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Liechtenstein: Government Adopts Consultation Report on Draft Blockchain Act

(Sept. 20, 2018) On August 28, 2018, the government of Liechtenstein adopted a consultation report on a proposed Blockchain Act. The goal of the Blockchain Act is to take advantage of the potential of blockchain technology, create legal certainty for market participants, protect users of blockchain technology from potential abuse, and reduce potential reputation risks for Liechtenstein. The deadline for comments on the consultation report (consultation period) is November 16, 2018. The consultation procedure is a preliminary voluntary step in the legislative process before the draft is submitted to Parliament for debate. (Ministerium für Präsidiales und Finanzen [Ministry for General Government Affairs and Finance], Vernehmlassungsbericht der Regierung betreffend die Schaffung eines Gesetzes über auf vertrauenswürdigen Technologien (VT) beruhende Transaktionssysteme (Blockchain-Gesetz; VT-Gesetz; VTG) und die Abänderung weiterer Gesetze. [Consultation Report on Enacting an Act on Transaction Systems Based on Trustworthy Technologies (TT) (Blockchain Act; TT Act; VTG) and the Amendment of Further Acts], Aug. 28, 2018, Government Chancellery website; Press Release, Government of the Principality of Liechtenstein, Consultation Launched on Blockchain Act (Aug. 29, 2018), Government website.)

Scope of Application

The proposed Blockchain Act applies to all trustworthy technologies (TT) service providers, unless the TT system is available only to a closed user group. (Consultation Report, supra, at 138 (quoting Blockchain Act arts. 2 & 4).) “Trustworthy” technologies are defined as “technologies through which the integrity of tokens, their clear allocation to the person in possession as well as their use without an operator can be ensured.” (Id. at 138 (quoting Blockchain Act art. 3, para. 1).) The rules on the control and use of tokens are only applicable when tokens are generated or issued by a TT service provider who is subject to Liechtenstein law, or when the Blockchain Act declares them applicable. (Id. at 144 (quoting Blockchain Act art. 11).) The Consultation Report states that the term “trustworthy technologies” was chosen as a technology-neutral term to encompass a wide range of technology options instead of the narrower terms ‘blockchain” and “distributed ledgers.” Furthermore, technology-neutral terms ensure that the law will not be outdated after a few years and only have a limited scope. (Id. at 40.)

Tokens and Related Concepts

The Consultation Report uses the word “tokens” to describe all types of technical implementation methods of the blockchain technology, even if the system does not actually use a “token” to implement it. “Token” is understood in an abstract and not in a technological sense. (Id. at 46.) The draft Blockchain Act defines “tokens” as “information on a TT-system that can represent transferrable claims or rights of membership vis-à-vis a person, rights in rem, or other absolute or relative rights, and that secures the attribution to one or more public keys.” (Id. at 139 (quoting Blockchain Act art. 5, para. 1, no. 1).) A token functions as a “container” that represents all types of rights on a TT-system. “Empty containers,” meaning tokens like Bitcoin that do not represent a specific right, are also possible. (Id. at 43.) The report states that the Blockchain Act serves as a framework law for all types of token-based applications. (Id. at 29.) It was decided to establish autonomous rules for ownership of tokens and TT-systems instead of modifying the existing property rules. (Id. at 47.)

A “public key” is defined as “consisting of a series of characters that constitute a specific publicly accessible address in a TT-system to which a token can be clearly attributed.” (Id. at 139 (quoting Blockchain Act art. 5, para. 1, no. 2) (all translations by author).) A “private key” on the other hand consists of a series of characters that, by themselves or together with other private keys, enable the use and transfer of the public key. (Id. at 139 (quoting Blockchain Act art.  5, para. 1, no. 3).) A transfer of a token by the person who owns the private key causes a transfer of the right that is represented by the token, meaning the online transfer precedes the offline transfer. (Id. at 49; id at 141 (quoting Blockchain Act arts. 6, 7).)

General Requirements for Persons Involved in Token Transactions

The draft Blockchain Act introduces a number of requirements for persons involved in token transactions. In general, TT services may be provided only by persons who have full capacity to act and are trustworthy. (Id. at 144 (quoting Blockchain Act art. 13, para. 1).) Trustworthiness exists when a person has not been convicted by a court of fraudulent bankruptcy or similar offenses and there are no other reasons that would give rise to serious doubts regarding the provider’s trustworthiness. (Id. at 145 (quoting Blockchain Act art. 13, para. 3).) In addition, TT service providers may provide services only if they have a clear organizational structure, including procedures to deal with conflicts of interest; written internal control mechanisms; and a minimum capital of 100,000 Swiss francs (CHF) (about US$102,843) or equivalent collateral. (Id. at 145 (quoting Blockchain Act art. 13, para. 4).)

Specific Requirements for Selected TT Service Providers

For selected TT service providers, in particular token issuers, token generators, physical validators, TT custodians, and TT protectors, the draft Blockchain Act sets out additional requirements and establishes a duty to register with the Financial Market Authority of Liechtenstein (FMA).

Token Issuers

A “token issuance” is defined as the “public offering of a token.” (Id. at 139 (quoting Blockchain Act art. 5, para. 1, no. 5).) Token issuers (Token Emittenten) are the “persons who perform the token issuance in their own name or on a professional basis in the name of a third party.” (Id. at 140 (quoting Blockchain Act art. 5, para. 1, no. 8).) They must set up appropriate internal control mechanisms to

  • ensure the disclosure of basic information as defined in articles 28–32 during the token issuance and for at least ten years after the issuance;
  • ensure the proper execution of the token issuance;
  • prevent the repeat token issuance for the same rights;
  • note a previous token issuance for a subsequent issuance on related rights; and
  • ensure business continuity in the case of disruptions during the token issuance. (Id. at 146 (quoting Blockchain Act art. 14).)

The rules are similar to the ones found in the Securities Prospectus Act, which may therefore be used as an additional interpretation aid. (Id. at 68; Wertpapierprospektgesetz [WPPG] [Securities Prospectus Act], May 23, 2007, LIECHTENSTEINISCHES LANDESGESETZBLATT NUMMER [LGBl.-Nr.] [LIECHTENSTEIN OFFICIAL LAW GAZETTE NO.] 2007.196, LILEX website.)

Token Generators

“Token generators (Token Erzeuger)” are defined as “persons who generate one or more tokens and make them available on a TT-system.” (Id. at 140 (quoting Blockchain Act art. 5, para. 1, no. 9).) Token generators must ensure by appropriate means that the transfer of the token causes the transfer of the represented right and that any other transfer of the represented right is not possible. (Id. at 142 (quoting Blockchain Act art. 7, para. 2).) The law does not specify what the appropriate means are. (Id. at 49 et seq.) In addition, token generators must establish internal control mechanisms to ensure the technical operability of the generated tokens during the token generation and for the following three years. (Id. at 148 (quoting Blockchain Act art. 19).)

Physical Validators

“Physical validators” are defined as “persons who ensure the enforcement of property rights within the meaning of property law that are represented by the tokens on a TT-systems.” (Id. at 140 (quoting Blockchain Act art. 5, para. 1, no. 11).) They must establish internal control mechanisms to ensure at all times

  • that the person initiating the token generation is the actual owner of the object at the time of the token generation;
  • that a collision of rights concerning the same object is avoided; and
  • that they will be held liable if the rights guaranteed by them cannot be enforced as stipulated in the contract. They must also ensure that the owner of the token has a direct claim against the insurance company of the physical validator or against the insurance for the specific object. (Id. at 148 (quoting Blockchain Act art. 20).)

TT Custodians

“TT custodians” (VT Verwahrer) are defined as “persons who provide custodial services for private keys of third parties on a TT-system.” (Id. at 140 (quoting Blockchain Act art.5, para. 1, no. 10).) They must establish internal control mechanisms to ensure

  • the establishment of appropriate security measures that prevent the loss or misuse of private keys by unauthorized third parties;
  • asset separation between the business assets of the TT custodian and the private keys of the customers; and
  • business continuity in the case of disruptions. (Id. at 147 (quoting Blockchain Act art. 15).)

TT Protectors

“TT protectors” are defined as “persons who hold tokens as a trustee in their own name on behalf of third parties.” (Id. at 140 (quoting Blockchain Act art. 5, para. 1, no. 12).) They are required to obtain an authorization according to the Trustee Act or the Banking Act. (Id. at 147 (quoting Blockchain Act art. 18); Treuhändergesetz [TrHG] [Trustee Act], Nov. 8, 2013, LGBl.-Nr. 2013.421, as amended, LILEX website; Gesetz über die Banken und Wertpapierfirmen [Bankengesetz] [BankG] [Act on Banks and Investment Firms] [Banking Act], Oct. 21, 1992, LGBL.-Nr. 1992.108, as amended, LILEX website.)

Duty to Register

The following persons must register with the Financial Market Authority of Liechtenstein (FMA) if they intend to provide TT services on a professional basis in Liechtenstein:

  • Token issuers
  • TT protectors
  • TT custodians;
  • TT exchange platforms
  • Physical validators
  • TT identity service providers as defined in article 5, paragraph 1, number 16 of the Blockchain Act. (Id. at 159 (quoting Blockchain Act art. 36, para. 1).) Other TT service providers may register with the FMA on a voluntary basis. (Id. at 159 (quoting Blockchain Act art. 36, para. 2).) Registered service providers are to be listed in a publicly accessible TT service provider registry by the FMA. (Id. at 161 & 164 (quoting Blockchain Act arts. 37, 41, respectively).)

Protections in Bankruptcy Proceedings

Tokens that are held by TT protectors or private keys that are held by TT custodians do not become part of the bankruptcy estate when the TT service provider becomes bankrupt and are to be held separately for the benefit of the customer. (Id. at 150 et seq. (quoting Blockchain Act arts. 24, 25).)

Fines

TT service providers that do not comply with the obligations set out in the draft Blockchain Act are subject to a fine of CHF20,000–30,000 (about US$20,570–30,853) depending on the type of violation. (Id. at 169 et seq. (quoting Blockchain Act art. 49).)

Due Diligence Act

Finally, the Consultation Report proposes amendments to the Due Diligence Act. The due diligence obligations codified in the Due Diligence Act serve to combat money laundering, organized crime, and terrorist financing. The Consultation Report includes token issuers, TT protectors, physical validators, TT custodians, TT identity service providers, and TT exchange office (bureau de change) operators among the persons subject to the due diligence requirements. (Id. at 173 (quoting Blockchain Act art. 3); Gesetz über berufliche Sorgfaltspflichten zur Bekämpfung von Geldwäscherei, organisierter Kriminalität und Terrorismusfinanzierung [Sorgfaltspflichtgesetz] [SPG] [Act on Professional Due Diligence to Combat Money Laundering, Organized Crime, and Terrorist Financing [Due Diligence Act] [DDA], Dec. 11, 2008, LGBl.-Nr. 2009.047, as amended, LILEX website.)