Building blocks

Gérard Pogorel speaks to Thomas Dünser, the man who led Liechtenstein’s pioneering Blockchain Act, on how he is shaping a brave new financial world


Liechtenstein has long been on the cutting edge of financial innovation, no more so than when it became the first country in the world to introduce comprehensive legal bases for applications of blockchain technology. Gérard Pogorel speaks to Thomas Dünser, the man who led Liechtenstein’s pioneering Blockchain Act, on how he is shaping a brave new financial world.

Liechtenstein’s financial services sector is a major factor in the country’s economic strength. It has one of the three highest GDPs per capita in the world and more registered companies than citizens. Low corporate tax rates have enticed foreign companies and investors. It is known for its financial innovation – so staying relevant and looking forward is especially important. For now, Liechtenstein is ahead of the curve on regulating DLT technology. For the principality to fully take off into the digital future, it needs other countries and blocs like the EU to catch up, as the development of the market is hindered by a lack of regulation in other countries. Only when other countries have followed suit will all these new opportunities for innovation, accessibility and fluidity be unlocked.

Leading the charge

Dr Thomas Dünser is Director of Liechtenstein’s Office for Financial Centre Innovation (SFI) which supports and advises financial businesses on questions concerning governmental innovation policies and frameworks. The SFI also helps shape legislative structures. Previously, as a senior advisor to prime minister Adrian Hasler, he was responsible for the development of Liechtenstein’s Blockchain Act. Prior to his position at the Ministry for General Government Affairs and Finance, he held leading positions in banking and consulting. For Dünser, the advantages of decentralising the financial system are obvious. Minimising the input of intermediaries like banks would reduce costs, increase stability and economic growth and expand accessibility to financial markets. By introducing regulation early on, he expects that Liechtenstein will become a role model for other countries. Professor Gérard Pogorel interviewed him.

Gérard Pogorel: What do you believe to be the benefits of decentralised finance (DeFi)?

Thomas Dünser: The current financial model requires financial intermediaries like banks to safely perform digital transfers of money and financial instruments. Due to the inherent risks that come with multiple bodies being involved, intermediaries must be extensively regulated. This is expensive, meaning they can only be used for restricted applications. 

Decentralised finance (DeFi) is the “disintermediation” of the transaction system. A crucial component of DeFi is distributed ledger technology (DLT) which makes it possible to safely transfer digital money or financial instruments without centralised intermediaries. Other services including custody, payments, exchanges, lending and asset management can also be provided in a decentralised way. Minimising the input of intermediaries like banks would reduce costs, increase stability and economic growth and expand accessibility to financial markets.

GP: What has Liechtenstein done so far to innovate in financial markets – and what regulation has it introduced?

TD: Liechtenstein began installing a so-called Innovation Framework as early as 2015. This entailed an update of the legal system, a new regulatory laboratory at the Financial Market Authority and an Office for Financial Market Innovation. Based on this, the government has established direct contact with innovative companies and can track new applications at an early stage.

The country’s pioneering TVTG (aka Blockchain Act), which came into force in January 2020, set out a new legal foundation for a token economy. The TVTG is designed to fill all the gaps in the regulation of the financial markets and, specifically, to regulate the “token economy”. It outlines a legal process by which nearly all physical items and rights can become “tokenised”. 

GP: Tokenisation is an important example of DLT for Liechtenstein. Can you explain what tokens are in this context and what we mean by the token economy?

TD: An essential innovation of the modern economy is the concept of securities: by putting the shareholder rights of a company on a piece of paper (a security), they can be transferred far more easily allowing, for example, stock exchanges to arise. With DLT, a similar step is now possible with almost every other asset or item; it is very easy and cost efficient to create a secure and transferrable digital representation of an asset and to transfer this representation. 

Tokens are digital representations of assets and items. This could be a car, a house or a right that relates to an asset such as car insurance. Tokens can be owned and transferred just like physical items. They are more flexible than certificates and paper-based securities and can be sold on the internet peer to peer or actively traded on a sophisticated exchange.

Customers can also sign contracts digitally. For example, if a car rental is secured in this way, a customer can gain access to vehicles digitally, thereby avoiding the need to wait in long queues at rental outlets. The way services are provided will be overhauled. These applications of DLT within the real economy are often called the “token economy”. 

GP: Are there potential risks with these new technologies? 

TD: Expanding accessibility to the whole investment universe does not come risk free. One of my concerns is investor protection. Although there is the potential for the problems experienced in the 2008 financial crisis – largely that the same assets were securitised multiple times – to be solved with tokenisation, this is dependent on assets being classified correctly. If tokenised assets are incorrect or mislabelled, investors can be misled.

This is why government intervention is vital. Laws must introduce the same investor protection measures for all tokens, or measures could be taken to improve and expand access to financial education. Another option is providing individuals with access to DeFi tools for risk management.

Liechtenstein has established a service provider regulation with a registration obligation and rules for issuing a basic information sheet in case of the public offering of tokens. This addresses the risks surrounding tokenisation because it triggers a similar liability like the prospectus regulation of the financial market. The application of the Due Diligence Act has also been clarified to prevent money laundering, terrorist finance and the circumvention of sanctions.

GP: What do you think the response has been to Liechtenstein’s innovations? 

TD: Liechtenstein’s introduction of the token as a new legal object is unique, so the regulation of blockchain service providers was well received by many entrepreneurs and has set a foundation of trust on which to thrive. Equally, regulation inevitably leads to more hurdles and increased administrative costs. Those entrepreneurs who prefer to work without regulation have thus chosen other jurisdictions to work in. 

As there are thousands of different applications, every application has to be explored by pioneers and this usually takes a bit of time, but the speed of development is immense. Liechtenstein is determined to maintain a balanced approach blending innovation and regulation.

GP: What are the current most significant examples of DeFi’s application – and what benefits do they bring? 

TD: Digital payments is one key area. It is now possible to transfer money around the world within seconds at very low cost. For countries with a less elaborate banking sector and individuals who lack access to a traditional bank account, this is of huge value. A small company in Kenya may find it prohibitively costly to borrow money in the London stock market, but by disintermediating the process, borrowers and lenders could conduct business through an app.

Alternative financing for start-ups is another. New projects and SMEs can find it nearly impossible to gain access to international markets. But using digital ledger technology (DLT), any person with access to the internet and a similar level of security can fund a project or business. Such transfers cost little. They provide a new variant of the Initial Public Offering (IPO) in forms like the Initial Coin Offering (ICO) and Security Token Offering (STO).

Companies have implemented security tokens opening up the investment sector. Shares, art, wine and real estate are being tokenised, opening up these areas that were previously only accessible to closed investor groups. With tokenisation, it is possible to create fragments of the property right, so that investment in such assets is open to many more people than today. This supports diversification so that people with smaller net wealth can have access to a risk-diversified portfolio.

DLT is also used in exchanges. As there are more than 7,000 coins or cryptocurrencies currently issued, these can be actively traded on both centralised or decentralised exchanges. This makes the lending process easier, inflates prices and lowers borrowing costs.

GP: Is Liechtenstein devising any ways to counteract the environmental damage done by new digital technologies? 

TD: We are at the beginning of an intensive technological development. The first cars were very different, in terms of energy consumption, to current models. We can expect the software to be altered to generally require less computational energy. In fact, new blockchain generations with significantly lower energy consumption have already been introduced.

GP: What do you see as the future of DeFi? 

TD: It holds the key to unlocking a new, safer and more efficient transaction infrastructure – and boosting innovation in the financial services sector. The involvement of other countries and blocs is essential. As a member of the European Economic Area, the European Union’s financial market regulation applies in Liechtenstein so the TVTG, rather than acting as a full market regulation, is intended to regulate the token economy and catch any existing gaps in the current regulation. 

The EU Commission’s Digital Finance Package, adopted in September 2020, included a Markets in Crypto Assets Regulation (MiCA) and a solution to facilitate the secondary trading of financial instrument tokens. MiCA is largely a complementary regulation to the TVTG. Liechtenstein fully supports the EU’s advancements and believes it will harness opportunities for future financial markets to develop.

I predict that DeFi will seem normal and be used by the masses and I expect that tokens will soon be an invisible part of almost every economic transaction.  

20th December 2021