The Principality of Liechtenstein is not on the beaten path. A German-speaking Alpine state nestled between Switzerland and Austria, the country covers just 62 square miles and had a population less than 40,000 citizens at the last census. A seemingly unlikely setting for an aspiring blockchain hub, one might think.
However, its geopolitical position could make Liechtenstein a leading light for blockchain regulation, and a future powerhouse (or powercastle?) in cryptocurrency.
Although the Principality is in the EEA and therefore subject to relevant laws (around 5,000 of the total of 23,000 EU laws apply there), it is not entirely at the mercy of European Union edicts, and has a level of independence with regard to its own financial regulation.
Historically known for little more than agriculture and winter sports, the country’s low corporation tax began to attract big businesses in the latter half of the 20th century. By the new millennium, Liechtenstein had reinvented itself as an international center for finance; the country is in the peculiar situation of having more registered companies that it does citizens.
Liechtenstein is now working on a new piece of legislation that observers claim will make the country one of the most attractive destinations in the world for institutional investors. Called the ‘Transactions Systems Based on Trustworthy Technologies Act’, the bill has been described as a means to secure regulatory oversight, whilst maintaining open dialogues with blockchain businesses and encouraging continual innovation in the space.
The Liechtenstein Blockchain Act
The proposed bill approaches blockchain legislation by setting clear rules for the businesses that work with it. Liechtenstein will not regulate cryptocurrency itself, but will instead focus on regulating the transfer of digital assets, as well as the businesses and service providers that leverage distributed ledger technology (DLT).
Part of the reasoning is practical. The pace of innovation is fast and the act saves the government having to rattle through new legislation everytime a new application is developed. According to Matthias Niedermüller, a lawyer who has worked closely on the proposed Blockchain Act both with businesses and the government, this is a realistic decision. Regulating the transfer of assets, as well as the companies that facilitate access to the blockchain, provides effective cover without curbing development, says Niedermüller.
“The Blockchain act provides for a comprehensive system for creation, storage and transfer of tokens along with the security for enforcement of the rights associated with every token and therefore creates an entire token economy”, he adds.
Liechtenstein’s role in global finance means there is already considerable overlap; existing regulation covers large swathes of the cryptocurrency sector’s activities. Liechtenstein’s Financial Market Authority (FMA) had already determined in September of last year that tokens sold in public sales already counted as financial instruments subject to existing regulation, especially in regards to security tokens. There was already enough regulation in February for Bank Frick, based in the Lichsteiner town of Balzars, to introduce a new service for its clients to directly, and legitimately, invest into cryptocurrency.
Projects looking to host a public sale need to provide potential investors with a comprehensive overview of the token and would have to register with the FMA, which would ensure adequate internal procedures are in place.
Most tokens are already recognized as legal tender in Liechtenstein. The Act states that cryptocurrency ownership is based on the private key. Excluding cases of theft, this gives the owner of the private key the right to sell the asset. Third party services are required to ensure safe custody and clearly define the company’s own assets from the ones held on the behalf of others.
Is Liechtenstein the Alpine Malta?
Malta has been one of the most enthusiastic national advocates for blockchain technology. The cryptocurrency exchange Binance moved its operations base to the island back in April and the government devoted most of the summer to passing legislation that gave legal status to cryptocurrency, as well as providing guidelines on token sales. The Maltese Stock Exchange (MSE) signed an MOU with Binance yesterday, the two companies will work together to establish a security token exchange.
Like Liechtenstein, Malta and Gibraltar transformed their economies in the latter half of the 1980s. Both jurisdictions lowered their capital gains tax and became prominent business centers for offshore gambling.
Monty Metzger, the CEO of LCX (Liechtenstein Cryptoassets Exchange), told Crypto Briefing that far from attracting institutional players, this will repel them. “Liechtenstein has a triple-A rating from Standard and Poor’s and a super high reputation, well known as a serious place of business with strong regulatory relationships”, he said. “Malta and Gibraltar, on the other hand, are known as for their online casinos which won’t help them attract serious clients”.
Although in the heart of Europe, Liechtenstein is not a member of the European Union. This is vital: it has a lot more freedom when drawing up its laws than its neighboring countries, which are also expected to comply with the European Parliament in Brussels. “The key difference between Liechtenstein and somewhere like Malta is that we’re not in the EU”, explained Ninos Mansor.
Liechtenstein’s membership to the European Economic Area (EEA) means its products and services have unrestricted access to the wider European market. As Niedermüller points out, financial instruments approved by the FMA, including cryptocurrency investment vehicles, could be distributed and sold across Europe, including in Switzerland. “A comprehensive EU-wide regulation of the Blockchain business does not appear to be probable in the next years,” he said. “The success of the Liechtenstein Blockchain Act, however, could form a role model on how to regulate the Blockchain business.”
The European Hub for FinTech?
A lack of regulation creates uncertainty in the market. The vast majority of businesses want to work within the law and will move to places where they can operate legally. Investment bank Goldman Sachs shelved their bitcoin (BTC) trading desk last week, citing a lack of regulatory clarity from the SEC.
There are benefits to being small: it’s easier for regulators to adapt to new technologies and innovation faster than their counterparts in larger economies. Whereas Gibraltar, Bermuda, and Malta have already passed some form of blockchain legislation in the past two years, America’s SEC has yet to provide anything resembling a clear legal framework for cryptocurrency.
Being less than a quarter of the size of London gives businesses in Liechtenstein plenty of access to the FMA. This has multiple benefits explained Monty Metzger. As a firm looking to facilitate security token trades between institutional clients, Metzger, who was originally based in Luxembourg, said they were attracted to Liechtenstein because of the high level of support from government and banks. “We’ve heard how companies in other countries have their accounts frozen without warning; LCX currently has three banking partners in Liechtenstein”, he said.
Frequent and wide-ranging contact with local cryptocurrency and FinTech services means the FMA has developed a strong working knowledge. Programmes like Impuls Liechtenstein have already established dialogues between state authorities and startups, providing clarity for both regulators and businesses.
“The small size of Liechtenstein definitely gives market participants and the regulator much better possibilities to exchange views and thoughts on a regular day to day basis to create a comprehensive and sustainable blockchain economy,” said Niedermüller. “In particular regular open communication with the regulator is very common.”
Well into the late 1960s, the princely family was selling off parts of its fine art collection just to keep the economy afloat. Finance transformed Liechtenstein into a very rich country. It now has a 1.5% unemployment rate and the highest GDP per capita in the world, a startling $139,100, over 10% higher than its closest competitor, Qatar.
On turning itself into a reputable hub for blockchain, the Crown Prince of Liechtenstein, Alois, said the country’s early regulation of blockchain ensures it attracts reputable service providers. A prince waxing lyrical about blockchain in his medieval castle seems like the collision of two very different worlds, but the Alpine state sees blockchain as the future.
Rather than protecting established interests, Liechtenstein is facing forward; even in the preamble to its Blockchain Act, legislators say that: “The government is convinced that the future of prosperity and an alternative range of jobs for Liechtenstein and the region can be obtained through continuous development and entrepreneurial innovation.”
The government has reportedly been working on this legislation for two years and officially announced the act at the Finance Forum back in March. Following the Government’s adoption in August, the proposed act is currently in the consultation period which end in November; if all goes well, the bill is expected to pass in Q1 2019.
Partly because of its size; partly because of its economy, Liechtenstein keeps a low profile; the Blockchain Act could change this. Already used to high-altitudes, the principality could soon reach the pinnacle of blockchain regulation. The country’s regulatory swiftness could earn it a princely sum.
The author is invested in several digital assets.