Until recently, the Federal Financial Supervisory Authority (BaFin) held the opinion that Bitcoin were financial instruments within the meaning of the KWG. In its ruling of 25 September 2018, the Berlin Court of Appeal renounced this categorization and decided that the KWG was not applicable to Bitcoin.
Bitcoin are categorized as a unit of account by the BaFin
The legal nature of Bitcoins has been and continues to be a controversial subject of discussion. The term "digital currency" is misleading insofar as Bitcoin do not constitute "money" or a "currency" for the circulation of which a central bank is responsible. The BaFin as well as the European Central Bank agree that Bitcoin do not qualify as legal tender or money.
In its comment dated 19 December 2013, the BaFin has categorized Bitcoins as financial instruments, i.e. an alternative to the units of account referred to in § 1 subparagraph 11 sentence 1 KWG. Units of account are units of value comparable to foreign currencies that are not legal tender. In general, this categorization applies to all "digital currencies", irrespective of the concrete encryption technology or underlying software.
The categorization of Bitcoin as a financial instrument results in additional regulatory obligations, in particular licensing requirements as Bitcoin trading is deemed to involve the conduct of banking transactions and/or the provision of financial services. If a required license has not been obtained, this may result in a statutory offense under § 54 subparagraph 1 no. 2 KWG which provides for fines or imprisonment for up to five years.
Ruling of the Berlin Court of Appeals: Bitcoin are not financial instruments; the sale of Bitcoin is not an offense
In its ruling of 25 September 2018 (reference no. (4) 161 Ss 28/18 (35/18)), the Berlin Court of Appeals has expressly renounced BaFin’s categorization and decided that Bitcoin are not financial instruments within the meaning of the KWG. In the appeal proceedings filed by the prosecutor, the Court of Appeals confirmed the criminal division's previous assumption that the sale of Bitcoin was not subject to the authorization requirements under § 32 subparagraph 1 sentence 1 KWG and, consequently, was not an offense pursuant to § 54 subparagraph 1 no. 2 KWG. Bitcoins were not financial instruments pursuant to § 1 KWG – and in particular not units of account. Due to this fact alone, the KWG was not generally applicable here.
The Court of Appeal's ruling was inter alia based on the fact that the German legislators had included the term "unit of account" in the KWG on 22 October 1997 in connection with the law on the implementation of EC directives for the harmonization of regulatory provisions in the field of banking and securities supervision although this term was not mentioned in the European directive. In addition, there was no indication in the bill that the term "unit of account" also covered so-called crypto currencies. The Bitcoin also did not meet the requirements applicable to units of account since it was neither a monetary means of payment nor a currency in the classical sense but merely a means of payment accepted only by certain economic operators the value of which depended largely on the value assigned thereto by network users at the time of valuation. As it had no predictable stable value, the Bitcoin also could not form the basis for comparing various goods or services. Therefore, the conceptual requirements relating to units of account were not fulfilled.
Referring to the abovementioned comment, the Court of Appeal critized BaFin for failing to realize "that it was not the responsibility of the federal authorities to exercise a modifying influence (in particular) on criminal laws". This constituted a breach of the requirement of clarity and definiteness pursuant to article 103 subparagraph 2 of the Basic Law for the Federal Republic of Germany (GG). Pursuant to this principle, provisions of criminal law must be phrased so that the addressee is in a position to appraise whether or not an act constitutes a criminal offense solely on the basis of the wording of the relevant provision. The Bafin, pursuant to § 6 KWG, had been assigned a general abuse control function (Missstandsaufsicht) and was also authorized, within the framework of its directive powers, to issue administrative acts against institutions in order to prevent or stop, in particular, any breaches of regulatory provisions. However, the sole objective of this provision was to counteract any shortcomings in the banking and financial services industry, not to extend the application of criminal law to banking transactions or financial services by expanding the prerequisites which require a license. To determine the prerequisites for criminal liability is the sole responsibility of the legislator and should not be left to the executive authorities.
The ruling of the Berlin Court of Appeal is final no further decisions are expected from the judicial authorities. Following this decision, the legislator may wish to regulate Bitcoin and other virtual currencies with new legal provisions beyond those already included in the fifth Anti-Money Laundering Directive, by modifying the KWG. This decision and the reference to article 103 subparagraph 2 GG may have an impact on the categorization of other tokens as "financial instruments" and indicates that virtual assets will increasingly be subject to European regulation.
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