Liechtenstein is drafting the first legislation to regulate business models founded on blockchains. A well-considered, pragmatic law is useful for the blockchain sector and good for Liechtenstein as a business location. It provides a firm basis. But things keep moving quickly in the blockchain world.
The first reaction could be to reject out of hand the idea of a blockchain law. When the Internet’s popularity took off decades ago, no one’s first thought was to immediately introduce laws to regulate everything. It was only later, when the products came to be understood, that legislation was introduced, for example related to data protection. Otherwise, it was – quite rightly – a waiting game to see what the market produces.
One might expect that any legislative interference would be unwelcome, in particular in the context of the blockchain, where independence from the authorities and the very lack of possibility to influence information are even more fundamental.
A blockchain law makes sense …
The first reason, however, why it makes sense to introduce a blockchain law is that the link between values and their transfer will surely be a key feature of both the technology and the applications. Also at stake, of course, is money. In contrast with the early days of the Internet, the blockchain relies on the fact that it is very easy to exchange information, values and data thanks to data networks available worldwide – although the blockchain represents a new stratification of the Internet and therefore a step forward in quality.
That is why it would be wrong simply to close our eyes and wait and see. Secondly, the stability of the financial markets and investor protection are also key issues. The blockchain will bring greater security, clearer assignability and lower costs through increased efficiency.
… under certain conditions
What I am arguing for here is the creation of a nightwatchman law. The concept of a nightwatchman state is often understood negatively. However, this concept says in fact that a state should ensure – with only minimal intervention but visible presence – that it provides security and prevents and penalises abuse when necessary. Abuse prevention, creation of a framework and … the courage to leave some gaps! Legislation must not stipulate exactly how providers of blockchain products have to operate. Yet it should make very clear that state permits and licences are required, as well as when these are required; moreover, it should dare to limit the requirements to registration only, where possible.
Furthermore, the “one size fits all” approach must be avoided too: small companies with low sales and few customers should be left with room to breathe.
In recent years, many of the requirements imposed on large companies with the aim of bringing them under control have been pushed down onto smaller companies – with the best of intentions but without thorough consideration. This was especially true for the financial sector. Such a mistake should be avoided by all means in this case. Pragmatism and a sense of proportion, alongside good old reasonableness, should be the main concerns.
Achieve the objective with simple solutions
In setting out the law’s function, it will be of critical importance to state clearly what the law aims to achieve. A key objective must be the definition of a sensible degree of due diligence. After all, the main focus is to make sure that the source of funds and the recipients of assets can be plausibly established. Simple solutions are what are needed here, wherever possible, so that these reviews do not act as too much of a brake on the newly acquired speed.
To give an example: If an individual uses their credit card to buy assets or services that are recorded in the blockchain, the card-issuing institution has already established the individual’s identity and the source of the funds. That can be assumed. Consequently, the institution receiving the funds no longer needs to carry out a full check. At Bank Frick, we make a point of thoroughly checking the funds we receive, partly because no laws applicable for blockchain transactions are in place yet. We are hoping to see pragmatic solutions for this in future legislation.
No need for administrative overkill
The blockchain law should set out the key principles defining what is and what is not a transaction subject to authorisation in accordance with financial market law. The starting point should be the evaluations already available in this very young area of the law. The art will lie in clearly identifying the factors required while still giving enough room for practical experience and the Financial Market Authority to manoeuvre so that these new initiatives are not stunted by immediate administrative overkill.
Practical impact of legal questions
How to identify ownership will also be a key issue. Currently, a token recorded in the blockchain is labelled with a public key and a private key. The public key functions more or less like an address, and the private key corresponds to proof of ownership of this token.
How should tokens be treated? As property or as claims? These particularly legal questions have significant practical consequences. Assigning tokens to property law would bring substantial benefits, especially in terms of sound legal protection.
In addition, certain provisions covering liability should be included. Who is responsible, and to what degree, for any loss or damage incurred in token production or when a token is lost or stored?
Consideration should also be given to reasonable limitation periods. Blockchain technology moves very quickly. If something goes wrong, it has to be checked very quickly. It becomes more difficult to check the more time has passed – in Liechtenstein, the usual limitation period for claims is 30 years.
Appeal to the community
The blockchain law will have a lot to deliver. Even now, we know that it will be unable to meet all the requirements, which is why this is also an appeal to the wider community: The good intentions of the legislator should be supported, and its positive creation received in the same spirit. At the same time, everyone must be aware that amendments to this law will almost certainly need to be made in the future. But the truism is as relevant here as anywhere: every journey starts with a first step.