Embracing FinTech Innovation – Liechtenstein's Regulatory Framework and the TVTG Refit’s preparatory Role for MiCAR implementation in Shaping a Progressive Financial Landscape

Josef Bergt
2023

Introduction

In the heart of Europe, nestled between Austria and Switzerland, Liechtenstein emerges as a bastion of financial innovation, leveraging the transformative power of financial technologies (FinTech). This article delves into the principality's strategic regulatory approach, embodied in the Token and TT Service Provider Act (TVTG; also known as “Blockchain Law”), which harmonizes with the Financial Market Authority's (FMA) vision to facilitate business models while ensuring robust consumer protection and financial stability. Furthermore, it elucidates the implications of the TVTG for service providers within the blockchain ecosystem, aligning with the Financial Action Task Force (FATF) recommendations to combat money laundering and terrorist financing.

In the dynamic realm of global finance, Liechtenstein has positioned itself as a sanctuary for FinTech innovation, where the synergy of regulatory foresight and economic stability fosters an environment conducive to the flourishing of established financial service providers and burgeoning enterprises alike. The principality's Financial Market Authority adopts a regulatory paradigm that not only accommodates but also shapes the trajectory of FinTech development, ensuring that customer protection, trust in the financial markets, and systemic stability are not compromised.

Liechtenstein's Strategic Positioning

The allure of Liechtenstein as a domicile for corporate entities is multifaceted. Its strategic location, embedded within the robust economies and market access of the European Economic Area and Switzerland, provides a diversified and stable economic platform. More than 4,500 enterprises are active in Liechtenstein. The government's commitment to innovation is palpable, with dedicated efforts to foster international collaboration and bolster Liechtenstein as a hub of innovation. The 'Impuls Liechtenstein' initiative stands testament to the state's dedication to advancing regulatory frameworks and nurturing innovative products and services.

The TVTG: A Regulatory Milestone:

The Token and TT Service Provider Act (TVTG) represents a significant stride in Liechtenstein's regulatory landscape, entrusting the FMA with the registration and event-driven supervision of eleven types of service providers operating on Trustworthy Technology (TT) systems, such as blockchains. This legislative measure translates the FATF's recommendations into national law, extending the scope of the Due Diligence Act (DDA) to encompass services related to virtual currencies and tokens.

The Regulatory Ecosystem for FinTech in Liechtenstein:

Liechtenstein's FinTech ecosystem is underpinned by a regulatory framework that is harmonious with European standards, ensuring seamless market access within the European Economic Area (EEA). The FMA's 'Regulatory Laboratory' serves as a nexus between regulation and market, offering guidance to FinTech entities. This, coupled with the country's liberal economic policies and a straightforward tax system, underscores its appeal as a FinTech-friendly jurisdiction. The country's size translates into flexibility and expedited decision-making processes, underscoring its pragmatic governance approach.

Liechtenstein's proactive approach towards FinTech is indicative of its recognition of the sector's vast potential. The FMA, while championing the opportunities inherent in technology-based business models, concurrently addresses the associated risks, ensuring customer protection, trust in the financial market, and systemic stability. Compliance with European standards is paramount to ensure market access within the European Economic Area, reflecting a balance between local innovation and international integration.

Membership in the European Economic Area since 1995 has accorded Liechtenstein a regulatory regime compatible with the EU, alongside full-service freedom within the EEA. Additionally, its close economic ties and agreements with Switzerland provide privileged access to the Swiss economic space. The country's liberal economic policies, reflected in labor and corporate law, alongside a simple and fair tax system with a flat corporate tax rate, further enhance its business-friendly environment.

Navigating the TVTG Registration Process:

Entities seeking to offer FinTech services (virtual asset services or crypto asset services) in Liechtenstein must navigate the TVTG's registration requirements. The FMA provides a clear pathway for trusted technology (TT) service providers pursuant to the TVTG to comply with the regulatory mandates. The registration process, while thorough, is designed to be accessible, with the FMA offering preliminary consultations to clarify the obligations and facilitate compliance. The scope of entities required to register under this act, encompass various actors in the FinTech space such as token issuers, TT (Trusted Technology) key custodians, TT protectors, physical validators, TT exchange service providers, TT auditors, TT price service providers, TT identity service providers, and TT agents. This delineation is crucial for entities operating or planning to operate within Liechtenstein's FinTech ecosystem, ensuring compliance and facilitating informed decision-making.

A pivotal aspect of the TVTG is its comprehensive registration mandate. Regardless of existing licenses or approvals from the FMA, entities engaging in TT services must register under the TVTG. This includes, for instance, banks holding tokens for customers who must register as TT token custodians. The registration process, subject to the quality of submitted documents, is in general capped at three months by law, if a complete application is provided, with associated fees detailed for initial and additional service registrations. In the beginning stage there is also the possibility of having a ruling by the FMA regarding the applicability of the TVTG on concrete facts, token functionalities and business models.

All virtual asset service providers respectively crypto asset service providers in Liechtenstein are subject to due diligence and reporting duties pursuant to European anti money laundering standards (AMLD6, FATF recommendations for crypto assets, travel rule pursuant to the Funds Transfer Regulation). As such, these service providers have to conduct KYC, AML and CFT checks, PEP, sanctions and adverse media checks and ongoing monitoring, a business risk assessment and corresponding internal control systems with technical and organizational measures. As such, the Liechtenstein legal framework as well as already registered service providers in Liechtenstein are already well prepared for MiCAR.

The Spectrum of TVTG Service Providers:

Under the auspices of the Token and TT Service Provider Act (TVTG), a diverse array of service providers is recognized, each playing a pivotal role in the emerging FinTech ecosystem of Liechtenstein. These service providers are categorized based on the nature of services they render within the realm of Trustworthy Technology (TT) systems, such as blockchain systems. The TVTG delineates the following entities as service providers:

• Token Issuers: These are entities that offer tokens publicly on behalf of third parties, a process often associated with Initial Coin Offerings (ICOs) and comparable to the traditional financial market placement business. The TVTG requires these issuers to register with the FMA, ensuring compliance with regulatory standards.
• Token Generators: Individuals or entities that create tokens for third parties, contributing to the expansion of digital assets within the market.
• TT Key Custodians and TT Token Depositories: These service providers are responsible for safeguarding tokens or private cryptographic keys on behalf of their clients, which may include managing wallets or executing transactions. With the TVTG Refit 2024 in preparation for MiCAR these service providers will be consolidated into one role.
• TT Protectors: These are entities that hold tokens on TT systems in their own name but for the account of others (for a beneficiary, i.e., as trustee), necessitating a license under the Trustee Act due to the fiduciary nature of their services. This service provider role will also be consolidated with the Custodian role in the TVTG Refit in preparation for MiCAR.
• Physical Validators: They ensure the enforcement of rights represented by tokens in accordance with property law, thus bridging the gap between digital assets and tangible legal rights.
• TT Exchange Service Providers: These entities facilitate the exchange of legal tender for tokens and vice versa, or the exchange of one type of token for another, which can include services provided by cryptocurrency ATMs or online platforms.
• VT Price Service Providers: They offer aggregated price information to users of VT systems based on buy and sell offers or completed transactions, playing a crucial role in the transparency and efficiency of the market.
• TT Auditor/Verifier is a person who verifies the legal capacity and requirements when disposing of a token (e.g., through age verification).
• VT Identity Service Providers: These providers identify the rightful owners of tokens and record such information, ensuring the integrity and security of transactions (comparable to a register of ultimate beneficial owners).
• VT Agents: They distribute or provide VT services within Liechtenstein on behalf of foreign VT service providers, acting as intermediaries and ensuring compliance with local regulations.

The TVTG Refit, supposedly entering into force in February 2024, in final preparation for MiCAR further introduces the service provider roles of 

• Tokenization service providers, which means a person who puts tokens into circulation for clients and ensures the legal and technical conditions for the effective representation and transfer of rights by tokens to third parties;
• TT Trading Platform Operator, which means a person who operates a trading platform for crypto-assets which brings together or facilitates the bringing together of the buying and selling interests of a number of third parties on the platform and in accordance with its rules in such a way as to create a contract for the exchange of crypto-assets either for other crypto-assets or for a nominal currency which is legal tender (multilateral trading facility with regard to crypto assets instead of bilateral exchange activity);
• TT Crypto Asset Administrator; which means a person who:
  • manages portfolios on a discretionary client-by-client basis under a mandate from the client, where such portfolios contain one or more crypto-assets; or
  • offers or makes personalized recommendations to clients regarding one or more transactions relating to crypto-assets or the use of crypto-asset services;
• TT Transfer Service Provider, which means a person who initiates the transfer of one or more Crypto Assets from one TT Identifier (public key/wallet) to another TT Identifier on behalf of clients;
• Token Lending Enterprise, which means a person who receives tokens transferred under the condition that they may dispose of them at their own discretion or at the instruction of customers but must retransfer tokens after a certain period of time. This role exceeds MiCAR, which does not yet separately regulate crypto-asset lending activities. 
  • However, pursuant to Art 142 MiCAR By 30 December 2024 and after consulting EBA and ESMA, the Commission shall present a report to the European Parliament and the Council on the latest developments with respect to crypto assets, in particular on matters that are not addressed in this Regulation, accompanied, where appropriate, by a legislative proposal. This report shall contain an assessment of 
    • the development of decentralized-finance in markets in crypto-assets and of the appropriate regulatory treatment of decentralized crypto-asset systems without an issuer or crypto-asset service provider, including an assessment of the necessity and feasibility of regulating decentralized finance;
    • an assessment of the necessity and feasibility of regulating lending and borrowing of crypto-assets; and
    • an assessment of the development of markets in unique and non-fungible crypto-assets and of the appropriate regulatory treatment of such crypto-assets, including an assessment of the necessity and feasibility of regulating offerors of unique and non-fungible crypto-assets as well as providers of services related to such crypto-assets.

Nevertheless, the Token Lending Enterprise may in practice be difficult to differentiate from both the provision of portfolio management of crypto assets and the administration of crypto assets on behalf of clients 

The Liechtenstein TVTG and VASPs respectively CASPs under it, are therefore not just well equipped for MiCAR but also for future regulatory changes to come and it encompasses all of the following roles under Art 3 no 16 to 26 MiCAR:

• Providing custody and administration of crypto-assets on behalf of clients, which means the safekeeping or controlling, on behalf of clients, of crypto-assets or of the means of access to such crypto-assets, where applicable in the form of private cryptographic keys;
• Operation of a trading platform for crypto-assets, which means the management of one or more multilateral systems, which bring together or facilitate the bringing together of multiple third-party purchasing and selling interests in crypto-assets, in the system and in accordance with its rules, in a way that results in a contract, either by exchanging crypto-assets for funds or by the exchange of crypto-assets for other crypto-assets;
• Exchange of crypto-assets for funds, which means the conclusion of purchase or sale contracts concerning crypto-assets with clients for funds by using proprietary capital;
• Exchange of crypto-assets for other crypto-assets, which means the conclusion of purchase or sale contracts concerning crypto-assets with clients for other crypto-assets by using proprietary capital;
• Execution of orders for crypto-assets on behalf of clients, which means the conclusion of agreements, on behalf of clients, to purchase or sell one or more crypto-assets or the subscription on behalf of clients for one or more crypto-assets, and includes the conclusion of contracts to sell crypto-assets at the moment of their offer to the public or admission to trading;
• Placing of crypto-assets, which means the marketing, on behalf of or for the account of the offeror or a party related to the offeror, of crypto-assets to purchasers;
• Reception and transmission of orders for crypto-assets on behalf of clients, which means the reception from a person of an order to purchase or sell one or more crypto-assets or to subscribe for one or more crypto-assets and the transmission of that order to a third party for execution;
• Providing advice on crypto-assets, which means offering, giving or agreeing to give personalized recommendations to a client, either at the client’s request or on the initiative of the crypto-asset service provider providing the advice, in respect of one or more transactions relating to crypto-assets, or the use of crypto-asset services;
• Providing portfolio management of crypto-assets, which means managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more crypto-assets;
• Providing transfer services for crypto-assets on behalf of clients, which means providing services of transfer, on behalf of a natural or legal person, of crypto-assets from one distributed ledger address or account to another.

Exploring another intriguing dimension of the regulatory approach to crypto assets lacking a distinct issuer, it's essential to examine how DeFi is viewed from a regulatory standpoint. Currently, DeFi generally seems to be outside the purview of MiCAR regulations. This is evident in the exceptions provided for activities like on-chain staking and mining, as well as for non-custodial digital wallets.

When discussing DeFi, it is crucial to understand that regulatory bodies may interpret this concept differently than the market does. Depending on the degree of control and intervention by developers or other parties, what is often referred to as DeFi might not truly be decentralized, but rather a semblance of decentralization or a decentralization sham.

As per Recital 83 of MiCAR, those who provide hardware and software for non-custodial wallets are not included under the regulation's scope. Furthermore, Article 4(3)(b) of MiCAR specifies that Title II is not applicable to crypto assets that are autonomously generated as rewards for distributed ledger maintenance or transaction validation, such as staking and mining activities.

Article 142 of MiCAR mandates that by 30 December 2024, the European Commission shall complete an evaluation of DeFi's evolution in the crypto-asset market and determine the need and practicality of regulating crypto-asset borrowing and lending, as well as the proper regulatory approach for decentralized crypto-asset systems without an issuer or service provider and an assessment of NFTs. However, it's important to note that national jurisdictions might already impose stricter regulations on these services, including lending and staking operations, compared to MiCAR. 

In this context, the liability for on-chain activities on permissionless blockchains is an essential topic in regulatory discussions. The case of Tulip Trading Ltd v Bitcoin Association for BSV and others is particularly noteworthy. It may set a precedent in determining if developers of the underlying software infrastructure owe fiduciary or tortious duties to blockchain users. In this case, Tulip Trading Ltd suffered a loss exceeding USD 4.5 billion due to the theft of private keys from their digital wallet and subsequently sued the core developers of the Bitcoin blockchain. These developers are part of various associations and networks. However, the High Court of England and Wales, in a summary judgment, declared it unrealistic for Tulip Trading Ltd. to argue that the developers owe a fiduciary duty to all Bitcoin blockchain users, who are inherently "anonymous and fluctuating," and that the developers, being a "fluctuating body of individuals," cannot realistically be expected to continuously update and develop the blockchain in the users' interests.

Tulip Trading Ltd. appealed this decision, and the appeal was upheld. However, the Court of Appeal stated that the case's facts require more thorough examination than what was provided in the summary judgment and further stated that for Tulip’s claim to succeed, there would need to be a "significant development of the common law on fiduciary duties."

Source: FMA Liechtenstein on FinTech and TVTG, MiCAR, TVTG Refit (report and motion 2023/073 and 2023/116) private insolvency (debt settlement procedure)

Executive Summary:

• Liechtenstein strategically embraces FinTech, viewing it as an opportunity for growth and innovation.
• The TVTG framework is a regulatory milestone, aligning with international standards and enabling effective supervision of FinTech service providers.
• The FMA balances the promotion of FinTech opportunities with the mitigation of associated risks, ensuring customer protection and systemic stability.
• Liechtenstein's economic policies, EU compatibility, and close ties with Switzerland create an attractive business environment.
• The FMA's Regulatory Laboratory and the country's governance structure promote efficient and innovative financial services regulation.
• The TVTG recognizes a broad spectrum of service providers, each integral to the FinTech ecosystem.
  • Token issuers, token exchange service providers, token custodians, and other service providers are required to register with the FMA, adhering to stringent regulatory standards.
  • The registration process under the TVTG is designed to be transparent and efficient, with the FMA providing detailed guidelines to facilitate compliance and even conducts rulings in case of concrete facts of a business model and token functionalities.
• Compliance with the Due Diligence Act pursuant to European standards is mandatory for all service providers, emphasizing Liechtenstein's commitment to preventing financial crimes.
• Under the Token and TT Service Provider Act (TVTG), a diverse range of service providers is recognized, each with a critical role in Liechtenstein's emerging FinTech ecosystem.
• These providers are categorized based on their services within Trustworthy Technology (TT) systems like blockchain systems.
  • Token Issuers: Entities offering tokens publicly on behalf of third parties, akin to traditional market placement business. They must register with the FMA for regulatory compliance.
  • Token Generators: Individuals or entities creating tokens for third parties, enhancing the digital assets market.
  • TT Key Custodians and TT Token Depositories: Responsible for safeguarding tokens or private cryptographic keys for clients, including wallet management and transaction execution.
  • TT Protectors: Entities holding tokens in their name for others, requiring a license under the Trustee Act due to fiduciary service nature.
  • Physical Validators: Ensure enforcement of rights represented by tokens in line with property law, linking digital and tangible legal rights.
  • TT Exchange Service Providers: Facilitate exchange of legal tender for tokens and vice versa, or different token types, including services like cryptocurrency ATMs or online platforms.
  • VT Price Service Providers: Provide aggregated price information based on buy/sell offers or transactions, crucial for market transparency and efficiency.
  • TT Auditor/Verifier: Verifies legal capacity and requirements for token disposal, such as age verification.
  • VT Identity Service Providers: Identify rightful token owners and maintain records, ensuring transaction integrity and security.
  • VT Agents: Distribute or provide VT services within Liechtenstein on behalf of foreign providers, ensuring local regulatory compliance.
• The upcoming TVTG Refit introduces additional roles like Tokenization service providers, TT Trading Platform Operators, TT Crypto Asset Administrators, TT Transfer Service Providers, and Token Lending Enterprises in preparation for MiCAR.
• Article 142 of MiCAR stipulates a comprehensive evaluation of DeFi's development by the European Commission by 30 December 2024, assessing the necessity and feasibility of regulating crypto-asset lending and borrowing, decentralized systems, and NFT markets.