Cryptocurrencies, DLT and Crypto Assets – the Road to Regulatory Recognition in Europe

With Bitcoin, a new type of technology was born in 2008 when Satoshi Nakamoto released the white paper for a new cash payment system (Nakamoto 2008), which effectively invented blockchain technology. By 2015 the technology already gained a lot of interest among startups, financial institutions, and industrial enterprises. Besides Bitcoin, many other crypto assets emerged with various design approaches such as stablecoins, utility tokens, security tokens, decentralized finance (DeFi), and non-fungible tokens (NFTs). Many of these tokens have an identifiable issuer to whom existing regulatory frameworks could potentially apply. However, other types of assets that are based on fully decentralized protocols are governed entirely by technology and either do not have an issuer (like in the case of Bitcoin) or the initiators designed the technology in an ‘issuerless’ way - and have no relation to any ‘real-world asset’. It is the latter class of assets that are truly new and that have recently attracted increasing attention from regulatory authorities, international organizations, standard-setting bodies, and the like. On the part of regulators and policymakers, interest in and the activity surrounding cryptocurrencies, crypto assets, and stablecoins peaked in 2019 so far. Of the several key regulators and policymakers at the supra-national level, nearly all issued a report, warning, study, or recommendations on some aspect of blockchain technology in financial markets. This spike in interest is related to the increasing business activity in this area and growing interest of investors and consumers. The exponential rise in the price of Bitcoin also attracted the interest of a wider audience (Edwards et al. 2019). The increasing business activity always preceded the actions of regulators and policymakers, thus rendering the activities of the latter a ‘reaction’ to the market developments. According to the Financial Stability Board (FSB), crypto assets reached an estimated total market capitalization of $830 billion on January 8, 2018, before falling sharply in subsequent months (Financial Stability Board 2018). While the global value of the crypto assets market is still relatively small compared to the entire financial system, its absolute value and daily transaction volume are substantial, and its rapid development continues, gaining increasing market acceptance (Basel Committee on Banking Supervision 2019). This paper seeks to analyze regulators’ and policymakers’ efforts to understand and develop an adequate regulatory approach to crypto assets, tokens, and the distributed ledger technology (DLT) in general. After several years of innovation in the space of decentralized technologies, several principles became clear on how to treat both issuer-based tokens and issuerless tokens. However, when regulators and policymakers tried at first to understand these new decentralized technologies and the assets they enable, it was not clear to them from the beginning how to treat assets based on this new technology. Only recently has it been possible to identify best regulatory practices and to disentangle good approaches to regulation from the ‘noise’ of warnings, recommendations, or studies. Liechtenstein has adopted a remarkable perspective on and vision for crypto assets and tokens by creating a set of abstract definitions and models and applying them in their bespoke regulatory approach. The Liechtenstein Token Act has therefore inspired other policymakers and subsequent regulatory actions. The remainder of this paper is structured as follows. First, we seek to present the history of ‘opinions’' on behalf of regulatory bodies and policymakers over the last years. These opinions often lacked clear definitions, understanding, and models but also included valuable contributions. In the next section, we present key definitions and models of the Liechtenstein Token Act and describe how these have been included in Liechtenstein’s national framework to build a solid basis for the emerging token economy. Thereafter, we describe how the European Union’s approach to regulate crypto assets - the Markets in Crypto Assets Regulation (MiCA) - tackles crypto assets and tokens, and how it relates to the Liechtenstein Token Act. In the subsequent section, we review a variety of regulatory approaches and strategies. Finally, we offer concluding remarks.