We’ve seen the power of digitalisation in action for decades already: The invention and dissemination of the computer, the internet, electronic communications, mobile devices, and so on have had an enormous impact on the realities of our lives and on economic processes. The exponential increase in computing power and the availability of scalable and inexpensive data storage have accelerated the speed of this development even further.
Financial services are of course not unaffected by this development. Digitalisation has always had a strong influence on financial services, creating new and interesting opportunities. The last few decades have also revealed a new dimension, in which even the traditional business models in the financial sector are being disrupted. Digitalisation allows the value chain in the financial market to be fragmented in ways that were previously unknown. Blockchain is one of the technologies playing an important role in this development.
Even though innovation is primarily the responsibility of private businesses, this development also indirectly concerns the State and has a major impact on the business location. It is the responsibility of the State to guarantee the highest possible degree of legal certainty for private individuals and businesses, as well as to create attractive conditions that facilitate good business development, which in turn contributes to creating prosperity and attractive jobs.
“The speed of innovation and the degree of disruption are expected to continue to increase, and the financial sector will continue to undergo major changes over the coming decades.”
In light of the innovative developments in the financial sector, there are now two fundamental challenges:
1) Is it at all possible to implement the innovative business model or service within the framework of existing laws? If, for example, a bank wants to establish a new customer relationship using a completely digital process, this is possible only if all steps, such as the legally binding signature on a contract, are legally permissible even if they are purely digital.
2) How can a State create legal certainty at all in such a dynamic, innovative environment? By their very nature, laws and ordinances refer to the way the financial system was at least three to four years, but often even ten to twenty years ago. In a highly regulated system such as the financial market, any innovation inevitably collides with this regulatory system. Several scenarios are possible: For example, a business model or a service may be designed in such a new and innovative way that it is not covered by the financial market regulation currently in force. This may reveal unintentional regulatory gaps. On the other hand, a service may turn out not to be implementable within the framework of the laws in force, or it can be implemented only with disproportionate effort. This might impede or even prevent the implementation of a – potentially very useful – innovation.
The Office for Financial Market Innovation (SFI) was set up by the Liechtenstein Government to support innovative businesses in meeting these challenges. Its responsibilities include innovations in the framework provided by the State. This means that a company with a proposal to improve the business conditions can present it to the SFI by way of a very lean process. The SFI then prepares a basis for the Prime Minister or the Government to make a decision. This governmental innovation process has established itself successfully since 2015, leading to the implementation of many innovative ideas and the continuous improvement of the business conditions in Liechtenstein. The process is open to all companies and is in principle a crowdsourcing of new ideas for the further development of the financial centre. This alone is already a unique innovation worldwide. The process helps to ensure that obsolete laws or other business conditions that inhibit innovation can be specifically identified and improved, facilitating a comparatively rapid response to dynamic market developments.
Another important task of the SFI is to accompany innovative companies in the early stages of their development process. When a company is planning an innovative new business model or service, the feasibility often depends on specific legal issues, which in turn are influenced by official practice or the interpretation of a law. Normally, a company approaches the public authorities at a relatively late stage, generally when the business model is already fully conceived and a licence is needed. If it then turns out, for example, that a different kind of licence is required, or that implementation is not possible in compliance with the law, the entire project and business model are often called into question and must be redone, with considerable investment of time and cost.
The SFI accompanies the businesses in this innovation process and helps to clarify possible questions at an early stage. This reduces the regulatory risk and creates greater legal certainty and efficiency in developing business models.
This service provided by the SFI as a central point of contact for such questions is open to all companies, including those that wish to establish themselves in Liechtenstein and are seeking information on the governmental and regulatory framework. The SFI then coordinates the internal administrative clarifications and responses to questions. This is especially helpful if several public authorities, such as the Financial Market Authority, the Fiscal Authority, the Office of Justice, etc., are simultaneously concerned.
In addition to the innovation processes and support services that have been created, knowledge of new technologies and a deeply rooted culture of innovation among public authorities are especially important. For this reason, the SFI also cultivates an innovation ecosystem and the exchange of knowledge among market participants, public authorities, and academia.
All financial centres worldwide are currently facing similar challenges. A financial centre will be able to assert itself in future only if new ideas and innovations can be implemented with legal certainty. The speed of innovation and the degree of disruption are expected to continue to increase, and the financial sector will continue to undergo major changes over the coming decades. Liechtenstein has set the course to ensure the highest possible degree of legal certainty for innovative businesses and a continuous, dynamic improvement of the governmental framework.
Thomas Dünser is Head of Office for Financial Market Innovation of the Liechtenstein Government and has led the Blockchain Regulation Project (TVTG). He has been working for the Government for more than seven years. Before that he held leading positions in banking, industry and consulting. The Office for Financial Market Innovation supports companies close to the financial market in questions concerning the governmental framework and innovation.