In this Legal Landscape blog series, we will explore the emerging legal and regulatory landscape surrounding cryptocurrencies, legal avenues allowing DAO projects to gain legitimacy in the eyes of investors, lawmakers and the broader public, as well as ideas on how decentralized technologies can achieve harmony with legal constructs. Disclaimer: The contents of this blog do not constitute legal advice and are provided for general information purposes only. If you require legal advice you should contact a lawyer.
Legal perceptions and rules continue to evolve as the crypto space environment develops and expands. The conception of “crypto laws” is inevitable even though sceptics often point out the impracticable muddle such an overarching approach might create. We’ve witnessed such reluctance in mid-90s when “cyberlaws” were discussed and compared to the “Law of the Horse”. And yet, without clearly defined rules we lack the appropriate level of certainty which allows business and tech innovations and helps generate a much needed societal transformation.
Laws are in one way our lingua franca. We use them for communication between people who do not share a native language, do not come from the same jurisdiction but want similar things and have akin business interests. In order to transact globally, improve and digitize our records, amalgamate structures and functionalities of existing assets, commodities and other properties we have created up until today, we need to amend and come up with new rules and a new generation of legal practice.
Such novelty takes time and should not happen overnight. In order to avoid a situation where laws stifle innovation, one must always understand what society needs and how to best adapt. And there is no better way but to do it with software developers turned attorneys, such as Thomas Nägele, a Liechtenstein attorney and legal advisor, lecturer, and co-drafter of the newly passed Liechtenstein Blockchain Act, which will come into force in January 2020.
Liechtenstein allows the tokenization of all kinds of assets and rights without too much of a legal hurdle. The Act, known under the name Law on Tokens and Trusted Technology Service Providers (Token and TT Service Provider Act; TVTG), establishes a Token Container Model which creates the premise that a token can basically be a package of all the features: it can represent real estate, stocks, bonds, assets like gold, money value, a right to access, a security, etc. Just like any other security or asset, tokens can be transferred, managed in a portfolio or stored by a custody provider, while the rights and assets “attached” to the token remain unchanged. A token is literally a “container”, yet it can also be empty, in this case, it represents digital code only (which does not imply it doesn’t have any value). According to the drafters of TVTG, a good example of an empty container is Bitcoin.
In other words, written by Philipp Sandner: “driven by digital transformation - the physical world as we know it for hundreds of years will sooner or later be augmented by a digital world”. Similar to what Switzerland has done before, Liechtenstein introduced categories of tokens and based their categorization on the type of an asset/right being tokenized. The provided categories include utilities, payments, and security tokens, which are to be distinguished from other cryptocurrencies and assets, not backed by anything.
One of the most important and innovative points of TVTG are the guidelines around new service providers, and their registration and licensing obligations. TVTG also establishes physical validators, which are making sure digital records are accurate and in complete synchronization with the real world. This role is crucial as it ensures that the law and tokenization thereof are not only theoretically possible but have practical applications. As TVTG specifies registration and licensing requirements, it also brings clarity regarding the costs. Nothing makes the government more satisfied but the additional money flow, stimulated with a well written legal framework. Law prescribes minimum capital for different types of services, and its drafters have already noted the fees may get even lower once the tokenization and registration become standardized.
Some raised concerns regarding Liechtenstein not being a member of the EU. Indeed, it is not. Yet, as a member of European Economic Area (EEA), Liechtenstein is required to implement all EU legal acts relating to financial services into national law. Therefore the same legal framework applies to Liechtenstein as to the countries of the EU, its financial institutions thus enjoy direct access to the EU single market and can benefit from the EU passporting system, which allows providers of financial services already licensed in the EEA to offer their services in other EEA countries without additional approval requirements.
Liechtenstein did not create an overarching ‘cyber-law’. Instead, they introduced a very elegant regulative solution covering tokens and trusted technology service providers. The newly passed law establishes a high level of certainty around necessary steps a business, service provider and token issuer need to take when it comes to the creation of blockchain-based applications and organisations. There are still questions to be answered. Does this law apply to a general partnership? Can a decentralised organisation which functions autonomously follow the registration and licensing requirements? How might a DAO be compliant with all these clauses? Pencils down, we’ll be exploring answers to these questions provides in the articles to come.