Most publications covering cryptocurrencies and e-money come to the conclusion that Bitcoins cannot be classified as e-money in the sense of the German Payment Services Act (ZAG) because of the fact that there is no emitter who issued the coins in the first place while such emitter is a prerequisite to the e-money definition according to sec. 1 para. 2 sentence 3 ZAG. Even though due to this argument Bitcoins cannot be qualified as e-money question remains if blockchain based e-money is a regulatory option for providers at all or if this technology is in fact not useable in connection with e-money solutions.
What Exactly is E-money?
E-money as defined in sec. 1 para. 2 sentence 3 of the ZAG is every electronically, including magnetically stored monetary value as represented by a claim against the issuer which is issued on receipt of funds for the purpose of making payment transactions, and which is accepted by a natural or legal person other than the electronic money issuer. This definition is talen from the Directive 2009/110/EC of the European Parliament and Council of 16 September 2009 and was incorporated by the German legislator word by word into the Payment Services Act (ZAG). Bitcoin and for example Ether are not issued by an issuer but instead “mined” at the expense of computing power and then distributed by the “miners” themselves. These cryptocurrencies also cannot be considered a claim on a certain issuer because, in contrast to a claim that can only be enforced on the obligor of that claim, these cryptocurrencies embody something of value for everyone willing to accept them. The aforementioned publications and their conclusion seem to be correct in general. There should be no doubt that Bitcoins, Litecoins and Ether are in fact no e-money.
Are Blockchain Token the E-Money of the Future?
Is the aforementioned qualification of certain cryptocurrencies as not being E-Money valid for all blockchain based payment systems? How about tokens that have been created via smart contract onto the Ethereum blockchain (e.g. ERC-20, ERC-223 tokens) and that cannot be mined because there is a predetermined quantity of them? In these cases, the argument that there is no emitter does not hold true. Instead, whoever programed the smart contract and therefore the tokens is the emitter of it. The same would be true in the case that a completely new blockchain were to be created if its units (coins) were transferable and associated with a claim to change the token into fiat at a preset price against the creator. This shows that the arguments that are made against certain cryptocurrencies as e-money are not transferable offhandedly to all blockchain based e-money solutions.
What are the Advantages of Blockchain Based E-money?
As shown above, from a regulatory point of view there are indeed ways to base an e-money system on a blockchain. The advantages of such a system for the issuing e-money institutions are obvious. The transactions of the e-money product would only take seconds, international transfers would not be limited by national boarders and the transactions would not need the original issuer to be included in the process to take place. At the same time the blockchain would provide an unforgeable and gapless transaction record which allows the issuing e-money institution to substantially lower its administrative efforts and thereby reduce costs. FIN LAW, due to its experience and expertise in blockchain related BaFin processes is the competent partner for issuers of legally sound blockchain based e-money.
Attorney Lutz Auffenberg, LL.M. (London)