Fintech in Liechtenstein

Fintech landscape and initiatives

What is the general state of fintech innovation in your jurisdiction?

Many reputable players on the blockchain scene have come to Liechtenstein to establish businesses. For example, Yanislav Malahov (who was closely involved in the creation of Ethereum) has founded Aeternity – the first blockchain-based project in Liechtenstein with a market capitalisation of more than $1 billion (on 8 May 2018, making it the first Liechtenstein blockchain unicorn). Ultimately, Aeternity is a project focused on smart contracts, allowing for the execution of credible transactions through blockchain technology without the help of third-party intermediaries.

Further, one of the world’s leading crypto exchanges, Bittrex, has come to Liechtenstein with the aim of setting up an exchange with the ability to support the secondary market trading of security tokens.

Communications with the local regulator – the Financial Market Authority (FMA) – are efficient, as the FMA established its own fintech department in June 2018. Moreover, a so-called ‘regulation laboratory’ has been established to further the proliferation of fintech businesses.

In addition to these local projects and advancements in favour of fintech innovation, the so-called ‘Blockchain Act’ (Token and Trusted Technologies Law) is expected to come into force in 2019. In general, the government – along with the prime minister and even the prince – is open minded when it comes to fintech projects. In addition, the Crypto Country Association has been founded, which deals with various topics relating to the Liechtenstein crypto ecosystem.

The success of established and young companies has been aided by general state conditions, which are especially favourable to blockchain-based projects. The Ministry of Presidential and Finance has created innovation clubs, enabling companies to contribute ideas for improving the framework of conditions in an unbureaucratic manner. Moreover, the ministry offers all market participants from Liechtenstein and overseas the ability to engage in a transparent process for implementing ideas to improve the conditions of the local framework. Ultimately, successfully tested ideas are supported in direct contact with the ministry until they are implemented.

The ability to build new disruptive business models is crucial to the strategic competence of an economy. At the same time, while financing start-ups poses great challenges, so does the question of what constitutes an optimal level of support. Through favourable business conditions and state support, the government has created an incubator in cooperation with private partners, which has led to the successful establishment of numerous start-ups in Liechtenstein.

Do government bodies or regulators provide any support specific to financial innovation? If so, what are the key benefits of such support?

Communication with the FMA is excellent. Therefore, any new projects may be introduced in a personal meeting with the FMA. A legal opinion examining the business model and the token functionality (if a token is issued) will usually be filed with the FMA in order to receive a preliminary evaluation. If no regulation applies, the FMA will issue a statement indicating that the intended business does not fall under its jurisdiction if it is exercised in the way presented to the FMA in the set of facts of a legal opinion. The FMA has a department which is wholly dedicated to the analysis of fintech projects; therefore, it has amassed extensive knowledge in this field and operates in a time-efficient manner.

The FMA has also issued a factsheet on virtual currencies such as bitcoin, which was published on 16 February 2018. The factsheet stated that a ‘virtual currency’ is generally defined as a “digital representation of a (cash equivalent) value that is neither issued by a central bank or a public authority”. Further, the factsheet states that these tokens do not constitute fiat currency (legal tender). However, it points 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 on 1 October 2018). Depending on the specific design and function of the tokens, the guidance explains that tokens may constitute financial instruments if they have characteristics of securities or other investments. Further, activities relating to financial instruments are subject to licensing by the FMA, which assesses token offerings (ie, ICOs, token generation events or security token offerings) on a case-by-case basis. The FMA’s administrative practice on token regulation has since developed and the general opinion in Liechtenstein is that a token will follow the underlying (substance over form). Therefore, the following applies:

• If the token represents e-money, it will be classified as e-money.
• If the token represents a financial instrument, the supervisory regulations regarding financial instruments apply.
• If the token represents ownership rights of tangible chattel (right in rem), supervisory regulation does not apply but general civil law is applicable (eg, on the transfer of commodities).

Financial regulation

Which bodies regulate the provision of fintech products and services?

The Financial Market Authority (FMA) is the supervisory authority in the fintech sector, as well as the Liechtenstein financial market in general. The FMA has an entire department solely dedicated to the fielding of fintech-related inquiries.

Which activities trigger a licensing requirement in your jurisdiction?

As Liechtenstein is a member of the European Economic Area (EEA), general EU regulations and directives apply (with an EEA Joint Committee decision required). All banking activities (deposit and loan business), as well as investment services pursuant to Annex I of MiFID II are regulated. In addition, payment services pursuant to the EU Payment Services Directive (2015/2366/EC) (PSD2) and the EU E-money Directive (2009/110/EC) are regulated.

Is consumer lending regulated in your jurisdiction?

Regulation of consumer lending depends on the concrete business model. Taking deposits (in legal tender) and lending this money to others (deposit and lending business) are considered to be banking activities, which are both reserved to licensed banking institutions. If a platform is operated which enables users to provide these kinds of activities to other participants, then this could be an illegal business model. However, it depends on the exact use case. In addition, if loans are given in the form of tokens (which represent either e-money or financial instruments), then the Banking Act is not applicable, as it deals with legal tender (fiat) only.

Are there restrictions on trading loans in the secondary market in your jurisdiction?

If obligations from a debtor to a creditor are traded (factoring), this will constitute a commercial business without the requirement for special financial licences. However, if loans (in the sense of a lending business) are traded (ie, a new creditor is entering the agreement), then this will likely constitute a banking business. This must be differentiated on a case-by-case basis.

Describe the regulatory regime for collective investment schemes and whether fintech companies providing alternative finance products or services would fall within its scope.

The Liechtenstein Collective Investment Scheme (CIS) Regulation is mainly based on the EU Undertakings for the Collective Investment in Transferable Securities (UCITS) Directive (2009/65/EC) and the EU Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) and is therefore harmonised within the European Union and the EEA.

An ‘alternative investment fund’ (AIF) is broadly defined as an undertaking collecting capital in order to invest it pursuant to a defined investment strategy on behalf of the investors.

A ‘UCITS’ refers to an undertaking which raises capital from the public and invests this capital collectively in specific transferable securities on the principle of risk spreading.

Are managers of alternative investment funds regulated?

With funds, it is crucial to distinguish between the investment portfolio and the shares of the fund. Since a fund pursuant to the UCITS regime may invest only in specific types of financial product, a true crypto fund is not feasible pursuant to the EU UCITS Directive and only the shares of the fund may be tokenised. In that sense, a true crypto fund can only be achieved under the AIFMD, as this is primarily a fund-manager regulation, rather than an investment-fund regulation. An AIF mainly targets professional investors.

Hence, a fund pursuant to the AIFMD may invest in a crypto portfolio and its shares may be tokenised. A central aspect of an AIF is the pooling of capital or assets. These criteria must be broadly construed to mean any assets. Thus, a fund may be holding yachts in its portfolio or other commodities – such as tokens.

Describe any specific regulation of peer-to-peer or marketplace lending in your jurisdiction.

No specific regulation applies to peer-to-peer lending. EU legislation applies and it should be analysed if a banking business is conducted.

Describe any specific regulation of crowdfunding in your jurisdiction.

An EU directive on crowdfunding is due to be enacted in the future, which will affect Liechtenstein jurisprudence due to the country’s harmonisation with the European Union as an EEA member state. At present, an initial coin offering (ICO) or a token generation event may be regulated in Liechtenstein if security tokens are being issued. In general, there is no singular act specific to ICOs that regulates crowdfunding, but several laws may apply.

Moreover, although no specific act applies directly to ICOs, the passage of the Blockchain Act will directly apply to token generating events.

Describe any specific regulation of invoice trading in your jurisdiction.

Factoring is not regulated as a financial market activity. Only a commercial business licence is required from the Office of Economic Affairs.

Are payment services regulated in your jurisdiction?

The revised Liechtenstein Payment Service Act, which is based on PSD2, is due to enter into force on 1 October 2019. The E-money Act, which is based on the EU E-money Directive, is also relevant to payment services.

For a variety of business models, the application of PSD2 could trigger the need for a payment services licence.

Are there any laws or regulations introduced to promote competition that require financial institutions to make customer or product data available to third parties?

PSD2 introduces the new roles of a payment initiation service provider and an account information provider. In this regard, banking institutions must – to a certain extent – make customer or product data available to third parties.

Do fintech companies that sell or market insurance products in your jurisdiction need to be regulated?

The Liechtenstein Insurance Act is based on the EU Insurance Distribution Directive (2016/97/EC) and the distribution of insurance products is a regulated activity.

Are there any restrictions on providing credit references or credit information services in your jurisdiction?

Credit references and information services may constitute account information services pursuant to PSD2.

Cross-border regulation

Can regulated activities be passported into your jurisdiction?

Since Liechtenstein is a member of the European Economic Area (EEA), the financial market – along with the licensed financial intermediaries – is generally fully harmonised. This allows passporting (notification) throughout the European Union and the EEA, which enables companies to make use of the freedom of services and the freedom of establishment within the European single market.

Can fintech companies obtain a licence to provide financial services in your jurisdiction without establishing a local presence?

Companies can make use of the freedom of services to provide financial services without establishing a local presence. In contrast to services provided under the freedom of services, when establishing a branch, supervision may be split between the home and target jurisdiction supervisory authority.

Sales and marketing

What restrictions apply to the sales and marketing of financial services and products in your jurisdiction?

The provision of financial services (investment or ancillary services) is regulated under MiFID II. Likewise, the marketing of financial services may be deemed to be an investment service.

Change of control

Describe any rules relating to notification or consent requirements if a regulated business changes control.

Licensed intermediaries and institutions must notify the Financial Market Authority of any qualified holdings (10% or more).

Financial crime

Are fintech companies required by law or regulation to have procedures to combat bribery or money laundering?

The Liechtenstein due diligence regime does not directly apply to token offering in an initial coin offering. Exchange activities with regard to crypto fiat are subject to due diligence duties. However, the involved banking partner is subject to full due diligence duties; therefore, it is necessary to align the due diligence concept with any involved financial intermediaries.

Once the Blockchain Act enters into force, due diligence duties will also apply to these kinds of activities.

Is there regulatory or industry anti-financial crime guidance for fintech companies?

In 2002, 2007 and 2014 the International Monetary Fund (IMF) and MONEYVAL assessed the extent to which the Liechtenstein anti-money laundering/combating the financing of terrorism provisions meet the Financial Action Taskforce (FATF) standards (FATF 40+9 Recommendations). The IMF and MONEYVAL attested to Liechtenstein's high standards in combating money laundering and the financing of terrorism.

The know-your-customer and anti-money laundering requirements are provided by the Liechtenstein Due Diligence Act and Ordinance.

Peer-to-peer and marketplace lending

What are the requirements for executing loan agreements or security agreements? Is there a risk that loan agreements or security agreements entered into on a peer-to-peer or marketplace lending platform will not be enforceable?

Contracts are generally enforceable through the Liechtenstein courts. Enforcement may be difficult if the debtor is domiciled in a foreign jurisdiction.

What steps are required to perfect an assignment of loans originated on a peer-to-peer or marketplace lending platform? What are the implications for the purchaser if the assignment is not perfected? Is it possible to assign these loans without informing the borrower?

Assignment may take place through sign (cession by sign); written form is not required. If the borrower is not informed of the assignment, they may discharge their debt (liberation) by repaying the debt to the assignor (former creditor).

Are securitisation transactions subject to risk retention requirements?

Securitisation transactions (securitisation special purpose vehicles) are not subject to any risk retention requirements. However, such an investment vehicle must be differentiated from collective investment schemes such as an alternative investment fund.

Is a special purpose company used to purchase and securitise peer-to-peer or marketplace loans subject to a duty of confidentiality or data protection laws regarding information relating to the borrowers?

Data protection applies to any personal data pursuant to the EU General Data Protection Regulation. However, there may be a legitimate interest (in order to carry out the duties under the agreement) or even a consent that personal data is being processed. Pursuant to the general doctrine of good faith, information concerning an agreement should generally be treated as confidential.

Artificial intelligence, distributed ledger technology and crypto-assets

Are there rules or regulations governing the use of artificial intelligence, including in relation to robo-advice?

Depending on the designated business plan, robo-advisory or AI may constitute a form of asset management (ancillary securities service).

Ultimately, the regulation surrounding any automated platform depends on the type of token being traded. Bitcoin itself is not a security; however, the government is moving towards classifying initial coin offerings (ICOs) that meet certain requirements as securities, thus subjecting those particular tokens to regulation.

Therefore, any kind of AI applied to the trading of officially recognised securities is subject to regulation by the authorities. Conversely, AI that is applied to the trading of utility or commodity tokens does not require a licence by the Financial Market Authority (FMA). Again, whether the AI is regulated depends on the underlying business case. AI itself is not regulated.

Are there rules or regulations governing the use of distributed ledger technology or blockchains?

On the regulatory front, the government intends to enact the Blockchain Act, which will regulate certain business projects based on trusted technologies (eg, distributed ledger technology and blockchain technology). Through this regulation, the government is aiming to support and monitor use, while regulating it. This ensures assistance, while avoiding uncontrollable growth. Ultimately, this serves to attract crypto projects, while also providing legal certainty.

Are there rules or regulations governing the use of cryptoassets, including digital currencies, digital wallets and e-money?

Virtual currencies were included in the latest amendment of the Due Diligence Act, pursuant to the EU Anti-money Laundering Directive. The due diligence obligations codified in the act serve 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 consist of 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.

‘E-money’ is defined as any electronically or magnetically stored monetary value in the form of a claim against the issuer of electronic money issued against the payment of a sum of money in order to effect payment transactions within the meaning of the Payment Service Act, and which is accepted by natural or legal persons other than the issuer of electronic money. In that sense, there are five characteristics or attributes of e-money:

• having electronic or magnetic monetary value;
• involving a claim against the issuer (central issuance);
• being obtained by money (legal tender and e-money itself);
• being suitable to conduct payments; and
• being accepting by third parties.

Cryptocurrencies such as Bitcoin are mined; therefore, they cannot be classified as e-money, because there is no claim against the issuer. In addition, if tokens (eg, in an ICO) can only be obtained through the use of other cryptocurrencies (non-regulated tokens), then the E-Money Act is not applicable. With regard to the payment function and acceptance by third parties, two major exemptions may be relevant. If only a limited product range or range of services can be obtained with a newly generated and issued token, then an exemption from the e-money regime applies. The same applies if only a restricted service provider network accepts the tokens as a means of payment (this is especially relevant for franchises).

However, it must be noted that the e-money regime is generally not suitable for blockchain and crypto technology. Most of the stablecoins (coins pegged to fiat) should probably be deemed as e-money, which has been implemented incorrectly, since certain restrictions apply to e-money and its distribution (although the territorial scope of the E-Money Directive may not apply to jurisdictions outside the European Union and the European Economic Area). For example, e-money must be exchanged back to fiat at all times at par value (Cp EFTA Court Decision in Case E-9/17 Falkenhahn AG v Liechtenstein FMA) and no or only minimal fees may apply for this service (this is not a criterion for e-money to come into existence, but the re-exchange is merely the logical and legal consequence of e-money). E-money also cannot be used for savings purposes and no interest may be granted. In addition, problems may arise with token holders storing their e-money token on a wallet to which they have access to the private key. Lastly, the money collected in exchange for e-money must be placed in deposit-protected accounts, which means that – contrary to popular belief – these funds may not be used by the entity which collected them for their operating business.

With regard to the variety of business models in the sector, PSD2 may also apply; therefore, it may be necessary to apply for a payment service licence.

Are there rules or regulations governing the operation of digital currency exchanges or brokerages?

Since there are various forms of crypto exchanges, varying regulations apply in certain cases. Exchanges which match the buying and selling interests (matched principal trading; multilateral) with regard to utility tokens against fiat and/or cryptocurrency are deemed to be unregulated and require only a trade licence from the Office of Economic Affairs to conduct an operating business. However, the settlement in fiat is considered to be a regulated payment service (especially since the commercial broker exemption is no longer applicable under PSD2 when acting both on the buyer and seller side).

However, if these tokens are traded against the own book for fiat payments, it may be deemed to be a so-called ‘Wechselstube’ (exchange office; bilateral) pursuant to the Liechtenstein Due Diligence Act. This is not a licensed activity, but rather the FMA must be notified of this kind of undertaking and due diligence duties apply. If only crypto/crypto pairs are traded against the own order book, this is again deemed to be an unregulated business activity. Under the Token and Trusted Technologies Law, this type of exchange must be registered with the FMA if payment tokens are being traded.

There are also security token exchanges. These kinds of exchange are fully regulated pursuant to MiFID II and require an investment firm with a multilateral trading facility (MTF) or an organised trading facility (OTF). The main differences between an MTF and an OTF are that all financial instruments may be traded on an MTF, whereas only certain debt instruments may be traded on an OTF (the OTF may also act on a bilateral basis regarding government bonds). Therefore, an MTF has participants while an OTF has customers (also due to the discretionary execution). Another difference between the two trading facilities is that an OTF allows discretionary trading and matching rules, compared to the non-discretionary nature of an MTF.

Lastly, it is possible to set up fully decentralised peer-to-peer security exchanges without any regulation requirements. With a decentralised network operating an exchange, there is no entity to be regulated and the exchange itself does not fall under the definition of an MTF or OTF (trading venues). Depending on the services rendered in connection with such a peer-to-peer exchange, certain licence requirements may apply. In any event, prospectus requirements must be adhered to. Both matching and settlement are usually carried out in a decentralised manner on such exchanges and associated aspects, such as the order book and custodial or escrow services (smart contracts), are also decentralised.

Are there rules or regulations governing initial coin offerings (ICOs) or token generation events?

The rules and regulations governing ICOs or token generation events depend on the token being offered. If the token offered constitutes a financial instrument or e-money, the respective regulation applies (eg, it is necessary to apply for an e-money licence or to prepare a securities prospectus). Under the Blockchain Act, the issuer of tokens will need to register with the FMA.

Data protection and cybersecurity

What rules and regulations govern the processing and transfer (domestic and cross-border) of data relating to fintech products and services?

In general, the EU General Data Protection Regulation (GDPR) is directly applicable in Liechtenstein. In addition, the Liechtenstein Data Protection Act, which has undergone a complete revision in view of the GDPR, covers regulations based on enabling clauses and the implementation requirements under the GDPR. There is no specific regulation for fintech companies but any processing of personal data is subject to the GDPR and the Liechtenstein Data Protection Act. If the prerequisites for processing personal data are fulfilled (eg, processing personal data is necessary to carry out duties under an agreement or imposed by the law, or for the purposes of legitimate interests of the processor or a third party) or if the concerned person’s consent to process personal data is given, the processing is generally allowed. In connection with processing personal data, the processor is bound to a duty of information towards the individual concerned, who has a right to know how, by whom, in what way and for how long their data is processed. It may be necessary to appoint a data protection officer and prepare internal data protection concepts in order to implement the right to be forgotten, the right to information, the right to data portability and procedures in case of a data breach, among other things. It may also be necessary to conclude a data processing contract with service providers. Lastly, processing data in countries which do not have the same level of data protection is generally prohibited. The relevant assessment on whether the same level of data protection applies is provided in an adequacy decision by the European Commission.

What cybersecurity regulations or standards apply to fintech businesses?

There are no particular cybersecurity regulations applicable to fintech businesses. Similar to other ventures, fintech businesses must be GDPR compliant, as well as compliant with the due diligence regime if they are subject to it (if not, it is still recommended to coordinate due diligence concepts with involved banking partners or other intermediaries).

Outsourcing and cloud computing

Are there legal requirements or regulatory guidance with respect to the outsourcing by a financial services company of a material aspect of its business?

Key functions (personnel-wise) may not be outsourced. It is possible to outsource due diligence, but the financial intermediary will continue to be responsible for the upkeep of the necessary compliance standards.

Are there legal requirements or regulatory guidance with respect to the use of cloud computing in the financial services industry?

There are no specific regulations on cloud computing. The general provisions – in particular, the EU General Data Protection Regulation – must be adhered to.

Intellectual property rights

Which intellectual property rights are available to protect software, and how do you obtain those rights?

The Liechtenstein Copyright Act provides a wide range of IP protections (eg, copyright protection, trademark protection and patents). Computer programs or code may be copyrighted in certain circumstances, which may be particularly interesting for developers of a blockchain or smart contracts.

Who owns new intellectual property developed by an employee during the course of employment? Do the same rules apply to new intellectual property developed by contractors or consultants?

The ownership of intellectual property is subject to the employment agreement.

Are there any restrictions on a joint owner of intellectual property’s right to use, license, charge or assign its right in intellectual property?

Aside from any agreements providing otherwise, joint owners of intellectual property can use a work only with every other joint owner’s consent. Denial of consent must not go against good faith (paragraph 3, Article 7 of the Copyright Act). In case of copyright infringement, each joint owner can individually assert a claim against the party committing the infringement; however, the claim for remedy must be paid to all joint owners (paragraph 4, Article 7 of the Copyright Act).

How are trade secrets protected? Are trade secrets kept confidential during court proceedings?

Employees are prohibited from sharing or exploiting trade secrets of which they acquire knowledge while being employed. If it is necessary to protect the employer’s legitimate interests, the employee remains bound to secrecy even after the employment contract is terminated. The confidentiality of other information is subject to the employment agreement.

Trade secrets can be kept confidential in civil court proceedings. If the presentation of a document would lead to a breach of a trade secret, the document does not have to be presented. Likewise, if, during a witness statement, answering a question would reveal a trade secret, the witness can refuse to answer the question.

What intellectual property rights are available to protect branding and how do you obtain those rights? How can fintech businesses ensure they do not infringe existing brands?

According to Liechtenstein law, branding and trademarks must be registered for the corresponding rights to emerge. The rights include the exclusive right to use the branding or trademark to denote the holder’s goods or services and the right to dispose of it. Thus, others can be prohibited from using the branding or trademark for their own goods or services. The registration of a brand or trademark is valid for 10 years and can be extended by filing a corresponding application. Further, branding and trademarks can also be registered on an EU level; registrations in the EU trademark registry are valid in all EU member states.

There is no method that is specifically designed for fintech companies to ensure that existing brands are not infringed. The most reliable way to avoid infringement is to check the national and EU trademark registries regularly during the initiation process in order to determine whether the envisioned brand has already been registered.

What remedies are available to individuals or companies whose intellectual property rights have been infringed?

Available remedies include:

• a declaratory action regarding the breach of IP rights;
• an injunction regarding an imminent breach;
• a claim for remedying a present breach; and
• a claim for damages and reparation; if applicable, compensation for pain and suffering, as well as compensation for lost profits, can also be asserted.

Competition

Are there any specific competition issues that exist with respect to fintech companies in your jurisdiction?

No competition issues are known.

Tax

Are there any tax incentives available for fintech companies and investors to encourage innovation and investment in the fintech sector in your jurisdiction?

As a member of the European Economic Area, Liechtenstein is also subject to the prohibition of state aid. For this reason, specific tax concessions for the fintech sector are prohibited.

Overall, Liechtenstein is attractive for innovative business models due to its liberal tax law and the direct exchange with the tax administration.

Are there any new or proposed tax laws or guidance that could significantly increase tax or administrative costs for fintech companies in your jurisdiction?

No.

Immigration

What immigration schemes are available for fintech businesses to recruit skilled staff from abroad? Are there any special regimes specific to the technology or financial sectors?

Immigration to Liechtenstein is generally restricted. However, members of the European Union or European Economic Area can locate near the Liechtenstein border in Switzerland, Austria or Germany. In addition, a short-term permit can generally be granted for up to 12 months. Further, there are exceptions from this restrictive regime for highly skilled individuals.

Since the fintech area generally requires specialist knowledge, there is potential to have these work permits granted in order to promote the growth of fintech businesses within the country.

In addition, in the event that a person is unable to achieve residency in Liechtenstein, they can seek residency in Switzerland, Austria or Germany and then be granted a cross-border commuter card for the purposes of employment within the country.

Update and trends

Are there any other current developments or emerging trends to note?

In the past year, the market has shifted from a focus on initial coin offerings for utility tokens to a focus on security token offerings and the goal of creating crypto exchanges with the ability to support the secondary market for security tokens.

Law stated date

Give the date on which the above content is accurate.

12 July 2019.