AuthorErly, Nick


This Note examines Liechtenstein's Token and Trusted Technology ("TT") Service Providers Act ("Blockchain Act") and delves into some of the key issues surrounding the "physical validator," a newly recognized actor within the blockchain system that is tasked with the role of ensuring the contractual enforcement of represented rights to tokenized physical assets. (1) The Blockchain Act came into effect in the Principality of Liechtenstein on January 1, 2020, and is one of the first examples of imposing liability on actors within the blockchain system. (2) Its purpose is to regulate civil law issues concerning investor and asset protection, as well as to put forth a neutral and all-encompassing framework integrating various aspects of tokenization. (3) Specifically, it lays the legal foundation for the rights of ownership, possession, and disposition of tokenized analog assets. (4) Moreover, the Blockchain Act devises a classification system for existing digital assets, including Bitcoin, by defining them as tokens and establishing a framework that presides over token-based transactions and services. (5)

There is little doubt that blockchain technologies in the United States are here to stay. The burgeoning blockchain ecosystem is filled with various actors who interact with each other on a variety of decentralized systems. (6) With an increasing number of business applications utilizing blockchains, the rise of cryptocurrencies, and a rising interest in the tokenization of hard assets and commodities, this legal grey area has presented a number of legal challenges in the United States. (7) These challenges have both limited corporate interest in the space, as well as discouraged financial technology companies from operating domestically. (8) Part of the problem is that transactions on a blockchain often take place between pseudonymous parties, and because the transaction occurs on a decentralized network, free from intermediaries who might be able to identify the parties. (9) One of the key issues the physical validator seeks to remedy arises when these pseudonymous parties are dealing with tokenized physical assets. (10) Handling physical assets on the blockchain calls for a need to maintain a legal link between the physical and digital worlds.

The Blockchain Act recognizes that different stages in the lifecycle of a token have brought forth different actors. These actors include token generators, issuers, and depositaries, as well as exchange service providers, price service providers, identity service providers, and physical validators. (11) The Act also recognizes the need for registering these different service providers and establishing various requirements for doing so. (12) An application of the legal framework surrounding the physical validator in the United States could potentially facilitate institutional and private entry into the space, while safeguarding consumer interests.


    Liechtenstein's former Minister of Economic Affairs and current Prime Minister, Daniel Risch, stated in an interview prior to the enactment of the Blockchain Act that "[d]igitalization is not something you either participate in or you don't.... For us, digitalization is a driver of innovation, which is key for our economy, education, and administration and we are making a consistent effort to be a leading player." (13) Liechtenstein's approach and simplified regulatory structure toward digital assets have garnered significant international attention in recent years. (14) Part of the reason for Liechtenstein's success is due to its small population and exceptionally high GDP per capita. (15) In 2020, Liechtenstein had a GDP per capita of $157,755, one of the highest in the world. (16) Furthermore, Liechtenstein is also one of the global leaders in internet usage based on percentage of population, with nearly 100% of its population using the internet. (17) In following the principle that infrastructure drives innovation, Liechtenstein is positioning itself to be a leader in the development of its fiber-optic network. In 2020, the active usage of fiber-optic connections in Liechtenstein increased from 23% to 58.7%, with regulators intending to "provide fiber-optic connectivity to the entire country by 2023" as part of a [euro]48.3 million network expansion plan. (18)

    This high-performance network combined with a strong cellular network is considered the foundation for Liechtenstein's digital economy. (19) Furthermore, Liechtenstein has ample access to a well-educated and technologically adept workforce, as well as a central geographic location nestled between Austria and Switzerland. (20) "With a very small home market, the business models of Liechtenstein financial service providers have a very strong cross-border orientation." (21) Businesses within Liechtenstein benefit from direct market access to many countries in the European Union and European Economic Area. (22) It is no coincidence that there are roughly 4,700 active companies registered within its borders, a statistic that becomes even more impressive when you consider that is approximately one active company for every eight people in Liechtenstein. (23)

    These are important facts to recognize as we consider the transferability of Liechtenstein's Blockchain Act to larger economies, like the United States. Liechtenstein is particularly well-suited for providing TT provider services, as it is a jurisdiction where "[a]pproximately 90 percent of [its] financial services business is provided to nonresidents," many of whom are attracted "by the availability of discrete and flexible legal structures, strict bank secrecy, and favorable tax arrangements, within a stable and well-regulated environment." (24) Financial services providers that are already serving similar functions in the traditional banking system could be well-equipped to register as physical validators. Thus, if aspects of the Blockchain Act were to be implemented in the United States, it might be advisable to do so at the state level, as opposed to implementing a one-size-fits-all approach at the federal level. State-level legislation allows for a more tailored and flexible approach to regulating technology. It also allows for the experimentation of new and varying use cases, and for the effectiveness of new regulations to be properly evaluated. Additionally, issues involving recording real property and commercial transactions are often enforced at the state level, so having state-level legislation could potentially mitigate any unforeseen externalities. (25)


    It is first important to recognize some of the basic catalysts fueling the growth of decentralized token systems. First, "it allows a relatively easy means for cross-border peer-to-peer transfers." (26) Second, parties do not need to know, nor even trust one another in order to conduct a transaction. (27) Third, decentralized blockchain systems are run by participants on a peer-to-peer network, thus greatly reducing the need for any third-party intermediaries. (28) This lack of intermediaries "results in a lowering of transaction costs and a lessening of insolvency risks." (29)

    The objective of Liechtenstein's Blockchain Act is to "ensure trust in digital legal communication, in particular in the financial and economic sector and the protection of users of TT [s]ystems" and to "create excellent, innovation-friendly, and technology-neutral framework conditions for rendering services concerning TT Systems." (30) The Blockchain Act does this by regulating the supervision rights and obligations of TT service providers. (31) In other words, the Blockchain Act clarifies the application of pre-existing laws to provide legal certainty within decentralized markets. (32)

    [T]he approach of the regulation is twofold. On one hand, the [Blockchain] [A]ct clarifies pre-existing law--providing a civil law basis for ensuring that the underlying right represented by the token is effectively transferred from party A to party B. On the other hand, the [Blockchain] [A]ct provides regulatory and supervisory rules regarding those interacting with TT Systems - including consumers, TT service providers, and intermediaries. (33) The Blockchain Act applies to all TT service providers that generate or issue tokens in Liechtenstein. (34) These "[l]egal entities with a registered office and natural persons with residence in Liechtenstein performing a TT Service, are subject to registration under Art[icle] 12 paragraph] 1 TVTG." (35) Companies and entities that are not subject to the Article 12 provisions are not required to register as TT service providers and may still be permitted to operate in Liechtenstein. (36) Likewise, the Blockchain Act's provisions on supervision, registration, and rights and obligations of TT service providers apply only to those providers that are headquartered or currently reside within Liechtenstein's borders. (37) While some entities headquartered in Liechtenstein are required to register as service providers, individual parties to a token transaction must explicitly provide for the use of these service providers. (38) However, parties that neglect to use registered service providers will be unable to seek any sort of legal remedy should an aspect of their transaction fail in some respect. (39) These flexible registration requirements were implemented because the "regulation of the actors within the system does not equate to a regulation of the underlying system as a whole. Regulating the entire system proves to be difficult to enforce." (40) The implementation of these regulations serves to mitigate the possibility of imposing undue burdens upon nascent entities, whilst simultaneously preserving the autonomy of individual investors in terms of how they interact with service providers.


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