Cryptoassets for investment and financing
Regulatory threshold
What attributes do the regulators consider in determining whether a cryptoasset is subject to regulation under the laws in your jurisdiction?
The Token and Trusted Technology Service Provider Act (TVTG) determines which tokens or cryptoassets are subject to Liechtenstein laws and therefore fall under Liechtenstein jurisdiction. According to the rules of the TVTG, Liechtenstein law applies to all tokens that are issued by an issuer with seat or residence in Liechtenstein. Further, Liechtenstein law also applies to those tokens on which the parties of an agreement have opted Liechtenstein laws to be applicable. In this way, the Liechtenstein legislator explicitly provided foreign VT service providers the possibility to contractually declare the TVTG applicable and make use of the benefits of Liechtenstein laws. Consequently, the Princely District Court is competent for civil proceeding disputes in such cases.
Additionally, based on the Token Container Model (TCM) the rights contained in a token determine which additional laws apply on the tokens besides the TVTG, such as securities laws, property laws, laws on alternative investment funds etc.
Besides the rules on applicability of Liechtenstein laws on token, the TVTG also contains rules on the applicability on persons or entities that provide professional distributed ledger technology (DLT) services as defined under the TVTG. In general, all persons or entities with seat or residence in Liechtenstein that provide professional DLT services are subject to the rules of the TVTG.
If the DLT services also include services that fall under other financial market laws, these laws are applicable in addition.
Investor classification
How are investors in cryptoassets classified and treated differently?
The civil law rules of the TVTG on the nature, ownership and transfer of tokens apply to all types of tokens issued under Liechtenstein, disregarding what rights they contain.
Due to the TCM applied in Liechtenstein, the rights contained in a token determine whether a token is considered as a payment token, utility token or security token. Therefore, generally all tokens are treated identical under the TVTG. However, depending on the material rights contained, the tokens are subject to additional laws.
The applicability of several laws relevant for investors therefore depend on the rights contained and the qualification of a token as a payment token, utility token or security token.
Security tokens: all tokens that contain rights that qualify as rights of certain financial instruments under the regulations of MIFID II as defined on the Banking Act are considered security tokens. Hence all the rules applicable to the specific financial instrument the rights in the token represent, are fully applicable on such tokens, such as rules on public offerings etc.
Utility tokens: all tokens that do not qualify as financial instruments (security tokens) or as payment tokens are considered utility tokens. As the name suggests, there is a utility behind the utility token. A utility token can be seen as an exchange or resource that has a certain functionality like voting rights or access but grants no property rights on companies. A utility token allows, for instance, holders to use and stake (concept of effective and proven use) to make use of the given output and are best compared with digitalised vouchers that contain rights and claims against the issuer that may be obtained in return for transferring the token and thus using it for its defined purpose. If the tokens can only be used for certain limited services and are not accepted by a larger group of acceptants as a means of payment they usually qualify as a utility token. As the utility token must not contain rights of a financial instruments, the existing financial market rules do not apply on such tokens.
Payment tokens: these are tokens that are accepted as means of payment in a larger group of acceptants in return for goods or services and, therefore, usually constitute E-money. Payment tokens usually do not grant any claims or rights against the issuer of the tokens. Only utility tokens and payment tokens may be traded on non-MIFID II licensed exchanges.
Although the traditional financial markets laws only provide for specific rules for offering securities to retail clients, they do not provide for specific rules with regards to utility tokens.
Therefore, the TVTG closes this gap and provides for additional protective rules for public offerings of any kind of token to non-professionals in public offerings by implementing the requirement for a basic information document (BID), which has to contain similar information on the tokens offered as a prospectus.
Initial coin offerings
What rules and restrictions govern the conduct of, and investment in, initial coin offerings (ICOs)?
The term initial coin offering is used differently in many countries. Sometimes the term is understood as an initial public offering of utility tokens only. Mostly, the term is used as a general term for initial public token offerings (IPTO) of tokens of any kind. The below refers to initial public token offerings of any kind of token regardless of their classification.
The TVTG provides general rules for initial public offerings of any kind of token that shall protect investors and token issuers alike, increase trust in token offerings and prohibit the abuse of token offerings for unlawful purposes.
The TVTG recognises that ICOs are regularly used as a means for crowdfunding of startup companies and, therefore, imposes different rules depending on the volume of funds raised.
If an IPTO is made with an overall volume of less than 5 million Swiss francs only limited restrictions apply. The issuer in such case only has to notify the Liechtenstein Financial Market Authority (FMA) of the token issuing and provide general basic information to the regulator in this notification. Furthermore, the issuer is subject to the due diligence obligations under Liechtenstein law and has to provide for a comprehensive KYC and AML policy.
If the IPTO exceeds the volume of 5 million Swiss francs, additional requirements have to be met. In such a case, the issuer has to register with the FMA as a token issuer and also issue a BID that outlines the main aspects and risks of the offered token and can best be compared with a simplified prospectus under the Prospectus Regulation. If the token is offered to fewer than 150 persons, or the investors have expressly waived their right to receive a BID, no BID is required.
For the registration as a token issuer with the FMA the issuer has to meet several requirements and run through checks of the FMA. The checks include a review of the involved persons and owners (fit and proper review) as well as the ability to successfully conduct the token offering. Further the issuer has to show a functioning corporate governance and internal control system for the purposes of the IPTO. The issuer also has to ensure that there is a business continuity during the token issuing and that the token issuing is conducted in accordance with the BID. Finally, additional capital requirements also have to be met depending on the offering volume. At an offering volume above 5 million francs a capital of 100,000 francs is required. At an offering volume above 25 million francs a capital of 250,000 francs is required. All these requirements shall ensure that the token offering can be conducted in a legally compliant and transparent manner and investors are protected in the best way possible.
However, Liechtenstein laws do not impose specific restrictions on investors investing in ICOs. However, such restrictions may apply depending on the rights contained in a specific token and the location of the respective buyer.
Security token offerings
What rules and restrictions govern the conduct of, and investment in, security token offerings (STOs)?
The legal rules for ICOs also generally apply if the IPTO relates to a security token and therefore is considered as a security token offering (STO).
However, given that an STO relates to a financial instrument under MIFID II in addition traditional financial market rules apply. In this regard, in particular for public offerings of security tokens the EU Prospectus Regulation and the national implementing laws have to be followed.
According to these rules, STOs are regularly subject to prospectus requirements in case the relevant thresholds are met. Liechtenstein, unlike several other countries, made use of the possibility to allow public offerings of financial instruments without prospectus requirements up to a volume of 8 million Swiss francs.
Further exemptions from prospectus requirements apply if the STO (1) is only made to qualified investors, or (2) the offering is made to fewer than 150 persons, or (3) the minimum ticket size is above 100,000 francs per investor. Furthermore, in any event private placements are exempted from the prospectus requirements.
If a prospectus is required, there is no additional requirement of publishing a BID under the TVTG.
Stablecoins
What rules and restrictions govern the issue of, and investment in, stablecoins?
Stablecoins are generally tokens that are fully backed by a set of fiat currencies or other valuable assets and are bound to one or more fiat currency. In this sense, a stablecoin is equivalent to a currency unit and its aim is to achieve the lowest possible volatility. Each issued stablecoin is secured with the same amount of the currency unit. Thus, depending on the amount of the currency unit received, the same amount of stablecoins are issued.
The issuing of stablecoins may be subject to licensing requirements under the existing traditional financial market laws. For instance, the issuing of stablecoins could be considered as issuing of E-money and thus lead to a licensing requirement under the E-Money Act.
The question whether or not a stablecoin constitutes E-money mainly depends on the question whether there is a large group of acceptants and an array of goods and services that may be obtained in return for the use of the coin. Depending on the structure the stablecoin may be E-money within the meaning of the Act and the provisions on E-money as well as payment services would apply. If the structure resembles a financial instrument, other financial market rules may apply. Finally, it has to be decided on a case-by-case basis whether or not licensing requirements apply.
Further, if the stablecoin is also offered in a public token offering the rules outlined on IPTO also have to be considered.
Airdrops
Are cryptoassets distributed by airdrop treated differently than other types of offering mechanisms?
The distribution by airdrop is usually used as a marketing mechanism and the tokens distributed by airdrop are distributed without any consideration.
The rules of the TVTG also considered the possibility of airdrops as a means of publicly distributing tokens. If the tokens are distributed without consideration, the TVTG considers that there is no offering volume met.
Therefore, mere airdrops generally only require a Liechtenstein issuer to notify the FMA of the fact that tokens are issued and distributed by airdrop.
Further, also the due diligence laws include exceptions for airdrops as in such cases the issuer does not receive funds from ‘investors’. Therefore, if the issuer only receives 1,000 francs or less in proceeds not even due diligence requirements to be met.
However, if an airdrop is made for consideration or combined with another offer that collects funds, the above regulations on IPTOs may nonetheless apply.
Advertising and marketing
What laws and regulations govern the advertising and marketing of cryptoassets used for investment and financing?
Liechtenstein law provides for clear rules for marketing of cryptoassets for investment. If the token is a security token (financial instrument under MIFID II) that shall be offered in a public offering, the limitations of the Prospectus Regulation and the national implementing laws apply. Therefore, it is most relevant what the offering volume is, to whom the offering is made and which minimum ticket sizes the offering has. Depending on the answers, exemptions may apply.
Further, in the case of public offerings of other tokens that are not security tokens, the restrictions of the TVTG apply, in particular the requirement of a BID and eventual registration requirements. Here exemptions may apply.
Trading restrictions
Are investors in an ICO/STO/stablecoin subject to any restrictions on their trading after the initial offering?
Liechtenstein law does not have any trading restrictions for investors who obtained tokens in an IPTO or in another manner (private placement, airdrop, secondary market, etc). Therefore investors may freely trade tokens in a peer-to-peer manner, regardless of the nature of the token.
However, restrictions apply for the provision of services as a secondary market exchange which brings together interested buyers and sellers. Again, the applicable restrictions depend on the nature of the tokens traded.
If the tokens are payment tokens or utility tokens they may be traded on a crypto exchange that may provide its services subject to the registration as a TT Service Provider under the TVTG.
If the tokens to be traded are security tokens and, therefore, financial instruments, the exchange services of a secondary market require the licensing as an investment firm under the Banking Act (eg, as a multilateral trading facility (MTF)).
Currently, Liechtenstein is home to the first MIFID II licensed MTF on which tokenised derivatives and, therefore, security tokens may be traded.
Crowdfunding
How are crowdfunding and cryptoasset offerings treated differently under the law?
There are no particular laws that regulate crowdfunding. Rather the applicable rules depend on whether the offering is made to the public or not, whether the offering is made in the form of tokens or not and whether the product offered is a financial instrument under MIFID II or not. The volume of funds raised in the crowdfunding determines the applicable laws.
Depending on how the crowdfunding is structured, the Prospectus Act, the Blockchain Act and also the KYC/AML regulations of the Due Diligence Act are applicable. In addition, depending on the structuring and the services provided, the rules of the Banking Act, the E-Money Act, the Act on Alternative Investment Funds and other financial market laws may apply and must be followed.
Transfer agents and share registrars
What laws and regulations govern cryptoasset transfer agents and share registrars?
Under Liechtenstein laws, shareholders of Liechtenstein entities and beneficial owners in general have to be recorded. The share register may also be maintained by using DLT registers. Any transfer of ownership may be a relevant transaction under the applicable KYC and AML laws of the Due Diligence Act.
Also, generally in the case of a transfer of cryptoassets the KYC and AML rules of the Due Diligence Act have to be adhered by the involved Service-Providers to provide an effective anti-money laundering regime.
Further, the Blockchain Act defines that certain services in connection with the transfer of cryptoassets require a registration. Depending on the structuring of the services the transfer agent may be required to register as a TT exchange service provider. Other services may also apply such as the service of a TT price service provider.
If the cryptoasset (token) is considered as a financial instrument under MIFID II, the provision of services with regards to these tokens and execution of transfers may also require licensing under the Banking Act as broker or dealer.
Anti-money laundering and know-your-customer compliance
What anti-money laundering (AML) and know-your-customer (KYC) requirements and guidelines apply to the offering of cryptoassets?
The prevention of financial crime and money laundering is one of the key aspects for the long-term functioning of the Liechtenstein financial market. Liechtenstein, as an EEA member state was also one of the first countries to implement the fifth EU Anti Money Laundering Directive ((EU) 2015/849 and (EU) 2015/847). Thus, Liechtenstein law provides for substantial and effective KYC and AML regulations under the Due Diligence Act also for offerings of and transactions with cryptoassets.
The Blockchain Act defines that all issuers of cryptoassets (token issuer) are subject to the KYC and AML rules of the Due Diligence Act and has to provide for a Due Diligence Concept for the execution of the token offering. Token issuers have to identify all token investors and also respect international blacklists and sanction lists. Further information concerning the source of funds of the respective investors has to be collected.
Due to a risk-based approach of the entire KYC and AML rules, the Due Diligence Act allows for application of different rules, depending on the investment volumes, overall volumes, involved countries and involved persons, thus making it more effective.
Being aware of the necessity of automated systems in large-scale offerings of tokens the Due Diligence Act and the FMA as competent supervising authority allow the use of compliant automated systems for onboarding of investors for an offering of tokens and therefore provides the possibility of an effective onboarding also of a large number of investors. In autumn 2020, in one offering conducted in Liechtenstein over 6,000 persons were onboarded in an automated system and over 4,600 persons from 90 countries participated in a token sale.
Liechtenstein laws, therefore, provides for a comprehensive and sophisticated KYC and AML system for offerings of tokens.
Sanctions and Financial Action Task Force compliance
What laws and regulations apply in the context of cryptoassets to enforce government sanctions, anti-terrorism financing principles, and Financial Action Task Force (FATF) standards?
Liechtenstein has implemented highest KYC and AML standards of the fifth Anti Money Laundering Regulation and the FATF standards in the Due Diligence Act. Also, Liechtenstein is a recognised long-term member of the Moneyval Group.
The Liechtenstein Due Diligence Act is applicable to all issuers of cryptoassets as well as transactions with cryptoassets. The Due Diligence Act also implements all major sanctions and blacklistings of EU and other international authorities.
Law stated date
Correct on
Give the date on which the above content is accurate.
23 November 2020.
