Crypto Assets vs. Units of Account - What would be the Impacts of the Introduction of Crypto Assets as Financial Instruments?

(For German version click here)

 

The German Ministry of Finance caused a stir to the German cypto community in May 2019 with its first draft for the transposition of the provisions of the 5. European AML Directive into national law. The ministries draft would not only implement the mandatory regulations from the directive to the German Anti Money Laundering Act but go beyond and define crypto assets as financial instruments according to the German Banking Act (KWG). While the 5. European AML Directive requires the EU members to create a definition for virtual currencies that includes not only crypto currencies but also other forms of alternative money such as computer game currencies, the ministries draft explicitly targets crypto assets and therefore transferrable blockchain units. It is questionable if this first draft of the German legislator is sufficient to implement the European requirements. If, however the elevation of crypto assets to financial instruments in the sense of the German Banking Act becomes legislative reality, the big question would be what regulatory effects this would have on blockchain related Fintech companies?

Landmark Ruling from the Court of Appeal in Berlin Regarding Bitcoin as Units of Account

Already since 2011 BaFin qualified Bitcoin and comparable cryptocurrencies in an established administrative practice as units of account and therefore as financial instruments according to the German Banking Act. When the Court of Appeal in Berlin in a criminal case in September of 2018 ruled (Urt. v. 25.09.2018, Az 161 Ss 28/18) that Bitcoins cannot qualify as units of account as defined in the German Banking Act BaFin was quick to announce that it would stick to its established administrative practice as long as the competent administrative courts would not declare this practice unlawful or until the German legislator would regulate the subject otherwise. It can therefore be assumed that the aforementioned ruling motivated the German legislator to regulate the subject by specifically defining crypto assets as financial instruments according to the German Banking Act.

Crypto Assets as Financial Instruments Would be a German Solo Effort

The fact that the definition of crypto assets as financial instruments would be a solo effort within the European Union by Germany is problematic and has faced a lot of criticism during the course of the discussion that ensued after the first draft of the ministry was released. A base for such a legislative action cannot be found in the European directives or provisions regarding the banking or financial service regulations. As stated, the 5. European AML Directive requires the member states merely to define virtual currencies. That those emerge into a full-fledged financial instrument with all the regulatory implications that come along with this kind of qualification is not required by the directive. Interestingly enough, the regulation of units of account likewise does not have any legal basis within the European directives. The German legislator incorporated these into the catalogue of regulated financial instruments because he wanted to regulate the trading of units of account in the same way in which the trading of foreign currencies is regulated. Because the trading of cryptocurrencies is an international phenomenon, it should be undesirable to have different regulations for crypto assets within the European Union’s member states. The German legislator could instead campaign for the incorporation of marketable cryptocurrencies in the catalogue of the second Markets in Financial Instruments Directive (MiFID II). This would ensure a homogeneous regulation of cryptocurrencies throughout the European Union.

What Effects Would the Qualification of Crypto Assets as Financial Instruments in Germany Have?

The effects of the proposed draft on blockchain affiliated Fintech companies in Germany would be very limited because neither under the current regulatory situation which qualifies Bitcoin and Bitcoin-like cryptocurrencies as units of account nor under the proposed regulation those cryptocurrencies would qualify as financial instruments as defined by MiFID II. While the regulations of the German Banking Act would still be applicable, the other capital markets regulations that result from e.g. the German Securities Trading Act, the European Market Abuse Directive or the German Securities Prospectus Act would only be applicable if the crypto asset in question fulfilled the additional prerequisites to qualify as an financial instrument according to the law in question. The EU Passporting, that is the usage of a German BaFin license in other EU member states, would still be impossible because the regulation would still not be harmonized within the EU. Positive from a solely German point of view would be that the German legislator reacts to the legitimate criticism from the Court of Appeal in Berlin regarding the current regulatory situation in Germany and that the regulatory situation would get the necessary legal clarification.

 

Attorney Lutz Auffenberg, LL.M. (London)

 

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