Since the publication of Satoshi Nakamoto`s whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008, the Blockchain technology rose to prominence. It allows the usage of decentralized databases as well as the transfer of units between the users within the system but without the necessity of a trusted third party for validation. Bitcoin itself came into existence in 2009 and has seen almost unprecedented gains and losses. The success of Bitcoin inspired a lot of other pioneers who developed other cryptocurrencies on basis of the Blockchain technology. Today there are numerus decentralized ledgner systems in existence, most of them based on blockchain technology. Within those, there have been a lot of fascinating advancements and developments made for example in terms of privacy of the transactions (e.g. Monero, ZCash, Dash) or in terms of the implementation of so called decentralized Apps (dApps) via smart contracts into the blockchain (e.g. Ethereum, EOS, Neo). But blockchain technology is not limited to payment services or the financial industry. It is also very useful and holds a lot of advantages over traditional technologies in areas like supply chain management or wherever a trusted third party is currently needed but unwanted in the process.
The regulatory classification of crypto assets is internationally inconsistent and right now subject of controversial discussion between the legislation and regulatory authorities. In Germany the Federal Financial Supervisory Authority (BaFin) decided in 2011 that Bitcoin and comparable cryptocurrencies shall be treated as units of account and therefore fall under the definition of a financial instrument according to the German Banking Act. This administrative practice has since been challenged and ruled unlawful by the Court of Appeal in Berlin but this decision as a criminal ruling has no binding effect for the BaFin. Therefore BaFin’s administrative practice to qualify Bitcoin and comparable clones as financial instruments stays in effect until the administrative courts or the lawmakers decide otherwise. All other crypto assets or blockchain tokens could also qualify as a financial instrument in the opinion of the BaFin. Depending on the individual design and function of a crypto asset in the specific case, these units could be qualified by the BaFin as either securities, assets, units of account or in certain cases even as e-money. In all these cases, the applicable banking supervisory laws and regulatory capital amrkets laws have to be followed. FIN LAW not only has the legal expertise to guide its clients through these regulatory laws but also the technical understanding of Blockchain technology to correctly identify the regulatory needs of the client in regard to supervision by BaFin. This combination guarantees top-level legal advisory services for all projects and businesses that are blockchain related.
Since the appearance of Bitcoin in 2009 multitudinous new business models with relation to blockchain technology have come up. Service providers offer crypto wallet applications for the storage and administration of cryptocurrencies as well as of the private keys which are necessary for transferring them. Another first-generation business model is the operation of trading platforms for cryptocurrencies where users can exchange cryptocurrencies for other cryptocurrencies or even for legal tender. Such trading platforms operate usually online even though trading cryptocurrencies can also happen by the use of so-called Bitcoin ATMs, that is to say machines enabling users locally to exchange for example euros or US-Dollars for cryptocurrencies or vice versa. For all these and comparable crypto-related business models a sound and professional regulatory advisory is of utmost importance when realizing it in Germany because of BaFin’s qualification of cryptocurrencies as financial instruments. The German regulator is not only competent for the business model if the company realizing it has its seat in Germany but also whenever a company from the USA or any other country outside the European Economic Area actively addresses the German market with its services, for example by the use of a website in German, marketing events in Germany or any other marketing activities expressing its intention to win German customers.
Attorney Lutz Auffenberg, LL.M.
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