Source: https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/germany
Timestamp: 2019-04-22 14:16:26+00:00

Document:
The German government’s1 views on and approach to cryptocurrencies is ambivalent. On the one hand, there is an awareness that the digital age is progressing with an ever increasing dynamic. To reflect these developments, the government has produced a relatively granular digital agenda.2 On the other hand, there are major concerns that are very much driven by (retail) investor protection considerations, specifically in relation to cryptocurrencies.
Tokens are generally assumed to be subject to high volatility. BaFin identifies a general risk that liquid secondary markets are not available, which means that investors risk being ultimately stuck with an illiquid asset.
BaFin also adopts the view that a substantial number of companies financed viaICOs, i.e. by way of issuing security tokens rather than payment tokens, exhibit underlying business models that are still in an experimental stage, which also generates an underlying business risk. Smart contract elements may be complex, opaque and hard to scrutinise from an investor’s perspective. Moreover, Bafin identifies the particular risk that smart contract codes may be subject to successful attacks and therefore open to manipulation by third parties.
The regulatory authority also raises the general criticism that white papers are often of poor quality from a transparency perspective, and that ICO transparency is not sufficiently regulated. It even identifies the general risk that statements made in white papers may be objectively insufficient, incomprehensible or even completely misleading.
Before making any investments in tokens, investors should ensure that they fully understand the related risks and potential rewards. To this end, investors should ask the respective issuers as many questions as necessary in order to achieve an adequate level of transparency. Investors should also try to verify relevant statements via independent sources.
Investors should ensure that the features of the ICO (including the underlying project, if any) are aligned with their individual investment needs and risk appetite.
From a technical legal perspective, cryptocurrencies were classified by BaFin back in 2013 as financial instruments according to Sec. 1(11) of the German Banking Act (Kreditwesengesetz).11 They fall in the sub-category of so-called “units of account” (Rechnungseinheiten), which are a specific national category of financial instruments not based on EU law.
Back in 2013, BaFin issued its cryptocurrency guidance in light of the growing significance of Bitcoin. The guidance is, however, also applicable for the general classification of cryptocurrencies. The key issue is that the respective tokens qualify as a substitute for legal tender, as they are accepted for payment based on private law agreements, i.e. in contrast to a public law regulation, which is the core feature of fiat currencies.
BaFin also states in its guidance that cryptocurrencies do not generally qualify as regulated e-money, since there is no central e-money issuer.13 Where there is a central issuer, however, an assessment on the basis of the German definition of e-money must be conducted. According to the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz), e-money is defined as any monetary value that is stored electronically, including magnetically, and takes the form of a claim against the issuer which is issued in return for payment of funds in order to make payment transactions within the meaning of Sec. 675f (4), first sentence, of the German Civil Code (Bürgerliches Gesetzbuch) and which is accepted by a natural or legal person other than the issuer.
In the following paragraphs, the authors will focus on the licensing requirements under financial supervisory law according to the German Banking Act, as well as the resulting AML compliance obligations. For the sake of completeness, it is worth noting that where a security token actually classifies as a security under MiFID II and thus as a security under the German Securities Trading Act (Wertpapierhandelsgesetz), there are numerous and complex conduct requirements besides the mere licensing requirements, the details of which go well beyond the scope of this publication. The same is true where the ICO of a security token triggers prospectus requirements under the German Securities Prospectus Act (Wertpapierprospektgesetz).
Using cryptocurrencies purely as a substitute for cash or book money in order to participate in the economic cycle in the exchange business is not an activity subject to any licensing requirements under financial supervisory law or other authorisations under German public law. This means that using cryptocurrencies as a means of payment is not a regulated activity, or, in other words, “going shopping” with cryptocurrencies is not a regulated activity for the purchaser, nor is the mere acceptance of cryptocurrencies as a substitute currency by the seller.
Certain commercial dealings in cryptocurrencies and other types of tokens can trigger licensing requirements under financial supervisory law pursuant to the German Banking Act. According to Sec. 32 (1) sent. 1 German Banking Act, anyone wishing to conduct banking business or to provide financial services in Germany on commercial terms, or on a scale which requires commercially organised business operations, requires written authorisation from BaFin. It is important to note in this context that “actively targeting the German market” from abroad is sufficient to trigger the relevant licensing requirements under German law, i.e. a physical presence in Germany is not necessarily required.
Principal broking services are defined as the purchase and sale of financial instruments in the credit institution’s own name for the account of others.
Underwriting business (hard underwriting) is defined as the purchase of financial instruments at the credit institution’s own risk for placement in the market or the assumption of equivalent guarantees.
Investment broking is defined as the brokering of business involving the purchase and sale of financial instruments.
Investment advice is defined as providing customers or their representatives with personal recommendations in respect of transactions relating to certain financial instruments where the recommendation is based on an evaluation of the investor’s personal circumstances, or is presented as being suitable for the investor and is not provided exclusively via information distribution channels or for the general public.
Operation of a multilateral trading facility (MTF) is defined as operating a multilateral facility which brings together a large number of persons’ interests in the purchase and sale of financial instruments within the facility according to set rules in a way that results in a purchase agreement for these financial instruments.
Placement business (soft underwriting) is defined as the placement of financial instruments without a firm commitment basis.
Contract broking is defined as the purchase and sale of financial instruments on behalf of and for the account of others.
Portfolio management is defined as the management of individual portfolios of financial instruments for others on a discretionary basis.
Proprietary trading is defined (in simplified terms) as the purchase and sale of financial instruments for own account as a service for others.
As regards the sales regulation for cryptocurrencies, commercial distribution may trigger the aforementioned licensing requirements for distributors under financial supervisory law (e.g. typically at least investment broking) due to the fact that these are financial instruments under the German Banking Act.
(i) While cryptocurrencies are financial instruments (units of account) within the ambit of the German Banking Act, they do not qualify as financial instruments under the German Securities Trading Act (Wertpapierhandelsgesetz), i.e. the conduct requirements under German law. The situation is different if tokens go beyond being a mere substitute currency; in such case they may qualify (in particular) as securities according the definitions set out in the German Securities Trading Act, triggering complex conduct regulation of their distribution.
(ii) The test for whether a cryptocurrency qualifies as security considers whether (simplified) securities-like rights are attached to the tokens and whether there is a minimum required fungibility, which can be generally assumed if they are (crypto-)exchange-traded.
(iii) The classification as “security” may also trigger prospectus requirements and where a token sale ICO, is issued to raise funds for a specific purpose, an assessment as to whether the tokens constitute units or shares in investments funds within the ambit of the German Capital Investment Code (Kapitalanlagegesetzbuch) must be made. Where an investment fund is in fact established and managed, this constitutes a prohibited activity if no licence under the German Capital Investment Code is obtained, which in turn can have far-reaching criminal and civil liability implications.
(i) Exchanging cryptocurrency into fiat and vice versa is exempted from the VAT regime.
(ii) The mere use of cryptocurrencies as a means of payment is not a taxable transaction for VAT purposes (i.e. the “cash leg” of a sales transaction).
(iii) Mining is not a taxable activity for VAT purposes.
(iv) Offering digital wallet services in return for consideration is a taxable activity for VAT purposes under German tax law where such service is offered in Germany.
(v) Providing a crypto exchange platform may be a taxable activity for VAT purposes, depending on the precise circumstances.
Since cryptocurrencies do not constitute legal tender, “payment accounts”, i.e. electronic wallets (hot or cold) where related keys are “stored”, do not constitute payment accounts21 according to Sec. 1 (17) Payment Services Supervision Act. It follows that licensable activities attaching to the opening and operation of payment accounts, such as direct debit business and credit transfer business (involving payment transactions in fiat currency), are not applicable. Due to the fact that fiat currency is not “remitted” outside payment accounts in the legal sense where, for instance, a person exchanges fiat for crypto, transfers the crypto to a third party and this third party (re-)exchanges into fiat, there are very convincing arguments that such activities do not trigger licensable money remittance business according to the Payment Services Supervision Act either, even if they are performed on a commercial business.
That being said, close attention must be paid to the structuring of any “fiat cash legs” involved when structuring a business model that involves transactions in cryptocurrencies, beyond the licensing requirements under financial supervisory law. One criterion that would lead the model to fall outside the ambit of the Payment Services Supervision Act is that no unlicensed administrator receives, stores or manages fiat currency for the account of any customer or any third party. The details need to be analysed on a case-by-case basis.
The mere use of cryptocurrencies and other tokens as a means of payment for goods and services and the sale and exchange of self-procured cryptocurrency does not subject the relevant persons or undertakings to any obligations under the German Anti-Money Laundering Act (Geldwäschegesetz).
Where commercial dealing in cryptocurrencies triggers licensing requirements under financial supervisory law according to the German Banking Act, by way of express statutory reference in the German Anti-Money Laundering Act, however, this also means that the person or undertaking becomes an “obliged person” (Verpflichteter) for the purposes of German AML law.
At the level of European law, the European Parliament and European Council reached an agreement in December 2017 that will extend AML obligations to firms operating centralised cryptocurrency exchanges and custodial wallet providers for cryptocurrencies by adding them to the definition of “obliged entities” contained in the existing directive framework. This means that for such EEA countries where, unlike in Germany, cryptocurrencies do not constitute financial instruments and thus (in an nutshell) commercial dealings in them do not trigger licensing requirements under financial supervisory law, which in turn trigger AML obligations, there will be a minimum harmonisation of AML law in the crypto sector.
In Germany, there is no sandbox or any other type of light-touch regulatory regime available for commercial dealing in or handling of cryptocurrencies or any other types of tokens.
This is due to the fact that in Germany there is no legal basis for any light-touch approach, which could potentially include systematic deviation from the principle of equal treatment of the applicants.
The Bundesbank also stresses that, as the German law currently stands, and in contrast to the FCA and the PRA, promotional activities in specific economic sectors are not part of the banking regulators’ mission statement.23 Rather, banking supervisors are, by law, obliged to counteract undesirable developments in the lending and financial services sector which may endanger the safety of the assets entrusted to institutions, impair the proper conduct of banking business or provision of financial services, or entail major disadvantages for the economy as a whole.
Where cryptocurrencies are held “for the account of others” on a commercial basis, the respective business model must be assessed on a case-by-case basis. Such activities may, in particular, trigger the regulated activities of: (i) portfolio management; (ii) principal broking services; (iii) contract broking; and/or (iv) investment broking according to the German Banking Act or even constitute managing an investment fund, which is a licensable activity under the German Capital Investment Code.
According to this regulatory guidance, the creation of new cryptocurrency by solving complex mathematical computational tasks (i.e. mining) does not constitute a regulated activity under the German Banking Act. In particular, the miner does not underwrite or place financial instruments as a service for another issuer, which might otherwise constitute a regulated activity under the German Banking Act.
There is no general prohibition on “importing” cryptocurrencies into Germany or “exporting” them out of Germany.
As regards the calculation of applicable values for the purposes of the Union Customs Code,27 i.e. in cases where goods are imported from third countries, the legal position is likely to be as follows: According to Art. 69 Union Customs Code, the customs value of goods, for the purposes of applying the common customs tariff and non-tariff measures laid down by Union provisions governing specific fields relating to trade in goods, is to be determined in accordance with Art. 70 and 74 Union Customs Code.
According to Art. 70(1) and (2) Union Customs Code: (i) the primary basis for the customs value of goods is the transaction value, that is the price actually paid or payable for the goods when sold for export to the customs territory of the Union, adjusted, where necessary; and (ii) the price actually paid or payable is the total payment made, or to be made, by the buyer to the seller, or by the buyer to a third party for the benefit of the seller for the imported goods, and includes all payments made or to be made as a condition of sale of the imported goods.
It can likely be derived from Art. 70 Union Customs Code in conjunction with Art. 120 (para. 2 thereof in particular) of the Delegated Regulation28 that, due to the fact that cryptocurrencies are not legal tender and often subject to major fluctuations, the price conversion into legal tender at the relevant point in time according to Art. 128 of the Delegated Regulation cannot be determined with sufficient accuracy.
Accordingly, the alternative valuation methods according to Art. 74 Unions Customs Code are likely to apply, which (in a nutshell) means that the customs value shall be either of the following: (i) the transaction value of identical goods sold for export to the customs territory of the Union and exported at or about the same time as the goods being valued; or (ii) in case (i) cannot be determined, the transaction value of similar goods sold for export to the customs territory of the Union and exported at or about the same time as the goods being valued; or (iii) in case (ii) cannot be determined, the value based on the unit price at which the imported goods, or identical or similar imported goods, are sold within the customs territory of the Union in the greatest aggregate quantity to persons not related to the sellers. This means that the payment leg of the transaction in question is not the decisive factor, but rather that a valuation cascade is applied in relation to the asset in question.
The following paragraphs contain a discussion of some of the core provisions of the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung). Cross-border transactions involving cryptocurrencies should be assessed on a case-by-case basis.
According to Sec. 67 (1) Foreign Trade and Payments Ordinance, German residents must notify the Bundesbank, by predefined deadlines, of payments (i) which they receive from foreigners or from residents for the account of a foreigner (incoming payments), or (ii) which they make to foreigners or to residents for the account of a foreigner (outgoing payments).
According to Sec. 67 (2) Foreign Trade and Payments Ordinance, the relevant notifications to the Bundesbank are not required for: (i) payments which do not exceed the amount of €12,500 or the equivalent value in another currency; (ii) payments for the import, export or transfer of goods; or (iii) payments for the granting, receipt or repayment of loans, including the justification and repayment of credit balances, with an originally agreed term or termination deadline of not more than 12 months. Accordingly, the question of whether using cryptocurrencies as an alternative means of payment does not arise within the exemptions set out in Sec. 67 (2) Foreign Trade and Payments Ordinance. In all other cases of cross-border transactions, the legal interpretation of Sec. 67 (3) Foreign Trade and Payments Ordinance is decisive. According to Sec. 67 (3) Foreign Trade and Payments Ordinance, payments within the meaning of the relevant subdivision of the Foreign Trade and Payments Ordinance shall include netting and offsetting and payments handled by direct debit.
Despite such very broad definition of “payments”, it is very likely that the definition only applies to payments made in fiat currency.31 As cryptocurrencies are not legal tender, it is very likely that transactions cannot be classified as payments but rather occur within barter transactions which merely contain the economic components of payments in the legal sense.
(iii) incoming and outgoing payments for interest payments and similar revenues and expenses, excluding interest on securities received from or made to foreigners on their own account.
Such reporting obligations are not applicable to payments which do not exceed the amount of €12,500 or the equivalent value in another currency.
However, the term “payments” according to the relevant provisions of the Foreign Trade and Payments Ordinance further includes the contribution of objects and rights to companies, branches and permanent establishments.32 It is very likely that the respective provision applies the concept of payments in fiat currency in an analogous manner to the contribution of objects and rights into companies, branches and permanent establishments located in Germany. It follows that this case-specific sub-definition cannot be taken as a means to argue that transacting in cryptocurrencies is to be generally treated as being equivalent to payments in fiat currency.
However, the question arises as to whether cryptocurrencies, when paid into a German-based undertaking (i.e. by means of a contribution in kind) within the ambit of this definition as a means of raising (equity) capital for such undertaking qualify as “objects” or “rights”. While almost all33 cryptocurrencies are surely not “objects” (Sachen), as they do not constitute tangible property (körperlicher Gegenstand), cryptocurrencies may from time to time carry rights attached to them or, from a teleological perspective, the factual possibility to effect economic payments via their use, may be construed as being equivalent to being a right within the definition of the term “right” according to Sec. 67 (3) sent. 2 Foreign Trade and Payments Ordinance. Accordingly, where contributions in kind to German-based companies are made in the form of cryptocurrencies, the transactions in questions should be assessed on a case-by-case basis and it may be advisable to seek a common understanding with the competent authorities.
As regards the question of how cryptocurrencies are treated for the purposes of estate planning and testamentary succession, the rules according to the German Civil Code (Bürgerliches Gesetzbuch) are relevant.
Sec. 1922 (1) of the German Civil Code states that upon the death of a person (devolution of an inheritance), that person’s property (inheritance) passes as a whole to one or more than one other persons (heirs). This provision of the law codifies the so-called principle of universal succession, which means that the heirs assume the legal positions of the deceased in their entirety.
This principle of universal succession also encompasses the general rule that property relations usually pass to the heirs, and intangible rights expire upon death. Exceptions to this principle require a special statutory provision.34 Cryptocurrency has the character of a substitute for cash or legal tender. As such, it forms part of the property of the deceased and should pass to the heirs after death according to Sec. 1922 of the German Civil Code (BGB). In a sense, the private key (and the wallet), or such other means that allow for the transfer of a given cryptocurrency, should qualify as forming part of the inheritance within the ambit of Sec. 1922 of the German Civil Code.
It thus follows from this analysis that cryptocurrencies should be subject to all the regular rules of inheritance according to the German Civil Code, including that they can be subject to testamentary succession.
1. The term “government” in this case also includes regulatory authorities such as the German Bundesbank and the German Federal Financial Supervisory Authority (BaFin).
2. For the general digital agenda and related “hightech-strategie” cf. the German government’s webpage: https://www.bundesregierung.de/Webs/Breg/DE/Themen/Innovationspolitik/_node.html.
3. Public warning dated 2 February 2018, available at: https://www.bundesregierung.de/Content/DE/Artikel/2018/02/2018-02-02-kryptowaehrung.html.
4. For further information on these investigations please refer to the webpage Marktwaechter: https://ssl.marktwaechter.de/pressemeldung/kryptowaehrungen-undurchsichtige-geschaefte-rund-um-bitcoin-co.
5. Public warning dated 9 November 2017, available at: https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Meldung/2017/meldung_171109_ICOs.html as well as further background material dated 15 November 2011 available at: https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Fachartikel/2017/fa_bj_1711_ICO.html.
6. This advice is primarily directed at consumers (Verbraucher) but written in a general “common sense” manner.
7. Cf. interview; quotes available at: http://www.faz.net/aktuell/finanzen/digital-bezahlen/bitcoin-und-co-bafin-stellt-regulierung-in-aussicht-15462114.html.
8. Cf. further reference: “Vorteile durch neue digitale Produkte im Zahlungsverkehr” – Interview in German Focus, dated 05.02.2018, available at: https://www.bundesbank.de/Redaktion/DE/Interviews/2018_02_05_dombret_focus.html?searchArchive=0&submit=Suchen&searchIssued=0&oneOfTheseWords=cryptocurreny%2C+Bitcoin%2C+Kryptow%C3%A4hrung; “Finger weg von Bitcoin!”, Guest commentary in the Frankfurter Allgemeinen Sonntagszeitung dated 04.02.2018, available at: https://www.bundesbank.de/Redaktion/DE/Standardartikel/Presse/Gastbeitraege/2018_02_04_thiele_fas.html?searchArchive=0&submit=Suchen&searchIssued=0&oneOfTheseWords=cryptocurrency%2C+Kryptow%C3%A4hrung%2C+Bitcoin; “Auswirkungen virtueller Währungen auf die Finanzmärkte”, speech at Union Investment dated 15.01.2018, available at: https://www.bundesbank.de/Redaktion/DE/Reden/2018/2018_01_15_wuermeling.html?searchArchive=0&submit=Suchen&searchIssued=0&oneOfTheseWords=cryptocurrency%2C+Kryptow%C3%A4hrung%2C+Bitcoin.
9. Cf. under “Sales regulation” below for details.
10. E.g. adequate licences are obtained.
11. Cf. the public BaFin guidance dated 19 December 2013, available at: https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Fachartikel/2014/fa_bj_1401_bitcoins.html.
12. Where there is a central issuer, however, detailed analysis must be conducted in order to assess potential classification as e-money.
13. Cf. the public guidance issued by BaFin dated 28 April 2016, available at: https://www.bafin.de/DE/Aufsicht/FinTech/VirtualCurrency/virtual_currency_node.html.
14. Please refer to further details below.
15. Cf. the public guidance issued by BaFin dated 20 February 2018, available at: https://www.bafin.de/SharedDocs/Downloads/DE/Merkblatt/WA/dl_hinweisschreiben_einordnung_ICOs.html.
16. For further information on the complex legal implications and classifications, cf. BaFin’s ICO Guidance, available at: https://www.bafin.de/SharedDocs/Downloads/EN/Merkblatt/WA/dl_hinweisschreiben_einordnung_ICOs_en.html.
17. For further information on taxation of the digital economy, cf. Troetscher in: Kunschke/Schaffelhuber, FinTech, Grundlagen, Regulierung, Finanzierung, Case Studies, (2018), p. 209 et seq.
18. Cf. German Ministry of Finance, available at: https://www.bundesfinanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Steuerarten/Umsatzsteuer/Umsatzsteuer-Anwendungserlass/2018-02-27-umsatzsteuerliche-behandlung-von-bitcoin-und-anderen-sog-virtuellen-waehrungen.pdf?__blob=publicationFile&v=1.
19. Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC.
20. Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC.
21. These are defined as an account held in the name of one or several payment service users and serving the execution of payment transactions.
22. Cf. Kunschke, contribution of input for Germany to Holman/Stettner (et al.), Chapter “Anti-Money Laundering Regulation of Cryptocurrency: U.S. and Global Approaches” in: The International Comparative Legal Guide to Anti-Money Laundering, (2018), ICLG.
23. Cf. Niessner/Schlupp in: Kunschke/Schaffelhuber, FinTech, Grundlagen, Regulierung, Finanzierung, Case Studies, (2018), p. 50 et seq.
24. Cf. Niessner/Schlupp in: Kunschke/Schaffelhuber, FinTech, Grundlagen, Regulierung, Finanzierung, Case Studies, (2018), p. 50 et seq.
25. For further background cf. BaFin under: https://www.bafin.de/SharedDocs/Veranstaltungen/DE/160628_BaFin-Tech2016.html.
26. Cf. the public BaFin guidance dated 19 December 2013, available at: https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Fachartikel/2014/fa_bj_1401_bitcoins.html.
27. Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013 laying down the Union Customs Code.
28. Commission Implementing Regulation (EU) No 2015/2447 of 24 November 2015 laying down detailed rules for implementing certain provisions of Regulation (EU) No 952/2013 of the European Parliament and of the Council laying down the Union Customs Code.
29. Gramlich in Hohmann/John § 59 AWV, Rn. 5.
30. Grämlich in Hohmann/John § 59 AWV, Rn. 3; Samm in: Bieneck, § 21 Rn. 61, und Contag in: Schult, § 59 AWV, Rn. 1.
31. On the classification of cryptocurrencies as regards payments cf. further Eckert in: DB 2013 2108 (2110); Boehm/Pesch MMR 2014, 75 (78); Spindler/Bille WM 2014, 1357 (1361).
32. The German original reads: Als Zahlung gilt ferner das Einbringen von Sachen und Rechten in Unternehmen, Zweigniederlassungen und Betriebsstätten.
33. There may, however, be certain related physical “emergences” such as cold keys.
34. MünchKomm/Leipold, § 1922 BGB Rdn. 19.

References: Art. 69
 Art. 70
 Art. 70
 Art. 70
 Art. 120
 Art. 128
 Art. 74
 § 59
 § 59
 § 21
 § 59
 § 1922