Liechtensteins Tokens and TT Service Providers Law

#tokencontainermodel #tvtg

Capitalizing on the opportunity to create a friendly regulatory atmosphere for entrepreneurs and consumers alike, the Liechtenstein government has put forth the Liechtenstein Tokens and Trusted Technologies Law, or TVTG. With a law and government consultation report (BuA 54/2019) spanning 380 pages, the law is designed to enable crypto and blockchain projects to thrive, while at the same time providing consumers with a basis for trusting in these new technologies.

Presenting a technology that has taken the world by storm, blockchain is changing how the physical world interacts with the digital world, consequently demanding that new legal definitions be put forth in order to bridge this gap between the “online” and “offline” realms. The TVTG is designed to solve the aforementioned problems, thus creating legal certainty within a token economy.

The Liechtenstein Approach

One of the first questions that arose in Liechtenstein, was whether or not a determined law is a possibility. Due to Liechtenstein’s status as an EEA member state, this requires compliance with codified EU/EEA guidelines and regulations. These base line regulations create a floor that Liechtenstein legislators are able to build upon. Building on this regulatory foundation, the TVTG instates certain registration requirements for Trusted Technology service providers and minimum standards for token issuance that are unique to Liechtenstein. In other words, the registrations issued under the foundational regulations and directives of the EU/EEA remain passportable to other EU/EEA member states, while the Liechtenstein unique registrations are designed to serve as a mark of quality and integrity and are not passportable. This is designed to provide entrepreneurs with legal certainty, as well as providing consumers with a basis for trusting in these technologies.

How to develop a tech law frame work

When legislating in the technology space, there is always the risk that legislation put forth will become obsolete with growth and development. Recognizing this risk, Liechtenstein legislators have instead taken a proactive approach which avoids this problem. This preemptive method is employed by putting forth a technologically neutral and all-encompassing framework designed to capture all aspects of tokenization. In particular, capturing the functions of tokens such as legitimization (for the benefit of the beneficiary or creditor), liberation (in favor of the debtor, and transportation (transfer of the underlying right).

Functions of a Token

Token Container Model

This created the need for a technologically neutral and agnostic token definition, leading to coinage of the “Token Container Model,” or TCM, which lies at the heart of the TVTG. Within this framework, a token serves as a container with the ability to hold rights of all kinds, whether that be the right to something represented – examples including real estate, stocks, bonds, and gold; or nothing — encompassing digital code, the most notable example being Bitcoin. Consequently, this progressive model provides legal certainty surrounding pre-existing rights that are tokenized, as well as rights to digital information on blockchain based systems.

Thus, the approach of the regulation is twofold. On one hand, the act clarifies pre-existing law — providing a civil law basis for ensuring that the underlying right represented by the token is effectively transferred from party A to party B. On the other hand, the act provides regulatory and supervisory rules regarding those interacting with TT Systems — including consumers, TT service providers, and intermediaries.

While pre-existing law provides a legal basis for what constitutes an effective transfer of property, there is a need for clarity surrounding what constitutes effective transfer of a tokenized property, as well as what constitutes effective transfer of these newfound digital assets in general. Therefore, the TVTG provides that transfer of a token on a TT system constitutes a binding transfer of the underlying right, whether that be a right to a physical object or a digital asset.

Regarding physical assets, this calls for a need to bridge the gap between the “offline” and “online” world, and assurance that the underlying right embodied by the token actually exists. This is accomplished through regulatory aspects of the act creating the role of the “Physical Validator” who ensures that the party tokenizing the right to something represented “online” is in fact the person who possesses that right “offline.” Therefore, this confirmation by the physical validator allows for tokenization of a pre-existing legal right and its subsequent valid transfer on a TT system.

Token Economy

Transaction Systems

TT systems are defined as transaction systems, which ensure secure transmission and retention of tokens by use of trusted technologies. These technologies ensure the integrity of tokens, association of tokens with their TT identifier (e.g. public key) and the user’s disposal of tokens on TT systems. Further defining elements of the token economy, the TVTG puts forth various roles and requirements such as the following:

  • TT Identifier: A unique identifier enabling allocation of tokens (e.g. a public key).
  • TT Key: A key enabling disposal of tokens (e.g. a private key).
  • Basic Information: A requirement to put forth basic information on tokens offered to the public, allowing a user to develop an informed opinion in regards to the rights and risks associated with the tokens, as well as the rights and risks related to the involved TT Service providers.
  • TT Service Provider: A person or entity carrying out functions within a token economy.

The TVTG defines the following Service Providers:

  • Token Issuer: A person or entity offering tokens to the public on its own behalf or that of another person or entity.
  • Token Generator: A person or entity generating tokens.
  • 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 3rd party.
  • Physical Validator: A person or entity who ensures the existence and enforcement of contractually obligatory rights to property represented on a TT system — in the sense of property law.
  • 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.
Physical Validator

The Relationship Model

This intuition is also witnessed by carefully crafted definitions surrounding the “private” vs. “public” key pair. Instead of using these definitions that could be considered by some as misleading, the TVTG provides that what is traditionally described as the private key is a TT key, while what is traditionally described as a public key is instead a TT Identifier that allows for the clear assignment of tokens upon a transfer.

This distinction is due to the fact that TT keys can carry with them both the power of disposition and the right to dispose. In other words, there can be a person who knows the sequence that is the private key, versus the person who is entitled to use that key to effectuate disposal of a token. Furthermore, the law provides guidelines in the event that a user holding a token representing a right loses access to their token, such as in the case of the loss of a TT key, highlighting the existence of court proceedings for proof of ownership.

In addition to the recognition of specialized TT service provider roles, the TVTG also instates registration duties, and requirements that vary based on the role filled. These requirements include personal requirements, organizational requirements, minimum capital requirements, and the presence of special internal control mechanisms when providing a TT service; as well as minimum and maximum operational fees. Most notably, the legislation requires that the role of TT Protector be reserved to those licensed as a Liechtenstein Trustee, seeing that role constitutes management of a cryptographic assets in the Trustee’s own name for the benefit of one or more third persons.

Relationship Model

Registration Requriements

TVTG Service Providers must apply with the FMA for registration in the TT Service Provider Register pursuant to Art. 23 TVTG, and are subject to due diligence obligations pursuant to the Due Diligence Act (DDA; SPG) as of 01. January 2020.

Transitional provisions and due diligence obligations.
In accordance with the transitional provisions , persons who already provide one of the aforementioned TT services before the instatement of the 01. January 2020 registration requirement must comply with this requirement by submitting a written request to the FMA for entry into the TT service Provider’s Register within a period of 12 months of the TVTG’s entry into force (i.e. by 01. January 2021 at the latest). Otherwise, entitlement to the provision to TT services shall lapse.

Irrespective of these transitional provisions on registration, the due diligence regime shall be fully applicable by 01. January 2020, provided that TT services are provided. In order to comply with the resulting obligations, the relevant provisions of the DDA and the Due Diligence Ordinance must be observed (suitable personnel, KYC/AML policies, organizational measures, etc.).

Conclusio

At its core, the TVTG is focused on adapting pre-existing laws to foster legal certainty within a token economy. Drawing a clear line between what falls civil law versus regulatory and supervisory law; the TVTG includes adaptations of the Liechtenstein Persons and Companies Act, Trade Act, Due Diligence Act, and Financial Market Authority Act. The TVTG was enacted 2020/01/01.

Disclaimer:

All information provided in this article is given without warranty as to its accuracy or completeness. This article is meant for the personal use of the reader only. This article does not constitute legal advice. You must independently seek legal advice in regards to any matter of personal concern.

Attorney at Law specialized in Banking & Finance and Technology | Former coder | member of the workgroup drafting the Liechtenstein Blockchain Act.