Regulating “virtual currencies” – a fresh start?


“Virtual currencies” have been well known not only to interested users but also to the general public since the rapid rise in value of Bitcoins in recent years. The increasing interest in Bitcoins and other virtual currencies (also called cryptocurrencies or cryptocoins) has triggered a rush to online trading platforms where traders can exchange “genuine” bank deposit money for virtual currencies. The question of whether the sale of Bitcoins on such trading platforms requires a licence was recently the subject of a decision by the Court of Appeal in Berlin (25 September 2018, case no. (4) 161 Ss 28/18 (35/18)). What is notable about this decision is that the Court of Appeal contradicts the previous opinion of BaFin –  which is relatively restrictive compared to the regulatory positioning in other countries – on the legal nature of Bitcoins and states that there would be no supervisory license requirement for trading in Bitcoins.

Previous opinion of Germany’s Federal Financial Supervisory Authority (BaFin)

Bitcoins are produced by computer calculation methods and are part of an encrypted decentralized electronic payment system. The special characteristic of Bitcoins is that they are are administered and stored in a publically accessible network and that Bitcoins can be technically transferred to anyone having access to a web-enabled computer. Another key feature of Bitcoins is that there is no superordinate, identifiable (legal) person who could exert a regulatory influence on the distribution of Bitcoins.

The issue of the supervisory regulation of Bitcoins and other virtual currencies is becoming ever more relevant alongside the increasing prominence and dissemination of Bitcoin, Ethereum, Ripple, Litecoin and others. Besides warnings from various supervisory authorities of the financial dangers connected with virtual currencies, there is a particular focus on the question of a regulatory classification and on the relevance of existing sanctions for the infringements of regulatory license requirements.

BaFin has so far held the view that Bitcoins and comparable virtual currencies would be accounting units within the meaning of sec. 1(11) 1st sentence no. 7 German Banking Act (Kreditwesengesetz, “KWG”) and would thus qualify as financial instruments. According to this legal view of BaFin, providers who exchange deposit bank money for Bitcoins via online trading platforms, would fall within the scope of the KWG and be subject to the licensing requirements standardized therein (see BaFin, Advisory letter on financial instruments, 26 July 2018; BaFin, Bitcoin: Supervisory assessment and risks for users, 19 December 2013).

BaFin’s legal position compared to foreign financial supervisory authorities

Trading in virtual currencies online is not uniformly regulated on an international level. The G20 finance ministers and central bank heads also could not agree on any specific measures for regulating virtual currencies at their meeting in Buenos Aires on 19 20 March 2018.

The  Swiss Eidgenössische Finanzmarktaufsicht (FINMA) stated in one of its fact sheets on 30 August 2018 that virtual currencies themselves are not to be regulated, but that virtual currency platforms are subject to applicable AML legislation and that in individual cases a banking licence may be necessary. According to a statement by the Dutch finance minister published by the Dutch Autoriteit Financiële Markten (AFM) on 20 December 2013, virtual currencies in the Netherlands are not subject to supervision by the AFM. In the United Kingdom, the Financial Conduct Authority (FCA) in a statement on 6 April 2018 likewise classified virtual currencies as unregulated assets, as long as virtual currencies are not made the subject of regulated financial instruments. In an opinion of the Austrian Finanzmarktaufsichtsbehörde (FMA) of 1 October 2018, virtual currencies (crypto-assets) are not themselves subject to regulation, which shall not, however, generally exclude a licence requirement for business models based on virtual currencies. The Banque de France issued a statement on 5 March 2018 to the effect that the operation of online trading platforms for virtual currencies (crypto-actifs) may require a licence.

Welcome decision by the Court of Appeal in Berlin

In its judgment of 25 September 2018 (case no. (4) 161 Ss 28/18 (35/18)), the Court of Appeal contradicts the previous view held by BaFin on the classification of virtual currencies as accounting units and does not classify the operation of a related online trading platform as a business requiring a licence within the meaning of sec. 32(1) 1st sentence KWG.

Since Bitcoins, in the opinion of the Court of Appeal, are therefore also not financial instruments within the meaning of sec. 1(11) 1st sentence KWG, trading Bitcoins on an online platform without a regulatory licence should also not be punishable under sec. 54(1) no. 2 KWG. The Court of Appeal bases its decision mainly on the following two aspects: firstly, Bitcoins are regarded as unable to be subsumed under the definition of “accounting unit” in the meaning of sec. 1(11) 1st sentence no. 7 KWG, because Bitcoins would lack general acceptance, stability of value and a value measurement function; and secondly, BaFin would exceed its remit in the light of the criminal certainty principle of art. 103(2) German constitution (Grundgesetz, “GG”) if it, as an administrative authority required to avert risk, indirectly increases the reach of criminal statutory law by expanding the scope of regulatory licence requirements for banking transactions or financial services.

Regarding its outcome, the decision of the Court of Appeal deserves consent. Also in connection with financial innovations and further related developments, economic actors subject to the law must be able to clearly recognise – especially given the punitive sanctions laid down in sec. 54 KWG – to what extent regulatory licensing requirements reach. Ambiguities must not be to the detriment of citizens. Instead, it is the role of the legislative bodies to clearly define the scope of criminal offences. This should not be the task or responsibility of administrative authorities responsible for law enforcement, not even specifically in connection with a new financial phenomenon such as the virtual currencies.

How the Court of Appeal’s decision affects BaFin’s future supervisory work

In the first place, the decision of the Court of Appeal has a direct effect only on the particular case decided. In addition, BaFin is in principle legally free to make future decisions that differ from the precedent set by the Court of Appeal’s decision. However, BaFin would be required to provide clear grounds for any divergent opinion that conflicts with the decision of the Court of Appeal.


Given BaFin's previous administrative practice in dealing with court decisions, it is unlikely that BaFin will change its supervisory practice in relation to virtual currencies anytime soon. This is probable to also apply to Initial Coin Offerings (ICOs), insofar as they are related to virtual currencies. To avoid the current legal uncertainty – which seems particularly unfortunate given the punishability under sec. 54 KWG – the legislator is requested to further clarify the terms “financial instrument” and “accounting unit” in the KWG in order to sufficiently comply with the principle of criminal law certainty laid down in art. 103(2) GG  (“nullum crimen, nulla poena sine lege scripta, praevia, certa et stricta” – no crime and no punishment without written, previous, well-defined and exact law). In view of the fragmentary nature of German criminal law, however, it cannot be left to BaFin as an administrative authority to forge the sharp sword of criminal law. To avoid legal disadvantages, it is advisable for companies to continue to very carefully analyse and evaluate business models relating to virtual currencies (including ICOs) beforehand in the context of applicable supervisory law. Following such approach may help to avoid sanctions via timely coordination with BaFin and, if necessary, to enable the relevant party to leverage an existing scope for a licence-free legal and contractual structure.

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