LBChain is the world’s first blockchain-based sandbox developed by a financial market regulator, the Bank of Lithuania. The platform was developed through a pre-commercial procurement and is now opening up to international start-ups as well as financial and FinTech companies to test their solutions on the LBChain. The project combines the creation of innovative blockchain-based solutions with supporting their application in the financial sector as well as improving the quality of regulatory requirements and attracting foreign direct investment.

The LBChain project is divided into three stages. After the first design stage, the Bank of Lithuania selected three service providers: Deloitte (IE), IBM (PL) and Tieto (LT). During the second development stage, the three service providers will be working on two tasks. First, they will join forces with the selected FinTech companies to create the LBChain platform.

Second, together with the Bank of Lithuania, they will consult the FinTech companies on developing a specific blockchain-based product that would meet their needs. The FinTech companies will then be able to test this product within the LBChain environment in the third stage. The LBChain pre-commercial procurement receives assistance from the European Structural and Investment Funds and is assisted by the European Assistance For Innovation Procurement.

It is intended for existing and potential financial market participants and entities intending to organise ICOs or offer this type of products to Lithuanian investors.

The term "virtual currency", which was used in the previous version of the position, has been substituted with "virtual asset".

The bank has also clarified how and when virtual assets may be used for payment as well as specified “when and how financial market participants may set up investment funds for investment in virtual assets”.

However, the underlying principles of the position have remained unchanged.

In particular, according to the document, financial market participants should not participate in activities or provide services associated with virtual assets and their activities should be clearly separated from activities associated with virtual assets.

They should also provide "appropriate and not misleading" communication about the nature of services they provide.

The bank clarified that financial market participants are still prohibited from receiving payments in virtual assets, but the position provides for the possibility of using third-party services.

"Payments to a financial market participant’s account can be made only in traditional currencies, thus no additional risks are entailed," the position paper stated.

In order to ensure equal operating conditions for financial market participants, the bank allows the creation of investment funds for professional investors to invest in virtual assets.

The bank said that such funds are "prevalent" in other countries, and "having completed the notification process", their investment units may be distributed in Lithuania.

According to the document, financial market participants cannot accept virtual assets with the obligation to repay them with or without interest and they also cannot issue virtual asset loans or accept virtual assets as collateral (unless the virtual asset tokens are considered to be securities).

Further, the document stipulates that financial market participants should comply with money laundering and terrorist financing (ML/TF) prevention and take appropriate measures to manage ML/TF risks.

On ICOs, the bank pointed out that although ICOs are not regulated by specific legislation, in some cases, such activity may be subject to other regulatory requirements, such as the laws on securities, crowdfunding, collective investment undertakings, investment services or secondary market.

The initial position was issued in January 2014 and warned consumers of the potential risks posed by virtual currencies.

A FAQs document accompanies the position paper.

In the guidelines, the Lithuanian Minister of Finance Vilius Šapoka pointed out the country's positive attitude toward the "brave new crypto economy", in a bid to encourage market participants to "innovate and create" in Lithuania.

The guidelines specify that if tokens grant various rights to their owners, including the right to participate in the company management process or receive part of the company’s profit, then "the probability exist that [the tokens] will be considered as security and the obligation to comply with relevant legislation will follow".

The guidelines classify tokens issued as part of ICOs as either granting "profits or governance rights" or not granting those rights.

In both instances, the ICO/token issue will be subject to anti-money laundering (AML) and counter-terrorist financing (CFTC) laws.

Tokens that do grant profits or governance rights are also broken down into categories that specify the applicable set of laws and regulations, such as securities, crowdfunding, financial instrument markets and collective investments.

The guidelines also specify that the Bank of Lithuania will regulate entities that are planning to release or be involved with tokens that have the characteristics of securities.

"Otherwise, engagement in activities associated with virtual currencies is not the provision of regulated financial services", the guidelines add.

In addition to financial regulations, the guidelines also clarify how taxation will apply, how tokens should be accounted for as well and mention that the Lithuanian AML and CFT law is in the process of being amended and will include provisions on virtual currency exchanges and wallet service operators.

In a final disclaimer, the document states that the guidelines should not be regarded "as an official interpretation of the legislation".

"Of course, risks are ubiquitous. But we cannot ignore the development of new financial instruments and phenomenon of blockchain technology. We do believe that certain usage of it, such as ICOs, should be regulated. Lithuania already has an exceptional regulatory advantage. We are one of the first ones in Europe who prepared comprehensive Guidelines on legal framework for ICO projects covering regulatory as well as taxation and accounting," Šapoka said in the introduction to the document.

In a memorandum of understanding, the finance ministers of Estonia, Latvia and Lithuania have agreed to co-operate to expand and develop their economies, a process that would include promoting distributed ledger technologies to aid in capital market innovations.

The memorandum says:

"The Estonian Ministry, the Latvian Ministry and the Lithuanian Ministry recognise the importance of the development of the capital market and a stronger institutional framework to handle the cross-border challenges in the Baltic States… [and] supporting the development of capital market innovations and new technologies with a consideration for regional FinTech solutions, such as DLT."