1 Legal and enforcement framework

1.1 What general regulatory regimes and issues should blockchain developers consider when building the governance framework for the operation of blockchain/distributed ledger technology protocols?

The Tokens and Trusted Technology Service Provider Law – known as the ‘Blockchain Act' – entered into force on 1 January 2020, establishing a general framework for all blockchain-related business models in Liechtenstein.

The following statutes are also of relevance for blockchain developers:

  • the Banking Act;
  • the Asset Management Act;
  • the Payment Services Act;
  • the E-money Act;
  • the EU Prospectus Regulation (2017/1129) and the European Economic Area (EEA) Securities Prospectus Implementing Act;
  • the Act on Alternative Investment Funds;
  • the Act on Undertakings for Collective Investment in Transferable Securities;
  • the Insurance Act;
  • the Due Diligence Act;
  • the Persons and Companies Act;
  • the Gambling Act;
  • the Consumer Protection Act;
  • the Remote Financial Services Act; and
  • the Distance and Foreign Trade Act.

Due to the wide range of potentially applicable regulations, it is recommended to seek a ruling from the regulator as to whether a specific business activity is subject to regulation.

Moreover, as Liechtenstein is a member of the EEA, the financial market, together with licensed financial intermediaries, is generally fully harmonised, enabling ‘passporting' throughout the European Union/EEA. This makes it possible to avail of the freedom of services and freedom of establishment within the European single market.

1.2 How do the foregoing considerations differ for public and private blockchains?

The Blockchain Act provides a comprehensive framework while remaining technology neutral. Therefore, the legal framework as such does not differentiate between public and private blockchain-based business models. Each business model must be assessed individually in order to identify all potential regulatory implications.

1.3 What general regulatory issues should users of a blockchain application consider when using a particular blockchain/distributed ledger protocol?

As mentioned, the Liechtenstein legal framework is technology neutral, so the use of different blockchains or distributed ledger protocols makes no difference from a legal perspective. The definition of such a protocol – called a ‘trusted technology system' in the Blockchain Act – is as follows: "Transaction systems which enable the secure transmission and storage of tokens and the provision of services in connection with them using trusted technologies."

The key criterion is thus that distributed ledger protocols ensure the secure transmission and storage of tokens in a tamper-proof manner. These elements may be further specified in the future Tokens and Trusted Technologies Ordinance, as well as in specific guidelines of the Liechtenstein Financial Market Authority (FMA). Leading protocols such as Bitcoin and Ethereum undoubtedly fulfil the criterion of a trusted technology pursuant to the Blockchain Act.

1.4 Which administrative bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The regulatory body responsible for enforcing the supervisory provisions of the Blockchain Act is the FMA. With regard to other matters – especially penal provisions – the ordinary Liechtenstein courts have jurisdiction.

1.5 What is the regulators' general approach to blockchain?

The FMA is generally very open to blockchain-related projects and has a whole department dedicated exclusively to handling fintech-related inquiries, about 90% of which directly concern crypto and blockchain.

On 16 February 2018 the FMA published a factsheet on virtual currencies such as Bitcoin, stating that these are generally defined as a "digital representation of a (cash equivalent) value that is neither issued by a central bank or a public authority". The factsheet further confirmed that these tokens do not constitute fiat currency (legal tender). However, it pointed out that virtual currencies are similar to fiat currencies when they are used as a means of payment or traded on an exchange.

The FMA also issued a factsheet on initial coin offerings (ICOs) on 10 September 2017 (last updated 1 October 2018). The factsheet explained that, depending on their specific design and function, tokens may constitute financial instruments if they have the characteristics of securities or other investments. Furthermore, activities relating to financial instruments are subject to licensing by the FMA, which will assess token offerings (ICOs, token generation events and security token offerings) on a case-by-case basis.

1.6 Are any industry or trade associations influential in the blockchain space?

The Crypto Country Association of Liechtenstein (Cryptocountry.li) is dedicated to promoting the growth of crypto and blockchain-related projects within the country.

2 Blockchain market

2.1 Which blockchain applications and protocols have become most embedded in your jurisdiction?


2.2 What potential new applications/protocols are most actively being explored?

One of the most popular blockchain and crypto-related initiatives in Liechtenstein is the issuance of security token offerings (STOs), due to a regulatory environment which allows for the issuance of dematerialised securities (ie, without a requirement for physical instruments). This means that securities can be placed on blockchain-based systems with relative ease.

Recently, there has been a move towards the creation of licensed exchanges with the ability to support the secondary market for security tokens.

2.3 Which industries within your jurisdiction are making material investments within the blockchain space?

Trust firms and private banks.

2.4 Are any initiatives or governmental programmes in place to incentivise blockchain development in your jurisdiction?

Although there is no regulatory sandbox, the Financial Market Authority has a department dedicated exclusively to fintech inquiries.

Moreover, the Liechtenstein government invested significant amounts of time and effort in drafting the Blockchain Act, which aims to enhance legal certainty within this space. It is anticipated that this will incentivise the development of blockchain projects by default.

3 Cryptocurrencies

3.1 How are cryptocurrencies and/or virtual currencies defined and regulated in your jurisdiction?

Liechtenstein has included virtual currencies in the latest amendments to its Due Diligence Act, pursuant to the EU Anti-money Laundering Directives. The due diligence obligations codified in the act aim to combat money laundering, organised crime and terrorist financing, and apply to providers of exchange services, among others. An ‘exchange office' (bureau de change) is defined as any natural or legal person whose activities involve the exchange of legal tender at the official exchange rate or of virtual currencies against legal tender, and vice versa. ‘Virtual currencies' are defined as "digital monetary units, which can be exchanged for legal tender, used to purchase goods or services or to preserve value and thus assume the function of legal tender". Pursuant to the Report and Motion 2016/159.31, the most famous example of such a virtual currency is Bitcoin.

This also means that crypto-to-crypto trading is fully unregulated and may be conducted with a simple trading licence. In theory, not even know-your-customer (KYC)/anti-money laundering (AML) duties will apply, since the trading of such utility tokens is treated as equivalent to the trading of commodities such as sugar and salt. However, due diligence duties will apply indirectly, as banking institutions usually will not exchange these crypto assets for legal tender if no KYC has been conducted, since banking institutions must be fully compliant.

In general, crypto fiat trading is also unregulated with regard to utility tokens if it is not conducted against the trader's own order book, but instead serves as matched principal trading. However, in the event of clearing services, a payment service provider may be required.

Under the Blockchain Act, service providers trading in cryptocurrencies or virtual currencies must register with the Financial Market Authority (FMA) and are subject to due diligence duties (KYC/AML) in order to further combat financial crime.

3.2 What anti-money laundering provisions apply to cryptocurrencies?

See question 3.1. In general, the Fourth European Anti-money Laundering Directive has been fully implemented in Liechtenstein, as well as parts of the Fifth European Anti-money Laundering Directive.

3.3 What consumer protection provisions apply to cryptocurrencies?

Since utility tokens are treated similarly to commodities, consumers generally have the right to withdraw from the agreement within 14 days, as the EU Consumer Protection Directive is applicable. Consumers may expressly waive this right if they have been fully informed about their rights and instantly receive the product. In other words, it is not possible to waive the right to withdraw from a contract for early contribution agreements or simple agreements for future tokens where no consideration (token) is given once the agreement has been entered into and the monetary assets have been transferred by the purchaser.

In general, the Remote Financial Services Act applies to security tokens; however, there is an exemption regarding the possibility to withdraw from a contract when securities are involved. Therefore, this act plays only a minor role in practice.

3.4 How are cryptocurrencies treated from a tax perspective?

No answer submitted for this question.

3.5 What regulatory requirements apply to a cryptocurrency trader/exchange?

As there are various forms of crypto-exchanges, diverse regulations apply in this regard. Exchanges which match buying and selling interests (matched principal trading; multilateral) with regard to utility tokens against fiat and/or cryptocurrencies are service providers that are subject to a due diligence regime and must be registered with the FMA. Now that the Blockchain Act is in force, there is no longer a need to obtain a trade licence. This notwithstanding, settlement in fiat is regarded as a regulated payment service (especially since the commercial broker exemption is no longer applicable under the EU Second Payment Services Directive when acting on both the buy side and the sell side).

However, if these tokens are traded against the trader's own book for fiat payments, the trader might be considered to be a so-called ‘Wechselstube' (‘exchange office'; bilateral) under the Due Diligence Act or a trusted technology exchange service provider under the Blockchain Act. This is not a licensed activity, but the service provider must be registered with the FMA and due diligence duties will apply. If only crypto/crypto pairs are traded against the trader's own order book, this is again deemed an unregulated business activity. However, as mentioned in the Blockchain Act, this type of exchange will be required to register with the FMA.

Security token exchanges are fully regulated pursuant to the Second Markets in Financial Instruments Directive and require an investment firm with a multilateral trading facility or organised trading facility on top.

Lastly, it is possible to set up fully decentralised, peer-to-peer (P2P) security exchanges. Where a decentralised network is operating an exchange, there is – from a practical point of view – no entity to be regulated. Depending on the services rendered by such a P2P exchange, certain licensing requirements may apply. In any event, prospectus requirements must be observed. Usually, both matching and settlement are carried out in a decentralised manner on such exchanges, and associated aspects such as the order book and custodial/escrow services (smart contracts) are also decentralised. Mere information platforms (so-called ‘bulletin boards') which act only as technical service providers may – depending on the exact business case – be subject to relatively relaxed regulatory requirements.

3.6 How are initial coin offerings and securities token offerings defined and regulated in your jurisdiction?

The treatment of tokens under Liechtenstein law depends on the type of token being offered. If the token offered constitutes a financial instrument or e-money, the respective regulatory regime will apply (eg, it will be necessary to prepare a securities prospectus or to apply for an e-money licence). Under the Blockchain Act, the issuers of tokens must register with the FMA.

With regard to security tokens, these follow the rights and obligations of the underlying asset and are thus themselves considered to be transferable securities (financial instruments). Any classic equity, equity-like or debt instrument may be represented by tokens. As such, if a public offering is carried out (eg, by means of a security token offering), it may be necessary to draw up a prospectus pursuant to the European Prospectus Regulation and have it approved by the FMA, if no exemptions apply. Such a prospectus is passportable within the European Union/European Economic Area, provided that at least the summary is translated into the respective official language of the jurisdiction into which it is passported and a tax addendum of that jurisdiction is provided.

4 Smart contracts

4.1 Can a smart contract satisfy the legal requirements of a legal contract under the laws of your jurisdiction? What will be considered when making this determination?

A smart contract may be considered a legally binding contract in Liechtenstein if the same conditions as apply under normal contract law are met. Contractual agreements may be entered into in written form, orally or even conclusively/by implication. Therefore, if the essentials of an agreement are stipulated in a smart contract, it may also form the basis of a legally binding contract.

4.2 Are there any regulatory or governmental guidelines or policies within your jurisdiction which provide guidance on regulating/defining smart contracts?

At present, there are no regulatory or governmental guidelines with regard to smart contracts in Liechtenstein. There is thus no guidance on the regulation or definition of smart contracts, although this will likely follow in the coming years. In the government's consultation report on the Blockchain Act, smart contracts are mentioned briefly and are defined as "automated contracts that can also trigger transactions with tokens". In general, Liechtenstein (civil) law applies to smart contracts.

4.3 What parts of traditional contract might smart contracts be able to replace?

Smart contracts can work in tandem with traditional contracts to enforce or verify a traditional contract, as they automate these processes. Where relations and actions are simple, and a certain action results in a specified outcome, smart contracts can facilitate this process without the need for any intermediary. Smart contracts can, for example, automate a payment that depends on a certain condition being met or impose a penalty if a certain condition is not met. They can thus operate in typical ‘if-then' scenarios and replace this aspect of a contract where simple and objective terms or thresholds must be met. The boundaries of smart contracts are mandatory protective and constitutional rights.

4.4 What parts of traditional contracts might smart contracts be unable to replace?

It is more challenging to code subjective legal criteria or complex transactions with multiple steps and clauses. Thus, smart contracts cannot replace traditional contracts in their entirety at present.

Furthermore, in the case of traditional contracts, the relationships between parties allow some room for manoeuvre in certain situations. For example, if an important customer makes a single late payment, a vendor could refrain from exercising its right to a late fee, placing more value on the relationship than on the imposition of a penalty. This often depends on the jurisdiction and the relevant norms of practice. However, if this process were automated through a smart contract, a late fee would automatically be imposed.

4.5 What issues might present themselves in your jurisdiction with regard to judicial enforcement of smart contracts?

As smart contracts are self-enforcing, judicial enforcement is not necessary. Vending machines are used in the literature as the typical example of self-enforcement, illustrating that there are in fact other established ways of enforcing contracts. Instead of going to court, smart contracts can thus pave the way for cheaper enforcement mechanisms. The nature of smart contracts challenges judicial enforcement mechanisms and presents difficulties in relation to whether a court has jurisdiction and over what specifically it can exercise this jurisdiction. Nevertheless, if a smart contract violates applicable laws to the detriment of a party, legal remedies may be sought before the competent courts.

A further issue that may present itself relates to coding errors; here again, the questions are whether the court has jurisdiction and how it can interpret the parties' intent and position this in relation to the code.

Another issue relates to the decentralised and anonymous nature of blockchain technology. If a court identifies damage that must be compensated, it may be unable to enforce this due to the anonymity of a party.

4.6 What are some practical considerations that parties should consider when drafting a smart contract?

The first consideration concerns the accuracy of the code, as this must reflect the parties' will. The parties to a contract may want confirmation of this and thus commission a review by a third party (eg, a tech audit).

The second consideration relates to the interpretation of a smart contract, as this will essentially involve the interpretation of programming language. Thus, it will be important to define the extent to which smart contract code can be used for interpretation.

Further issues relate to the immutable nature of blockchain technology. Traditional contracts are often modified, and in the case of general terms and conditions, parties can withdraw from the contract within 14 days without stating reasons. Smart contracts should thus allow enough flexibility for modification in order to incorporate any such changes that take place.

4.7 How will the foregoing considerations differ when smart contracts are running on a private versus public blockchain?

Whether a smart contract is running on a public or private blockchain (and relatedly, whether the blockchain is permissioned or permissionless) will affect whether it is available to the entire network or whether access to the content is restricted. Depending on the situation, the code may be visible to all participants, whether public or private, while the content of the contract is hidden, allowing for greater privacy and content control.

5 Data and privacy

5.1 What specific challenges or concerns does blockchain present from a data protection/privacy perspective?

The applicable regulations in this regard are the EU General Data Protection Regulation in conjunction with the Liechtenstein Data Protection Act.

The primary concern that blockchain presents from the perspective of data protection concerns the very nature of blockchain technology, which is characterised by decentralisation, transparency and immutability.

The decentralised aspect makes it difficult to hold someone accountable or responsible, especially as regards joint controllership under the regulation.

The immutability aspect, which maintains data integrity on the blockchain, presents problems in relation to the ‘right to be forgotten' and the assumption under the GDPR that data can be modified or erased. There is also no agreement on whether encrypted or hashed personal data can still be considered personal data in relation to the GDPR.

The transparency aspect also presents a challenge with respect to the GDPR, as it does not sit well with the data minimisation principle.

Thus, those aspects which are the cornerstones of blockchain present different problems from a data protection perspective. A new approach is required in order to reconcile these divergences and find a way to make blockchain technology GDPR compliant.

5.2 What potential advantages can blockchain offer in the data protection/privacy context?

Blockchain offers the advantage of removing the need for a central intermediary and, through its core aspect of transparency, allows for data sharing with the knowledge of who has accessed specific data. The GDPR seeks to give data subjects greater control of their data, so that they know what is being done with it; blockchain technology could thus act as a vehicle to support this. These advantages of blockchain could be used to further the goals of the GDPR.

6 Cybersecurity

6.1 What specific challenges or concerns does blockchain present from a cybersecurity perspective?

While blockchains are more resilient than traditional databases, due to the characteristics discussed in question 5, various security challenges must still be overcome. The rise of quantum computing is one of the biggest concerns in relation to security. Blockchains can be just as vulnerable in this regard, as they rely on elliptic curve cryptography for authentication, which will be a minimal hurdle for the quantum computers of the future. Thus, the development of quantum-resistant algorithms is crucial.

6.2 What potential advantages can blockchain offer in the cybersecurity context?

Blockchain can be used to strengthen cybersecurity. Due to its immutable, decentralised and transparent nature, blockchain technology can, for example, detect data tampering, which could help to improve cybersecurity.

Moreover, data itself is usually stored centrally by organisations, which can thus be vulnerable to cyberattacks. Blockchain-based storage solutions can mitigate this problem. The decentralised nature of blockchain makes it harder for cyberattacks to occur; and even if the blockchain is somehow hacked, the hackers will not gain access to all the data, but only to a fraction thereof.

6.3 What tools and measures could be implemented to mitigate cybersecurity risk?

Different approaches may be taken in this regard. One measure could be the regulation of network accesses, although this seems to be more feasible in the case of private blockchains. In this regard, security controls could allow for authentication of the individual, which would then give individuals the authorisation to use the blockchain. Full encryption of data and data transactions is also vital.

7 Intellectual property

7.1 What specific challenges or concerns does blockchain present from an IP perspective?

Though more of a general challenge, a significant amount of effort and resources must be invested in order to arrive at the advantages outlined in question 7.4, and thus the use of blockchain technology in this area is very costly. Further, at present, it is impossible to remove all barriers, as the IP legal framework is not evolving as fast as the technology. Hence, there is still a need for legal IP experts. It is also disputed whether blockchain technology itself may be patented.

7.2 What type of IP protection can blockchain developers obtain?

The Liechtenstein Copyright Act provides for a wide range of IP protection (copyright protection, trademark protection and patent protection). Liechtenstein law allows for the copyrighting of computer programs and code under certain circumstances, which could be of particular interest to developers of blockchain programs or smart contracts.

7.3 What are the best open-source platforms that could be used to protect developers' innovations?

No answer submitted for this question.

7.4 What potential advantages can blockchain offer in the IP context?

Blockchain technology can offer various advantages in the IP context. The potential advantages have also been identified by the European Union and the World Trade Organization, and are currently being analysed.

There are different registries for patents, which can be both public (operated by governments) or private. As this concept fits with the decentralised nature of blockchain technology, a blockchain-based registry could be established. The transparency of the blockchain-based registry would ensure the necessary level of trust and would come with the advantage of reduced costs.

Blockchain technology can also be advantageous in relation to proof of ownership and existence. If a design or work is uploaded to a blockchain, a time-stamped record is created, which cannot be changed due to the immutable aspect of blockchain. This provides evidence of when this record was created and by whom, and cannot be disputed, thus supporting designers and creators. IP rights holders can also control whether their IP rights are being rightfully used.

In a supply chain, the use of blockchain technology in relation to IP rights can also be beneficial. By recording which individuals hold IP rights, persons across the entire supply chain can access necessary information such as the characteristics of the product, where it originated and who owns it. In this respect, blockchain technology could also assist in the fight against counterfeiting. Since the technology is transparent and immutable, the origin of a product can easily be identified.

Finally, IP agreements can be enforced and payments automated through the use of smart contracts. This scenario is envisioned, for example, in the music industry, where the payment of royalties could be automatically executed and licences could also be executed upon use of a work by digital rights management and collecting societies.

8 Trends and predictions

8.1 How do you think the regulatory landscape in your jurisdiction will evolve in the blockchain space over the next two years? Are any pending changes currently being considered?

The regulatory landscape will change over the next two years following the introduction of the Liechtenstein Blockchain Act. The government has focused on this legislation over the last few years, beginning with the establishment of working groups in 2016 and followed by the issue of a government consultation report of some 380 pages prior to drafting the act. The Liechtenstein Blockchain Act provides guidance and enhances coherence, as well as creating a secure and trustworthy environment for companies. However, it is impossible to foresee all of the future scenarios that may arise; and following its implementation, there will likely be more changes along the way to adapt to this evolving technology.

8.2 What regulatory changes would you like your jurisdiction to implement to further advance the blockchain industry?

The Liechtenstein Blockchain Act is a significant step towards the implementation and further advancement of blockchain in this jurisdiction. It is likely that an accompanying ordinance will also be passed and that the Financial Market Authority will issue further guidelines to provide additional clarification.

8.3 What is the largest impediment within your jurisdiction to the adoption of blockchain technology?

While the technology is rather new, Liechtenstein has fully embraced the potential of distributed ledger protocols through its Blockchain Act. All government and economic players are proactive when it comes to blockchain technology and support its adoption. Consequently, there are no major impediments to the adoption of the blockchain technology in Liechtenstein, as the general mindset with regard to its implementation is very open and legal certainty is guaranteed through the Blockchain Act.

9 Tips and traps

9.1 What are your top tips for effective use of blockchain technologies in your jurisdiction and what potential sticking points would you highlight?

No answer submitted for this question.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.