Virtual currencies are a reality, but large countries have taken a conservative stance towards them, and have not legislated on this issue in their legal systems. Small countries, on the other hand, seeking a source of revenue, are trying to specialise to attract representatives of the world of new technologies and cryptocurrencies. The legislative initiatives taken recently by Malta and Liechtenstein are an example.
Brief remarks on new technologies and lack of regulation
Distributed Ledger Technology, which is the technology behind cryptocurrencies, also referred to as blockchain, is something relatively new in the legal world. Because cryptocurrencies are not issued and controlled by issuing banks, at the moment there are no specific laws at national or international level.
The European Central Bank also has no plans to introduce legislation in the near future to regulate the issuance and monitoring of cryptocurrencies or trading in cryptocurrencies.
In its February 2015 report on “Virtual Currency Schemes – a further analysis”, the ECB defines a virtual currency as “a digital representation of value, not issued by a central bank, credit institution, or e-money institution, which in some circumstances can be used as an alternative to money”. A virtual currency can be transferred, stored, or sold electronically. There are currently more than 600 different virtual currency systems. The most popular is Bitcoin.
Even as early as 2018, the German BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) and Luxembourg CSSF (Commision de Surveillance du Secteur Financier) advised users against purchasing cryptocurrencies, saying that a warning had been issued by a joint committee of three European regulators, the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA), as well as by the International Organisation of Securities Commissions (IOSCO). These institutions see user-consumers as being exposed to various kinds of risks relating to virtual currencies and Initial Coin Offerings (ICOs). At the moment, these risks cannot be effectively eliminated.
Meanwhile, on 9 January 2019, the EBA and ESMA made recommendations to the European Commission that unified legislation be drawn up on virtual currencies and ICOs at EU level, because having different national laws within the EU could lead to mistreatment of both investors and consumers.
Individual European countries have already thought of regulating this sector in a way necessary to attract representatives of the trusted technologies and cryptocurrency world. In addition to favourable tax laws, legal certainty is the determining factor when investors are considering where to locate cryptocurrency investment projects.
Malta as a pioneer in the EU
The first national jurisdiction in the EU to regulate the cryptocurrency sector was Malta. This small country in the Mediterranean was the first in the world to make the effort to draft legislation in this area.
Malta is a former British colony that was granted independence in September 1964. Due to its history, Malta has a common law system modelled on the laws of England and Wales.
Apart from the local Maltese language, the country’s other official language is English. All acts of law are issued in two languages, and the versions in both languages are equally binding. This helps foreign investors conduct business.
Public authorities that specialise and are designed to accommodate digital services, a modern financial services system, and competitive tax laws demonstrate the effectiveness of the Maltese authorities. By these means, Malta continually proves its commercial potential and is establishing itself as a promising business centre concentrating capital of foreign financial magnates. The Maltese authorities have major expectations with respect to transfer of capital of companies registered in the United Kingdom and Gibraltar (a British overseas territory on the European continent, which under Art. 355(3) of the TFEU is part of the EU). As Brexit proceeds, which in addition to the UK affects Gibraltar, as an overseas territory1, companies based there will probably relocate to Malta, which is a member of the EU.
Three laws came into force in Malta on 1 November 2018, the Virtual Financial Assets Act (VFA Act), the Malta Digital Innovation Authority Act (MDIA Act), and the Innovative Technology Arrangements and Services Act (ITAS Act).
- VFA Act
The Virtual Financial Assets Act regulates issues such as ICOs, when an issuer issues for the first time a cryptographic digital medium of exchange, unit of account, and tokens as store of value.
The Maltese act comprises eleven chapters, containing a total of 62 articles.
- MDIA Act
The Malta Digital Innovation Authority Act created a public authority called the Malta Digital Innovation Authority, laying down that body’s powers and duties. There are 61 articles in the act, and thus it is no less precise than the VFA Act described above.
- ITAS Act
The Innovative Technology Arrangements and Services Act comprises 20 articles and consolidates the various methods in which the Malta Digital Innovation Authority can confirm that “innovative technological solutions” and “innovative technological services” are lawful in the Republic of Malta.
An analysis of these three acts reveals that in Malta the requirements for placing services based on new DLT and blockchain technologies on the market have been consolidated in the law. For the time being, the other EU member states do not have laws of this kind. Firms providing cryptocurrency and blockchain services can therefore be expected to be keen to base their operations in Malta.
Importantly, the Maltese authorities have the power to fine service providers who violate the laws up to 15 million euros.
Also, instead of the term “token”, the Maltese act uses the term “DLT asset”. It defines this term as a “virtual token, virtual financial assets, e-money, or a financial instrument” established using DLT.
Meanwhile, there are no laws regulating disposal of DLT assets or the legal classification of disposal of that kind. This is an essential difference between the Maltese act, which derives from the Anglo-Saxon legal tradition, and the Liechtenstein act.
Liechtenstein plans to pass a Trusted Technologies Act
The Principality of Liechtenstein has also realised that this sector needs to be properly regulated to ensure legal certainty and attract investment to this small EEA country in the Alps.
The time limit for consultations on the proposal for the new Trusted Technologies Act expired at the end of November 2018. The bill was published by the government of the Principality of Liechtenstein in August 2018, and was intended to provide the required legal certainty and security for businesses in the Principality of Liechtenstein, and protect customers using financial services of this kind offered by businesses in Liechtenstein.
The government of the Principality of Liechtenstein has stressed that although blockchain technology now exists all over the world, there is no legal framework that guarantees the requisite legal certainty and ensures that trading takes place safely.
This is another reason why the government of the Principality of Liechtenstein has chosen not only to legislate on trading in cryptocurrencies and ICOs in the new act, but also to create the legal foundations for even broader trading in tokens (virtual property rights).
Unlike Malta, which is a common law country, the Principality of Liechtenstein has a civil law system, meaning that legislation is adopted differently in Liechtenstein than in Malta. The proposed Liechtenstein bill is called the “Gesetz über auf vertrauenswürdigen Technologien beruhende Transaktionssysteme” (Trusted Technologies Act) and comprises seven chapters, containing in total 53 articles.
- Laws on cases of theft and reversal of transactions
Liechtenstein has pointed out that despite blockchain being highly secure, the assets being traded can be stolen. The main target in an attack is the private key stored by the asset owner itself or by the appropriate service providers in the form of wallets. In the past, hackers have been able to gain access to these wallets and steal assets worth millions.
The question is how theft of this kind should be regulated and what sanctions should be in place. If a perpetrator is identified and caught, there is also the question of annulling the transaction performed by the thief. This is because it is not possible to manipulate blockchain, which means that a transaction cannot be annulled from a technical point of view. If the perpetrator transferred the wallet in question to a third party who acts in good faith, further legal issues arise that need to legislated for accordingly.
- Definition of a token
One key issue that arises under the new act is classification of tokens. The various ways in which tokens can be used extends beyond that of the classic financial instruments on the financial market at the moment. This means that legal certainty has to be assured by including a clear definition of a token in the act. Liechtenstein has decided to do this not only so that issues concerning trading in virtual currencies and ICOs are regulated. It also wishes to establish the legal groundwork for regulating a much broader range of issues relating to rapidly developing blockchain technology. The government of Liechtenstein does not want to legislate for each subsequent manner of use of tokens that emerges.
Under the act, a token is considered a digital version of all of the types of rights in the trusted technologies system. In other words, a token is a kind of digital container in which certain rights are kept or materialise.
The Liechtenstein government has stressed in the notes on the new act that using legal definitions used in property law is ill-suited to tokens, because they are digital information that is not material in form. This led to ownership title to tokens and the related legal consequences being regulated accordingly in the Trusted Technologies Act, and not in the existing laws.
- Abstraction principle
As a rule, a right is disposed of to fulfil the relevant contractual obligation (for example under a sale agreement). The obligatory elements of a legal transaction are subject to general effectiveness prerequisites (the legal transaction cannot be unlawful, the principles of community life have to be observed, etc.). The legal transaction can be called into doubt and contested if a declaration of intent is defective (due to an error, falsehood, etc.).
The relationship between the obligatory elements and disposal-related elements of a legal transaction can be regulated in one of two ways. In one, disposal of a right will simply have no legal consequences if there is no valid obligation (causality known in the legal systems of Switzerland and Austria, and also in Poland). In the other, disposal of a right continues to be valid if there is a defect or (as the case may be) a non-existent obligation, and the effects of disposal of the right are countered due to applicability of laws on unjust enrichment (the abstraction principle in German law).
The irreversible nature of disposal transactions that use trusted technology systems has led lawmakers in Liechtenstein to select a legal solution based on the abstraction principle.
New technologies and virtual currencies do not recognise geographic boundaries. They are an element of reality and even now have a noticeable impact on life.
For this reason, measures aimed at regulating this issue in particular jurisdictions and at making trade in cryptocurrencies as secure as possible are a good thing.
The legal solutions devised by these two European pioneers will probably facilitate work to draw up legislation that is currently absent at the international law and EU law level.
It is likely that in the first quarter of 2019 the Liechtenstein bill will be passed and subsequently take effect.
Time will tell whether Valetta or Vaduz will become the European centre for blockchain and cryptocurrency operations and ICOs.
Harald Marschner, attorney-at-law, Rechtsanwalt, Dispute Resolution and Arbitration practice, Wardyński & Partners
1 On 1 January 2018 the concise “Financial Services (Distributed Ledger Technology Providers) Regulations 2017” came into force. This lays down nine principles, but it is hard to describe it as an act, and it does not cover ICOs.