Liechtenstein is breaking new ground with its Token and trustworthy technologies service provider law (TTTL). The law, which comes into effect in 2020, creates far-reaching legal certainty for the still fledgling blockchain industry and therefore plays a key role in its professionalisation. The pioneering conditions of the TTTL offer companies freedom for new business models – Liechtenstein is therefore showing vision and underlining its pioneering role in the area of blockchain technology.
At the beginning of October 2019, the Liechtenstein Parliament approved the TTTL in a second reading, also generally referred to as the Blockchain act. The law will come into force at the beginning of 2020 and establishes pioneering conditions for the token economy in Liechtenstein. The parliament proved it had vision by formulating the law in a technology-neutral manner – this makes particular sense at the moment, as no standards are thus established where none exist yet. This is achieved by a token being regarded as a container for a right; from the legislator’s perspective, it is irrelevant whether the token actually contains a right and which distributed ledger technology (DLT) it is based on. As neither the legislator nor the companies involved can assess how it will develop, this stumbling block was neatly dealt with for the still fledgling blockchain industry.
Foundation of the token economy
The TTTL’s focus on the token economy will in turn play a key role in the advancement of the blockchain industry as a whole. In this kind of economic system, goods and services are obtained by means of a token; for example, visitors to a concert can exchange legal tender, such as Swiss francs, for a token and use it to purchase products. Against this background, the TTTL defines various participants, for which it has created ten roles that play a part in the token economy, from the TT inspection body through the exchange service provider to the TT token custodian.
Distinctions within the TTTL will enable companies to adopt clear positioning in future and ensure transparency in terms of role-dependent supervisory fees. From a client perspective, it therefore supports the search for suitable partners within the token economy and creates legal certainty for investors, such as the obligation to register. However, the law has not been too strictly formulated and stands out from other initiatives in this respect.
It should be noted that the TTTL was created across all sectors for any industry in Liechtenstein: this means that a global player such as Hilti can now issue tokenised usage rights for building equipment or process payments in the Internet of Things (IoT) using blockchain solutions. In future, a token for example could be required to unblock such equipment, allowing for better billing and control. Liechtenstein as a business location will therefore benefit from the TTTL’s industry neutrality in many areas of the DLT. In this respect, the legislator has acted with great foresight and drawn up provisions for the industry together with partners from politics, economics and society.
New business models and fields for the financial industry
In the past, and in particular since the 2008/2009 financial crisis, the regulator has often tried to apply tighter regulation to corporate business activity in order to protect interest groups, e.g. the MiFID II ordinance. By contrast, the TTTL provides an “open” regulatory framework because where classic legal texts mostly aim for specific factual circumstances that are already proven in practice, the TTTL regulates the interaction between market participants and the economy as a whole.
Based on this very constructive and forward-looking approach – most use cases are still at an early stage – the TTTL will instead help facilitate new business opportunities for financial institutions. There are essentially three distinctive strategies here.
- Entry into blockchain banking: through regulation of the crypto scene that was still described as the Wild West in 2018, the TTTL guarantees established financial institutions the necessary legal certainty for market entry. In the context of clients from the blockchain industry, risk management in particular will be made easier by the TTTL, such as security token offerings (STOs) for which the new law lists clear publication obligations.
- Expansion of blockchain banking: this requires an existing blockchain banking ecosystem: financial institutions here offer products and services in partnership with companies on the blockchain scene. The former bring regulatory expertise to the joint offering and the latter the technical knowledge which means that competitive advantages are created in terms of development time, etc. Furthermore, DLT-based products such as tokenised financial instruments become more attractive for classic investors, as all parties involved in issuing and distribution are now subject to supervision by the regulator.
- Expansion along the value chain: the clearly defined division of roles in the token economy offers financial institutions new possibilities along the value chain. For example, a registered TT token custodian can also take on the role of TT exchange service provider for its own book for trading crypto assets against fiat. Clients benefit from a single point of entry and therefore from simple access to and secure custody of crypto assets; this means that companies can carry out several roles at the same time.
Regardless of their current strategy, the TTTL will prompt previously inactive financial institutions to consider market entry, meaning that competitive conditions will tend to intensify. (Classic) market participants that hoped for adoption of the law will also drive forward this development.
From Bank Frick’s perspective, the greatest potential lies in expanding the ecosystem and building bridges to the classic financial industry. The latter’s impact on the future development of the token economy is crucial here, as the critical mass in volume can be achieved through classic participants (only). An exciting use case here is the tokenised securities business, as the TTTL defines all necessary roles – TT token custodian, TT protector, token issuer, token producer, TT exchange service provider – and the security can build the bridge towards the classic financial industry.
TTTL as an opportunity
The introduction of regulatory conditions, however, does not mean any kind of rigid manoeuvring within fixed pathways – relationships between participants are highly complex and are therefore only predictable up to a certain point. This is also true for the resilience of the law in everyday use, in relation to existing laws or in the detailed implementation of roles under the TTTL. Nevertheless, its forward-looking structure sends a signal and offers opportunities.
It is also to be assumed that a rising number of DLT companies will become established in Liechtenstein when the TTTL comes into force in order to be subject to its regulation. To identify potential reputational risks early, central points of contact can be helpful for new companies, particularly financial institutions with a track record in blockchain banking that act in an advisory capacity.
Brief glimpse into the future
The TTTL offers all industries sufficient flexibility for new business models and allows young companies to occupy niches in which to grow. Disreputable market participants will also be deterred by the regulation, meaning that reputational risk is thus proactively minimised. It remains to be seen which roles will be occupied multiple times by the same provider and how the market situation for blockchain companies and blockchain banking in general will develop. From the client’s perspective, a healthy competitive situation is beneficial; however, cut-throat competition at the outset would prevent the token economy from developing healthily and undermine the credibility of the market.
In the European context, there do not appear to be any comparable regulatory developments in the blockchain industry at the moment. The Liechtenstein TTTL can carry out pioneering work here to establish a European standard – all participants should keep this objective in mind. It should also be noted that the first lessons still have to be drawn from practice, but there are already discussions today on limiting various roles on one licence. This means that the TT protector is reserved for the time being for companies with trustee authorisation. The next few years will ultimately show how practicable the TTTL is.
In general, the TTTL will instil trust in the markets and attract new participants looking to further professionalise the still fledgling blockchain industry. The law offers another advantage for the location of Liechtenstein as a financial centre.