Key Takeaways:

• **The «Token Container Model» enables a technologically neutral and agnostic token definition and therefore bridges the gap between the digital and the physical world – everything can be tokenized.
• **The neutral approach of the TVTG offers all sectors sufficient flexibility to enter into new business models. The legal certainty provided by the law will encourage new market participants.
• **The legislation affords consumers a basis for trusting new technologies that was not necessarily present before.

In October 2019 in Liechtenstein, the Blockchain Act/Token & TT Service Provider Act (TVTG) unanimously passed through its second reading in parliament. Enacted into law on January 1st 2020, this leg-islation provides the world’s first comprehensive regulation of the token economy. But what is this law, and what does it mean for the future of Liechtenstein, as well as the future of regulation surrounding blockchain and crypto on a global scale?

The outstanding professionalism of the government and regulator show why Liechtenstein is well-positioned to continue its pioneering role in the blockchain space and will continue to strengthen their important position in future. The Blockchain Act is another step towards that goal and is the first law worldwide that governs the token economy.

In the heart of the TVTG lies the “Token Container Model” (TCM) which enables a technologically neutral and agnostic token definition. Within this model, a token serves as a container that links the digital world with the physical world. This can be something physical, a property, gold, stocks, bonds etc., a service but also a digital code, such as Bitcoin. From this, it follows that the TCM offers a legal certainty of already existing rights, but also rights to digital information based on blockchain systems.

Furthermore, recognizing the need for bridging the gap between the offline physical world and the online digital world, the TVTG introduces the role of the “Physical Validator” as a registered intermediary tasked with ensuring that the right to the underlying represented by the token is actually present. On this note, the TVTG also provides a civil law basis for what constitutes an effective transfer of the represented right to the token from party A to B, as well as what constitutes an effective transfer of these newfound digital assets in general.

Expanding on the role of the Physical Validator, Liechtenstein as a country especially well-suited for providing these kinds of service providers, due to the trust history within the country. The token is defined as a piece of information on a TT (“trustworthy technology”) System which can represent claims or rights of memberships against a person, rights to property, or other absolute or relative rights and is assigned to one or more TT identifiers.

Bringing these ideas together and to illustrate: If you tokenize the right to gold, this presents an example of tokenizing a physical real-world asset and bringing it online. Here, the Physical Validator would ensure that the gold actually exists. If errors occur with this storage, then the Physical validator maintains responsibility.

In connection with the example of tokenized gold, several other service providers will be necessary. For example, the “Token Generator” is needed to set up the smart contract and the “Token Issuer” will issue the token. In relation to storage, there is the important role of the “TT-Key-Depositary” who is responsible for the storage of the private keys. Many other roles are also affected, and this shows how regulated and structured the tokenization will be based on the Liechtenstein “Blockchain Act”. Besides the “TT Key” that allows for disposal an “TT identifier” is necessary to accomplish the clear assignment of the token.

Another very interesting case is the tokenization of shares. In this case, the TVTG makes it possible to bridge the gap between the classic financial industry and distributed ledger technology. Small and medium-sized companies, for example, can tokenize their shares and thus make them tradable.

The clearly defined assignment of roles in the token economy offers financial institutions, among oth-ers, new opportunities along the value chain. For example, a registered “TT-Generator” can also exercise the role of a “TT-Key-Depositary” when storing the private keys as well as the role of a “TT-Exchange Service Provider” when trading crypto assets for fiat money. Companies can therefore as-sume several roles, whereby customers can benefit from a single point of entry into the token economy.

The TCM is thus neutral, which allows for representing of rights to other kinds of tokens, including to-kens that might be classified as utility tokens, stable tokens, etc. in other jurisdictions. Avoidance of this classification in favor of a more neutral approach shows the innovative nature of the TVTG. As opposed to other jurisdictions which highlighted these pre-existing definitions in their legislative framework, Liechtenstein opted for the most neutral approach possible in order to accommodate change and inno-vation within the space. Therefore, the TVTG offers all sectors sufficient flexibility to enter into new business models and allows entrepreneurs to occupy niches and grow within a regulated environment.

This new legislation is being implemented in a country where the regulator responsible for its enforcement, the Financial Market Authority (FMA), already possesses the requisite know-how for dealing with these projects. With an entire department dedicated to the fielding of Fintech related inquiries, the FMA already has built up their knowledge base surrounding blockchain and crypto projects. This will only serve to grow the blockchain community here once the legislation is in place.

Although many argue that regulation in the blockchain sector is contrary to the peer to peer nature of the technology itself, the TVTG was carefully crafted in a manner that bridges the gap between pre-existing regulations and these new technological innovations, not creating unnecessary regulatory hur-dles where technology already does the job. Rather, the framework is designed to ease the transition from traditionally centralized and regulated intermediaries to decentralized systems. The Act also aims to assist in curbing money laundering activities by subjecting service providers to AML and CFT regulations.

Contrary to what is often assumed, serious companies in the industry are looking for such a regulated environment. Therefore, the new roles and requirements regarding service providers within the TVTG create a support network for entrepreneurs seeing to become TT service providers, enabled by the presence of friendly regulatory oversight. It can be assumed that the legal certainty created by the TVTG will incite companies from various sectors to consider entering into the market, which will tend to lead to a tightening of competition conditions. From a client perspective and for the Liechtenstein fi-nancial market, a healthy competitive situation is very positive and can be assessed as advantageous.

Furthermore, the legislation affords consumers a basis for trusting in these new technologies that was not necessarily present before and facilitates the customers’ search for suitable partners within the token economy. It can be expected that the law and the associated legal certainty will lead to Liechten-stein gaining in importance as a fintech and blockchain location for entrepreneurs and consequently allowing the location to benefit from new market participants.

In addition, regulation discourages dubious market participants, which proactively minimizes reputational risks.
Ultimately, taking into consideration Liechtenstein’s reputation as a financial center, Liechtenstein is well suited to provide all the services necessary to enable token-based projects to flourish. For exam-ple, Liechtenstein’s membership in the European Economic Area allows for the passporting of certain licenses and services to Europe as a whole, affording entrepreneurs access to the European single mar-ket. Although this passport ability does not include the registration requirements that are specific to the TVTG, it is the hope that this model will give way to a European-wide framework of a similar spirit. In fact, the structure and spirit of the TVTG already serves as inspiration for other jurisdictions, even those outside of Europe.

Only time will tell what the ultimate effect of inaction of this legislation will be, but it is clear that the prospects are bright, and the blockchain community here looks forward to inviting more innovators to Liechtenstein to drive change that will undoubtedly be felt on a global scale.