Most probably the German legislator did not expect the following when introducing crypto assets as financial instruments: On the 9th of June 2021, the small Latin American country of El Salvador passed a new legislation that will declare Bitcoin its unrestricted, domestic legal tender. As of the new legislation will come into effect, payments made in Bitcoin will have to be accepted by everyone in El Salvador and these payments will be legally effective. Prices can be displayed in Bitcoin and taxes and other public charges may be paid in Bitcoin. The passed law also regulates that profits made from Bitcoin transactions will not be subject to any capital gains tax just as gains from transactions with other foreign legal tender. This new law is a milestone for the national monetary policy of El Salvador, a country which hasn’t had an own national currency in over 20 years and instead used the US dollar as main currency. But even in Europe and especially Germany, the upgrading of Bitcoin to the status of a legal tender will probably not be without legal consequences.        



According to the definition of crypto assets in the German Banking Act (KWG) that has been introduced in early 2020, crypto assets are defined as 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. According to the unambiguous wording of the law, digital representations of value that possess the status of a legal tender are not covered by the definition. Therefore, the legal consequence from a German regulatory point of view would be that when the new legislation comes into effect in El Salvador, Bitcoin can no longer qualify as a crypto asset in the sense of the KWG. As this result will most probably not be intended by neither the German legislator nor by the competent supervisory authority it will be important to wait and see how BaFin positions in this matter. 



Even though the wording of the definition of crypto assets in the KWG seems to be unambiguous, Bitcoin will remain a regulated financial instrument under German law in the form of a unit of account. BaFin never gave up their long-standing administrative practice, according to which Bitcoin and comparable cryptocurrencies qualify as units of account and consequently as a financial instrument. The German legislator also emphasized in the legislative materials when introducing crypto assets into the catalogue of financial instruments in the KWG that in their view the aforementioned administrative practice is legitimate and legally sound. Therefore, Bitcoins will remain regulated financial instruments in the form of units of account under the German supervisory regulations, even though they might no longer qualify as crypto assets in the future.        



The financial service of crypto custodian service that was also introduced into the KWG early 2020 is conducted where a customer is offered the safeguarding or management of crypto assets respectively the private keys relating to crypto assets. Whoever intends to offer such services in Germany requires a prior authorization of BaFin. According to the legal definition, crypto custody services as an activity which is subject to authorization can only relate to crypto assets. Custody services relating to other financial instruments therefore do not qualify as crypto custodian service. Most importantly, custody services relating to units of account do not constitute a crypto custodian service, which was one of the major motivations for regulating the activity by introducing the crypto custody business in 2020. Strictly speaking, the custody of Bitcoins or private keys related to Bitcoins for a third party can therefore no longer constitute a crypto custody service when respecting the wording of the law. However, the question of how and to what extent the legislative decision in El Salvador affects German regulatory law is up to BaFin in the first place, even though it may be tested by the competent administrative courts at a second stage. The assessment and interpretation of the matter by BaFin should therefore be waited for.



The German definition of crypto assets is based on the definition of virtual currencies from the so-called fifth Directive on Anti Money Laundering, which also requires the digital representation of value to not qualify as legal tender. Conversely, this means that a legal tender cannot be a virtual currency in the sense of this directive. The fifth Directive on Anti Money Laundering had to be transposed by the EU member states into national law by January 2020, meaning that El Salvador´s decision will most likely also stir a regulatory discussion throughout the rest of the continent. The whole subject illustrates that the European legislator chose a wording for the definition of virtual currencies which enables non-European countries to cause massive turbulences within the European crypto regulation. The European as well as the German Legislator should therefore swiftly take appropriate action to undo this mistake.       


Attorney Lutz Auffenberg, LL.M. (London)





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