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Liechtenstein’s Banks Trade Crypto. The Blockchain Act To Pass in First Quarter of 2019

Denis Goncharenko

Liechtenstein (officially the Principality of Liechtenstein) is a state in Central Europe, a constitutional monarchy headed by the Prince. Despite being the fourth smallest country in Europe, it has the highest GDP per person in the world. Liechtenstein is a member of the UN, the European Free Trade Association, and the Council of Europe. It is not in the European Union, however. Liechtenstein also has a customs union and a monetary union with neighboring Switzerland.

Liechtenstein has developed a highly industrialized free-enterprise economy. Currently, the country has a strong financial sector centered in Vaduz, the capital of the state. Despite its size, the Principality produces electronics, textiles, precision instruments, metal manufacturing, power tools, anchor bolts, calculators, pharmaceuticals, and food products.

Liechtenstein has been known as a billionaire tax haven. By the late 1970s, the country used low corporate tax rates to draw many companies to become one of the wealthiest countries in the world and even now has more registered companies than citizens. The 2008 struck Liechtenstein with global tax investigations concerning evaded tax obligations by using banks and trusts in the country. It was seen as an attempt to put pressure on the Principality, then one of the uncooperative tax havens. In 2009 the OECD removed Liechtenstein from the blacklist of uncooperative countries. In recent years, the country displayed a strong determination to prosecute international money-launderers and now promotes its image as a legitimate finance center.

Here are some interesting facts about Liechtenstein economy:

  • Industrial exports from Liechtenstein more than doubled in 20 years from $1.21 billion (SFr. 2.2 billion) in 1988 to $2.9 billion (SFr. 4.6 billion) in 2008.

  • About 32% of the country's revenues are invested in R&D, one of the driving forces of the success of Liechtenstein's economy.

  • 270 licensed fiduciary companies and 81 lawyers serve as nominees for or manage, more than 73,000 entities (primarily corporations, institutions, or trusts).

  • In November 2016, the parliament of the principality decided with a large majority to introduce an agreement of automatic information exchange with 27 new treaty partners, including Switzerland. Data collection will start in 2018, and effectual exchange of account information is planned for 2019.

Key milestones in the development of Liechtenstein crypto industry

In September 2017, the Financial Market Authority Liechtenstein (FMA) published a fact sheet on ICOs, which stated that depending on their specifications, tokens may constitute financial instruments subject to the financial market law.

In February 2018, Crown Prince ALOIS of Liechtenstein said that digital tokens are “something to look more into the future”, but the Principality does not have the expertise to invest directly yet, adding that the blockchain will help “make our state more efficient the way it is administered."

The same month, Bank Frick, based in Balzers, introduced a new service for direct and legitimate cryptocurrency investments.

In March 2018 it became known that the FMA of Liechtenstein approved three Alternative Investment Funds for crypto assets.

On 21 March 2018, Liechtenstein’s authorities spoke about a comprehensive Blockchain Act at the Finance Forum. According to prime minister Adrian HASLER, the new act is about integrating current business models in regulatory terms to give companies and clients legal certainty.

On 21 June, the Official Announcement of the Blockchain Laws took place at the auditorium of the University of Liechtenstein, where Adrian HASLER and Dr. Thomas DÜNSER, Head of the Blockchain working group at the Ministry of General Government Affairs and Finance, presented a summary of the key elements of the Blockchain Act.

In August 2018, Liechtenstein’s first regulated exchange for cryptocurrencies and blockchain tokens (LCX) was announced. Aimed at professional investors, LCX applied to the FMA for a license.

On 16 August, LCX posted a press release regarding its partnership with Binance.

The same month, Union Bank AG has announced that it will be launching security tokens in alignment with FMA, and subsequently its cryptocurrency, “Union Bank payment coin,” which is backed by the Swiss franc.

In its meeting of 28 August 2018, the Government adopted the consultation report on the Law on Transaction Systems Based on Trustworthy Technologies (TT) (Blockchain Act; TT Act; VTG) and the amendment of further laws.

The overview of current stance on the blockchain and crypto by Liechtenstein authorities

As for now, the FMA website presents some definitions in the FinTech ‘Business Models’ section, with several fact sheets about ICOs and virtual assets attached, though it is not a regulatory document after all. The so widely discussed Blockchain Act is planned to be the legal framework aimed at making Liechtenstein one of the most attractive destinations in the world for institutional investors. The bill has been presented as a means to secure regulatory oversight, whilst maintaining open dialogues with blockchain businesses and encouraging innovation in the industry. It focuses on regulating the transfer of digital assets, businesses and service providers that leverage distributed ledger technology (DLT), the regulative framework opens up new opportunities in the spheres of financial services, mobility, and energy. These applications are summarised as “token economy”. According to the press release of 28 August, the consultation report is to provide greater legal certainty, improve client protection and reduce potential reputation risks for Liechtenstein. The consultation period is said to end on 16 November 2018.

“Regulating the transfer of assets, as well as the companies that facilitate access to the blockchain, provides effective cover without curbing development. The Blockchain Act provides 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,” says Matthias NIEDERMÜLLER, a lawyer from the Principality, working on the Act. “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. Open communication with the regulator is very common.”

A serious and considerable contender in the race

Liechtenstein has an AAA rating from Standard and Poor’s and a brilliant reputation of a well-respected and serious place for doing business. The majority of ventures want to work within the law and will move to places where they can operate legally. Liechtenstein looks like the place to suit the needs of businesses. We have already witnessed the situation when Switzerland suffered the outflow of ICO and blockchain capital to Liechtenstein during 2018. It made Swiss authorities think it over, with the idea of what seems to be a ‘neighbouring’ collaboration between two states presented to the rest of the world as a united blockchain hub in the CVVC recent report.

However, the regulatory hysteria may be overestimated. “The reality is that the new market is not demand led but provider-led. The institutions are not banging on the door of asset managers to let them trade in crypto but have a watching brief with little to no transactional aspiration,” concerns Olinga TAEED, Swiss Visiting Professor in Blockchain at Birmingham City University. “It is not a coincidence that small countries like Liechtenstein, Luxembourg, UAE, Singapore, Hong Kong and Switzerland so heavily rely on the financial sector. For them it is quite often the “Golden Ticket” that keeps their economies afloat. Ensuring that they can maintain that sector, and by that support their economy, is crucial. Seeing a liberalised market and laxer regulations is therefore common, and also goes quite often with strong (in)formal ties that facilitate decision making,” says Drs. Hans KONING, CEO at Vicarium. “In a way multiple responsibilities or swaying influence as a not appointed or elected official does not have to be problematic, but from a governance and legal point of view it is a very fine line where quite often the saying “the road to hell is paved with right intentions” applies.”

Indeed, the haste of adoption may lead to unexpected consequences sometimes, but it’s not about Liechtenstein: regulators of smaller states are fast-adaptive to new technologies and innovations. Frequent close contact with local FinTech and blockchain services made FMA of Liechtenstein develop a strong working knowledge and clear stance. Rather than protecting established interests, the Principality is moving forward as a tech-savvy state. The bill is expected to pass in the first quarter of 2019.

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