According to the basic idea of Satoshi Nakamoto, Bitcoin was meant to be an electronic peer-to-peer payment system that would function directly between the users without the necessity of payment processors such as banks. The massive increase in value since the mining of the first Bitcoin – to almost 20.000 euros per Bitcoin temporarily – as well as similar increases of the value of comparable cryptocurrencies led to the perception that Bitcoin and other cryptocurrencies are first and foremost a new type of asset for speculative investments. Nevertheless, there are now numerous service providers that offer their customers the opportunity to pay invoices with cryptocurrencies even though they are denominated in euros, USD or other legal currencies. These service providers require their customers to transfer the equivalent of the invoice amount to them in cryptocurrencies, then the service provider exchanges the transferred cryptocurrencies into the needed fiat currency and transfers the amount to the banking account of the invoicing party. If this business model would only use foreign exchange and legal tender, it would be subject to authorization according to the German Payment Services Act (ZAG). The acceptance of customer money and the transfer to the invoicing party would constitute a money remittance as defined in the ZAG which is a payment service and therefore subject to authorization from BaFin. But why is this service not regulated as a money remittance service if the invoice recipient pays with cryptocurrencies?
PAYMENT SERVICES ONLY RELATE TO LEGAL TENDER AND E-MONEY
The ZAG regulates the offering of payment services such as e.g. the money deposit and withdrawal at ATMs, the execution of transfer orders with and without credit granting, the issuing of payment cards and other payment instruments and of course money remittance services. These services all relate to payment processes that occur on basis of money in the sense of legal tender or e-money. Even though this restriction is not explicitly made in the ZAG, it can be derived from the fact that the ZAG is based on the second Payment Service Directive (PSD2). Article 4 nr. 25 of the PSD2 states that “funds” means banknotes and coins, scriptural money or electronic money as defined in the second European e-money directive. Cryptocurrencies such as Bitcoin, Litecoin, IOTA or Monero therefore do not constitute “funds” in the sense of the directive and can therefore not be the subject of payment services in the sense of the PSD2. The case would be different if at some point in the future e.g. blockchain-based central bank money as it is currently being considered by the Chinese and Russian central banks came into existence. E-money on a blockchain-bases could also qualify as “funds” in the sense of Article 4 nr.25 PSD2. These cryptocurrencies could then potentially be subject to payment services in the sense of the ZAG.
IS THE SERVICE OF FORWARDING CRYPTOCURRENCIES WITHOUT CONVERSION SUBJECT TO AUTHORIZATION?
The forwarding of cryptocurrencies from an invoice recipient to the invoicing party without the conversion to fiat currency, other crypto assets or other means of payment will only seldomly require the services of a money remittance service provider. The use of these services only makes economic sense, if the service provider would act as a fiduciary regarding the usage of the transferred cryptocurrencies. In these cases, the primary function of the money remittance service provider would not be the transmission of funds but rather the monitoring of the agreed upon payment conditions of the involved parties. If money transmission is just a by-product to the main service, BaFin in certain cases does not consider the forwarding to be subject to authorization.
SO MONEY REMITTANCE SERVICES INCLUDING CONVERSION OF CRYPTOCURRENCIES TO FIAT ARE NOT SUBJECT TO AUTHORIZATION?
Even though the receipt of customer cryptocurrencies in order to convert them to fiat currency and subsequently forward them via bank transfer to a payee does, as shown above, not constitute a money remittance service as defined in the ZAG, the exchange from cryptocurrency to fiat currency can constitute trading in financial instruments, if the cryptocurrency in question is to qualify as either a unit of account, a crypto asset or any other financial instrument in the sense of the German Banking Act (KWG) and therefore might be subject to authorization. Depending on the specific case and the way the cryptocurrencies are handled, the exchange might be considered either a financial commission business, investment brokerage or proprietary trading which are all subject to authorization.
Attorney Lutz Auffenberg, LL.M. (London)