Bitcoin are NOT Financial Instruments

By the End of 2013, German Federal Financial Supervisory Authority (BaFin) concluded an article on consumer protection that Bitcoin qualify as so called Units of Account which ultimately makes them financial instruments. Trading must thus meet special financial regulatory requirements. This assertion was commonly adopted in professional legal literature with only very few challenges as the opinion found its way in BaFin’s explanatory note on financial instruments under §1 Abs. 11 S. 1-3. As court decisions are rare, legal practice followed BaFin’s lead. Now, the Superior Court of Justice (Kammergericht) of Berlin decided: Bitcoin are not financial instruments.

In a criminal trial, the court assessed the criminal liability of Bitcoin trading via an online platform. The defendant was charged with the trading of financial instruments without permit pursuant to Section 54 of the German Banking Act (Kreditwesengesetz - KWG). After a conviction in the first instance of Berlin’s local court, in the second instance the sentence of Berlin’s regional court was one of acquittal. This decision was now confirmed by Berlin’s highest state court, the Superior Court of Justice (Kammergericht), in a verdict issued on September 25th, 2018.

The Kammergericht demonstrated that Bitcoin do not qualify as Units of Account (Rechnungseinheiten) which are comparable to foreign exchanges. The idea of a Unit of Account is to create a reference point of value for goods and services in different territories. This is not the case for Bitcoin.

The court goes on that Bitcoin misses a distinctly presentable or equivalent value. The highly volatile, unforeseeable durability of Bitcoin’s value, as well as its missing general public recognition, was of particular relevance for the judges’ decision to deny Bitcoins comparative value for goods and services.

At the same time, the Kammergericht finds Bitcoin not to qualify as e-money either.

In the course of revising general legal practice, the court censured BaFin for overstepping its own legal boundaries. BaFin misconceives its mandate when trying to shape criminal law which is a privilege to the democratic-parliamentary process thus clearly overreaching its function in classifying Bitcoin as financial instruments. With this interpretation however, the court itself fails to fully understand the character for BaFin explanatory notes. These are not meant to shape the law and legally bind individual operators. They simply create transparency for BaFin’s opinion and administrative practice regarding permit applications and prohibition orders. In general, the explanatory notes are very welcomed by all market participants. Additionally, the Kammergericht, in its BaFin-critique, takes a very different position as the regional court of Cologne. The regional court, in the so-called Lieferheld-decision, granted BaFin supremacy over the court’s own competency regarding the assessment of permit applications.

The implication of the court’s decision for other Currency Token must be examined carefully. To conclude, all Currency Token are no longer subject to BaFin regulation is a misleading generalisation. Instead, all features of a Currency Token should be thoroughly assessed. Nevertheless, the Kammergericht’s decision finally provides some tangibility to term Unit of Account. Whether BaFin will change its administrative practice regarding permit applications and prohibition orders remains to be seen as these would be mandated by decisions of administrative courts. The Kammergericht’s verdict in a criminal procedure as well as its interpretation is initially not binding for BaFin.

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