On October 3, 2019, the parliament of Liechtenstein has unanimously voted for the first-ever Blockchain Act in the world. Officially, the act is referred to as the “Token and Trustworthy Technology Service Providers Act” (abbreviated TVTG in German), and the act will become effective on January 1, 2020. Importantly, the TVTG is focusing on blockchain and tokens in general, rather than emphasizing on cryptocurrency. As such, the act is concentrating on trustworthy technologies (TT) system that regulates service providers in the token economy.
Liechtenstein is a small German-speaking country (a member of the European Free Trade Association and the European Economic Area; EEA) that is bordered by Switzerland and Austria, with an estimated population of 38,048, GDP of €151,377, and with income per resident of €49,229. It is worth to mention that Liechtenstein is known as a financial hub in specializing financial services for foreign entities. In this regard, the TVTG would serve as an essential element for the financial strategy of the Liechtenstein government, especially in the token economy as the TVTG guide civil law matter dealing with client and asset protection, which should result in a higher level of certainty for all market participants and encourage more crypto-related investments.
The TVTG is considered a blockchain-friendly legal framework as it leads to a “Token Container Model—TCM,” which means that any token transactions, including cryptocurrency (i.e., money), securities, rights to real estate, rights to assets, license rights, and rights of use will be fully defined in legal terms under the framework. That is, any form of assets or rights could be tokenized under the TCM, and the “token is therefore a kind of “container” for representing a right” (p. 44). As for Bitcoin, a form a cryptocurrency or crypto-asset, which without real value collateralization, is therefore considered a token with “empty container” that “accrues an intrinsic value through the rules of the system in order to function as a means of payment” (p. 56).
Under the TVTG, a token is defined as “a piece of information on a TT System which can represent claims or rights of memberships against a person, rights to property, or other absolute or relative rights, and is assigned to one or more TT identifiers” (p. 117). Importantly, the TVTG clarifies the general legal certainty for users and TT systems and TT service providers within the token economy, such as generating and storing tokens, but not on the regulation of activities in the financial market.
As mentioned in the first paragraph, the TVTG focuses on the TT system, which could be adopted by any new generation of crypto-related technologies and could be applied to any new project for distributed ledger technology (DLT) in the future. Moreover, the TCM itself does not explicitly state the types of distributed ledger technology used in the asset tokenization process; thus, it could be a permissionless blockchain, a permissioned blockchain, or an integration of any DLT with other technologies. Worth to highlight about, Liechtenstein is an EEA member state, which provides a possibility to any TT service provider that is registered in Liechtenstein to perform digital asset or token transactions across the conventional European markets, such as Finland, Sweden, Norway, Denmark, Iceland, Estonia, Germany, Austria, Italy, France and so on.
While referring to the blockchain topic, most people would relate to cryptocurrencies, such as Bitcoin or Ethereum, and most of the time, people are directed to a digital context without connecting to the transfer of physical assets. Remarkably, under Liechtenstein’s TVTG, the TCM defines tokens with three main functions: legitimization, liberation, and transportation. As such, the TVTG has created a new role—physical validator— either a person or an entity, which guarantees the transfers of the token have fulfilled the requirements for legal certainty between the digital and analog world, which refers to the synchronization between the tokens and the real object. For instance, an oil painting could be represented by tokens while it is safeguarded in a private vault physically. Thus, under the TVTG, the physical validator has the full responsibility to identify the object of value (serial number, certificates, etc.), token generator, token holders, as well as ensures the existence and location of the oil painting are deposited in a contractually regulated storage/warehouse/vault safely. In this sense, the token holders could change their ownership without moving the oil painting’s physical location, and they will access to more opportunities to resell their tokens on the secondary market, such as TT exchange platforms.
Apart from physical validator, other TT service providers are listed under the TVTG as to act in a professional capacity (section 3.2; p. 66-77). Thus, we could expect a lot of new business models and opportunities to have emerged in the next few years. There will be a huge demand for blockchain experts in the financial, real estate, supply chain, insurance, identity, health care, and creative industries.
List of TT service providers:
- Token generator: A person or entity generate tokens
- Token issuer: A person or entity offering tokens to the public on its own behalf or that of another person or entity
- TT key depositary: A person or entity acting as a custodian, holding the keys on behalf of the principal
- TT token depositary: A person or entity who holds tokens on behalf of another person or on another person or entity’s account
- TT protector: A person or entity holding tokens in their own name on a TT system for the benefit of a third party
- TT exchange service provider: A person or entity who exchanges fiat (legal tender) for tokens (or vice versa)
- TT verifying authority: A person who verifies the legal capacity and requirements for token disposal
- TT price service provider: A person or entity providing TT system users with aggregated price information based on buy and sell offers or completed transactions
- TT identity service provider: A person who identifies the person authorized to dispose of a token on a TT system, and enters or registers this person in a directory
Applicants could submit their applications online to the Liechtenstein Financial Market Authority (FMA), and all the successfully registered entities will be published on the FMA website to ensure the credibility of TT service providers. All TT service providers are subject to the supervision of Due Diligence Obligations by the FMA, which fight against money laundering, organized crime, and the financing of terrorism. However, there are a list of essential requirements that need to be fulfilled for the registration of TT service providers (articles 13 to 17; p. 125-133), such as free from fraudulent bankruptcy, minimum capital (varies upon different TT service providers), special internal control mechanisms, and the most important is to have a headquarter or place of residence (e.g., CEO) in Liechtenstein. In this regard, I believe that a virtual office might face its inherent difficulty during the registration process.
Since we are referring to a regulated token economy, the person(s) who register in the TT service providers shall be liable for their employees and shall not be relieved from liability hereunder for its own gross negligence (article 35; p. 45). The TVTG also included “processing and transferring personal data” in article 42 (p. 147), which means that TT service providers may need to send their clients’ data to the FMA and other national/international authorities if this is necessary to fulfill their duties under this act.
After reading 172 pages of the unofficial translated version of the Liechtenstein Blockchain Act (i.e., TVTG), I hold a favorable view towards this evolution. It is an encouraging move that leads to a better future in the token economy. Have you ever wondered why it is named as a “trustworthy technology-TT”? My personal view is back to the DNA of the blockchain technology; people would rather trust the technology itself, rather than the third parties/government/business partners who get involved in the transaction. However, in a full transactional environment, it would be impossible to process all types of token transactions on the blockchain without getting involved with any regulated parties or service providers, especially those transactions that involve physical assets, such as real estate, car, and diamond. For this reason, it is essential to create a regulatory environment in the token economy.
In spite of this, an argument arises as the existence of blockchain (e.g., Bitcoin) is to remove intermediaries in economics from a supply chain. Still, on page 44 of the TVTG, it stated that “a buyer needs to have confidence that he/she will effectively exercise the digitalised rights to a product or an asset and that he/she will be able to enforce his/her rights, where necessary with the aid of the rule of law. He/she also needs to have confidence in the companies and individuals who provide services on TT systems.” Therefore, in the future token economy, consumers may be more likely to depend on the TT service providers (i.e., a new list of “intermediaries” that are professionally exercising of the blockchain technology), such as TT price service provider, TT identity service provider, and physical validator.
Another argument could be the multiple roles of TT service providers that hold by a single corporate group. For instance, a giant K group (fabricated) may have a collection of subsidiaries that plays significant roles in the physical validator, contractually regulated warehouse, TT key depositary, TT token depositary, and TT key protector in the token economy. Will this lead to another centralization or monopoly? On page 83 and 125, the TVTG only states that “an entry in the TT Service Provider Register (article 23) requires the applicant to have a suitable organisational structure with defined areas of responsibility, including procedures for dealing with conflicts of interest”, without explicitly highlights the conflict of interest that resulted from an entity that plays multiple roles in the TT system. As a result, the FMA may need to consider this issue as I think there are many giant corporations are looking forward to dominating this market.
Unofficial translated English version of TVTG: https://nlaw.li/tvtgen
German full version of TVTG: https://nlaw.li/tvtgde
All views expressed on Oulu Business School Blog are my own and do not represent the opinions of any entity whatsoever with which I have been, am now, or will be affiliated. This content is intended to be used and must be used for informational purpose only. The information contained herein is not intended to be a source of advice or analysis with respect to the material presented, and the information and/or documents contained in this blog do not constitute advice.
Last updated: 24.2.2020