Since the beginning of the year, Germany has a new regulated financial instrument. With the regulation of crypto assets the German legislator regulates digital representations of value that are neither issued nor guaranteed by a central bank nor any other public authority and that do not possess the legal status of currency or money, but are accepted by natural or legal persons as a means of exchange or payment on basis of an agreement or actual practice or which serves investment purposes and which can be stored, traded and transferred electronically. Commercial activities on the basis of or in relation with such instruments may, as of this year, be subject to authorization for the providers of such services in accordance to the German Banking Act (KWG). But which products and services exactly are the subject of this rather wordily definition? Are now all blockchain units in Germany regulated can and possibly trigger BaFin authorization obligations when being subject to financial services?


The major example for crypto assets is Bitcoin. The legislator had in mind the most successful cryptocurrency and comparable blockchain units when he decided to introduce the new category of financial instruments into German banking regulatory law. Even so, the definition does not only apply to blockchain based units of value and mentions neither blockchain technology nor any other distributed ledger technologies as a mandatory technical prerequisite for crypto assets. In the spirit of a technology neutral approach the wording of the definition is sufficiently abstract to also cover representations of value that are based on new and future, nowadays not even existing technologies. A decentralized operating mode is also not required by the definition in order to define a product as a crypto asset. It is therefore possible for centralized issuers to generate and distribute crypto assets as long as the issuer is not a central bank nor a public authority and as long as the specific design of the digital representation of value does not qualify as e-money.


Cryptocurrencies with a decentralized design that are designed to be used as an alternative means of payment are, according to the definition, in principal crypto assets. To the extent however that currency tokens being represented by a smart contract are designed as e-money meaning that the issuing and the transfer of the tokens are executed on a blockchain but the issuer of the currency tokens offers the exchange of the tokens against legal tender at all times and that the tokens are accepted by others than the issuer as a means of payment, the KWG precludes in sec. 1 subsection 11 sentence 4 the classification of the tokens as crypto assets. These tokens are classified as e-money and are therefore regulated as such under the Payment Services Act (ZAG).


An interesting question is, if utility tokens which were extremely popular at the height of the ICO-hype in 2017 can also be classified as crypto assets under this definition. Utility tokens grant their bearers no monetary or shareholder rights but instead can be used as payment for services and goods exclusively within the business model of the issuer or as a voucher in a comparable way. According to sec. 1 subsection 11 sentence 4 KWG, these units are also not crypto assets if for example they can only be used for the purchase of goods and services of a single provider or a specific network of providers (e.g. shopping center) or for a very limited range of goods and services. These exemptions basically correspond with BaFins administrative practice that was in place prior to the introduction of crypto assets as financial instruments. BaFin, under the previous legal situation, did not qualify utility tokens as units of account and therefore not as financial instruments.


Security tokens, meaning digital units of value of which the ownership is connected to investor rights, such as e.g. claims for repayment or for an interest payment, pose a difficult special case. The first explanatory memorandum of the Federal Ministry of Finance for its draft legislation for the introduction of crypto assets stated that crypto assets are subsidiary to other financial instruments of the KWG so that digital representations of value that meet the requirements of any other financial instrument would not be qualified as crypto assets but as the other financial instrument instead. The wording in the draft legislation included an according subsidiary clause for crypto assets. The subsequently following governmental draft, according to its explanatory memorandum wanted to keep the legal effect of crypto assets to be subsidiary vis-à-vis other financial instruments. However, the wording of the proposed legislation did not include it anymore. Therefore, it is questionable if security tokens can now be e.g. debenture bonds and crypto assets at the same time. The only thing that is for sure is that security tokens are, in one way or another, financial instruments according to the KWG.

Attorney Lutz Auffenberg, LL.M. (London)




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