integrate potential investors. The obligation to meet specific registration and information requirements, as well as government supervision in the field of crypto, are elements that realistically attract investors looking for a predictable business environment for crypto projects.
Taking into account the presented conditions in the crypto industry, Liechtenstein can be perceived as a leader in the regulation of innovative elements, fully aware of the fact that the development of a friendly regulatory environment in the field of crypto is the key to competing in today's crypto market.
It also appears to be in a good position to continue its pioneering role in the blockchain space and consolidate its prominent position in the future. Liechtenstein may not be the first destination considered for a landscape excursion, but it certainly strives to be a country worth considering for crypto-based investments and financial technology. For this reason, we will be constantly examining the activities undertaken by Liechtenstein in the fintech industry.
 Art 1 TVTG.
 Art. 2, para. 1(a)–(c) TVTG.
 Lehmann 2021, p 7.
 Art. 2 TVTG.
 Art 4 Liechtenstein VTG Act; Lehmann 2021, p 8.
 Art 6 TVTG.
 Art 9 TVTG.
 Art 10 TVTG.
 Art. 12 TVTG.
 Art. 12(1) TVTG.
 Art. 19(2) TVTG.
 Art. 29 TVTG.