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The German federal government is currently preparing a comprehensive national “Blockchain Strategy,” which is slated to be presented in the summer of 2019. In addition, it supports the development of European and international regulation for cryptocurrencies and tokens (cryptoassets). In addition, in March 2019, the German Federal Ministry of Finance together with the German Federal Ministry for Justice and Consumer Protection published key points for the regulatory treatment of electronic securities and crypto tokens as the first implementing measure within the framework of the Blockchain Strategy.

Germany is currently in the process of transposing into its domestic law the amendment of the European Union’s Anti-Money Laundering Directive (5th AMLD), which extended the customer due diligence requirements to custodian wallet providers and virtual currency exchange platforms, and defined virtual currencies. In line with the jurisprudence of the European Court of Justice, transactions to exchange a traditional currency for bitcoin or other virtual currencies and vice versa constitute the taxable supply of other services for consideration, but fall under the exemption from value-added tax (VAT).

The German Federal Financial Supervisory Authority (BaFin) qualifies virtual currencies/cryptocurrencies as units of account and therefore financial instruments. However, on September 29, 2018, the Higher Regional Court of Berlin held that trading in bitcoin does not require a banking license, because it is not a unit of account within the meaning of the German Banking Act, a decision that is directly at odds with the regulatory practice of BaFin. With regard to ICOs, BaFin assesses on a case-by-case basis whether the ICOs qualify as financial instruments or as securities and therefore trigger the need to comply with the relevant financial legislation.

I. Approach to Assets Created Through Blockchain

The German Federal government is currently preparing a comprehensive national “Blockchain Strategy,” one of its priorities set out in the coalition agreement between the governing parties CDU, CSU, and SPD. In addition, it supports the development of European and international regulation for cryptocurrencies and tokens (cryptoassets).[1] A public consultation on the Blockchain Strategy took place from February 20 to March 29, 2019.[2] The Blockchain Strategy is slated to be presented in the summer of 2019.[3] With regard to the legal framework, the Blockchain Strategy will cover the necessity of a different legal approach for public and private blockchain, the applicable law, liability and enforcement, smart contracts, the use of intermediaries, data protection, formal requirements such as recognizing digital formats as equivalent to written formats, and taxation.[4]

In addition, in March 2019, the German Federal Ministry of Finance together with the German Federal Ministry for Justice and Consumer Protection published key points for the regulatory treatment of electronic securities und cryptotokens.[5] The key points are the first implementing measure within the framework of the Blockchain Strategy.[6] Its goal is to “make electronic securities possible while ensuring investor protection and creating legal certainty and application security for the areas of civil and supervisory law.”[7] The key points go beyond the Blockchain Strategy by making electronic securities available outside of blockchain technology and similar technologies.[8] Developments on a European and international level are taken into account to avoid a “German solution” that would conflict with EU-wide harmonization measures; however, Germany did not want to wait to publish its own rules as such EU-wide measures can take several years.[9] Anti-money laundering regulation is not the focus of this consultation paper, but will be addressed in the act implementing the amendment of the EU anti-money laundering legislation.[10]

A. Financial Regulation and Consumer Protection

1. Consultation Paper of the Federal Ministry of Finance

The consultation paper of the Federal Ministry of Finance suggests that German law should generally be opened up for electronic securities, meaning the current requirement that securities need to be embodied in a physical certificate would be eliminated.[11] However, issuing securities in electronic form would not be mandatory; issuers would have the option to still use a paper form.[12] In addition, the Ministry of Finance proposes that the regulation be technology-neutral, in particular with regard to the fact that blockchain technologies consume a lot of energy and affect the environment, and should therefore not be privileged.[13] The regulation of electronic shares will be taken up at a later point.[14]

The paper also suggests establishing a register for electronic securities run by a central state registry or a registry supervised by the state.[15] The issuer itself or an authorized third party might be able to register an electronic security if it is proven that blockchain technology will not permit subsequent unauthorized amendments.[16] The blockchain securities register might be included in another public register to provide legal certainty to issuers and investors that the securities listed therein are securities within the meaning of German civil law.[17] However, keeping a register on a blockchain might qualify as the operation of a securities settlement system, so that registration as a central security depository (CSD) within the meaning of EU Regulation No. 909/2014 might be necessary.[18] The paper states that further review is needed in this regard.[19] To ensure investor protection for securities registered on a blockchain (“blockchain securities”), the following is proposed (individually or cumulative):

• Blockchain securities may only be purchased by institutional investors.
• The issuer or the authorized third party who keeps the register must be subject to some type of state supervision.
• Blockchain securities may only be purchased by private investors if the relevant blockchain register is run by a credit or financial institution subject to supervision in the EU.
• Private investors may not purchase blockchain securities directly from the issuer or another investor, but the purchase must be effected by a licensed and supervised intermediary, who explains rules and advises investors.
• Private investors may purchase blockchain securities directly from issuers; however, issuers are subject to special information and documentation obligations. A resale of blockchain securities by a private investor to another private investor can only be effected via the issuer as a counterparty interposed between the seller and buyer in order to ensure that information and documentation obligations are complied with.[20]

The paper also proposes that electronic securities could be declared “objects” by means of a legal fiction so that the rules on property law apply. Alternatively, they could be subject to a law sui generis similar to the Swiss Federal Act on Intermediated Securities.[21] In any case, there will be independent rules on the acquisition and transfer of electronic securities as well as on good faith.[22] The paper also points out that electronic securities will be subject to the Securities Trading Act,[23] the Securities Prospectus Act,[24] and the provisions of the EU Market Abuse Regulation[25] as these laws do not require the embodiment of securities in physical form.[26]

As a last point, the paper also deals with the issuance of utility tokens/cryptocurrencies. It states that utility tokens are generally not classified as securities, investment assets, or other types of financial instruments within the meaning of the Securities Trading Act, and will most likely also not be classified as electronic securities in most cases.[27] They therefore will not be subject to the provisions of the Securities Trading Act, the Securities Prospectus Act, or the Investment Assets Act.[28] Thus, there is no obligation to publish a prospectus or information sheet for the public offering of utility tokens. The paper states that the “whitepapers” that are generally published are not comparable and do not enable an investor to make an informed decision. It also points out the risks associated with investing in utility tokens.[29] It notes that the European Securities and Markets Authority (ESMA) has also pointed out the necessity to create adequate risk disclosure requirements in its advice on ICOs and cryptoassets.[30] The paper proposes two different options to handle this situation:

• Germany will wait until the EU passes a regulation on the issuance of utility tokens based on ESMA’s recommendations and will actively participate in the legislative process; or
• Germany could pass national legislation as a bridge solution that would be in force until an EU regulation has been passed. It would require the publication of an information sheet approved by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) for every public offer of utility tokens.[31]

2. Proposal to Regulate Distributed Ledger Technologies

In addition, on September 11, 2018, the parliamentary group of the Free Democratic Party (FDP) submitted a request that the federal government regulate distributed ledger technologies (DLT) to the German parliament.[32] The proposal aims to provide legal certainty for the application of DLT, among others blockchain technology and ICOs, and to create a workable legal framework so that private persons as well as companies can make use of the new technology.[33] It also states that the treatment of utility tokens, debt tokens, and security tokens remains unclear and there is no enforceable legal protection against “ICO scams.” The application of tax law must also be clarified.[34] The proposal requests the following:

• Creation of more expertise and resources at BaFin to deal with regulatory hurdles with regard to the use of blockchain technology in the financial market.
• BaFin must be more transparent with regard to its classification of tokens; clear criteria must be published and be publicly available; the framework conditions for blockchain technologies, ICOs, and token sales must be available in several languages.
• Companies must have the possibility to submit a voluntary prospectus for tokens to BaFin for its approval; furthermore, Germany should advocate for EU-wide rules on prospectuses for securities token offers.
• Tax authorities must be technically capable of capturing situations involving cryptocurrencies and token issuances and be able to tax them appropriately. Data on blockchain technology must be compiled.
• A review must be undertaken as to whether the current legal framework is compatible with DLT and whether there are regulatory gaps, including in financial laws and civil law.
• The requirement that securities must be embodied in physical form must be abolished and a qualified digital register must be established.
• The use of smart contracts must be reviewed.
• Data protection rules must be updated.
• The role of banks as digital wallet providers must be reviewed and classified; a new provision in the Banking Act might be necessary.
• Taxation in general must be clarified—in particular whether the sale of tokens is subject to the “First-In-First-Out-Rule,“ the ”Last-In-Last-Out-Rule,“ or if there is a choice; the tax treatment of forks; and whether the sale of tokens is subject to value-added tax (VAT).[35]

B. Anti-Money Laundering Law

On July 9, 2018, the amendment of the European Union’s Anti-Money Laundering Directive (5th AMLD) entered into force, extending the customer due diligence requirements to custodian wallet providers and virtual-currency exchange platforms, and defined virtual currencies.[36] Member States must transpose the new rules into national law by January 10, 2020.[37] Germany so far has not implemented the changes into its domestic law.[38]

C. Taxation

In February 2018, the German Federal Ministry of Finance published guidance on VAT treatment of bitcoin and other virtual currencies. It determined that transactions to exchange a traditional currency for bitcoin or other virtual currencies and vice versa constitute the taxable supply of other services for consideration, but fall under the exemption from VAT. It stated that bitcoin or other virtual currencies that are used simply as a means of payment are treated the same as traditional means of payment. Using bitcoin or other virtual currencies for no other purpose than as a means of payment is therefore not taxable.[39] This guidance is in line with the European Court of Justice (ECJ) decision Hedqvist dated October 22, 2015.[40]

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II. Custodianship of Cryptocurrencies by Financial Institutions

It appears that Germany does not have any specific rules on custodianship of cryptocurrencies by financial institutions.

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III. Regulation of Cryptocurrencies as Financial Securities

BaFin qualifies virtual currencies/cryptocurrencies as units of account and therefore financial instruments.[41] Undertakings and persons that arrange the acquisition of tokens, sell or purchase tokens on a commercial basis, or carry out principal broking services in tokens via online trading platforms, among others, are generally required to obtain authorization from BaFin in advance.[42]

However, on September 29, 2018, the Higher Regional Court of Berlin (Kammergericht Berlin, KG Berlin) held that trading in bitcoin does not require a banking license because it is not a financial instrument—in particular, not a unit of account within the meaning of the German Banking Act. The decision is directly at odds with the regulatory practice of BaFin. The Court ruled that BaFin overstepped its competency when it classified bitcoin as “units of account” and therefore made them subject to authorization.[43]

In February 2018, the BaFin published information on the regulatory assessment of ICOs and the tokens, coins, and cryptocurrencies on which they are based.[44] It stated that firms involved in ICOs need to assess on a case-by-case basis whether the ICOs qualify as financial instruments (transferable securities, units in collective investment undertakings, or investments) or as securities and therefore trigger the need to comply with the relevant financial legislation.

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Prepared by Jenny Gesley
Foreign Law Specialist
April 2019

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Last Updated: 12/30/2020