Part 3/5 - Currency Token: Currency Token, also called cryptocurrency, are the origin of token. The most well-known example for a coin is Bitcoin. Other examples of Currency Token are Ethereum (or Ether) and Ripple. An essential feature is the money replacement character of the token, as they serve as decentralized currency.
Part 1 outlines general principles of tokenization
Part 2 assesses the features of Security Token
More on Blockchain/DLT applications on our Blockchain In-Focus page.
After briefly entering into the technical structure of tokens and the legal classification of security tokens in the first and second part of this essay,[i] the following parts are going to further examine currency tokens and utility tokens. In this regard, we are not discussing technical differences (if present at all).
The debate on the regulation of tokens and coins was encouraged by Bitcoin. While it is technically a coin, there is no difference in a legal context. Hence, we are treating it as part of the discussion of currency tokens. In the beginning, the most common form of tokens were currency tokens[ii], fulfilling the classic concept of cryptocurrency or virtual currency. Ether[iii] and Ripple[iv] also come under the legal term of currency tokens. A key feature is the token money character. They are supposed to serve as a decentralized, i.e. non-governmental, substitute currency[v]. There is no central office accepting or cashing tokens.
BaFin already addressed currency tokens on a number of occasions[vi], so that according to the administration, a sort of legal certainty was at hand with the supervisory classification. The latter was, however, shaken by a judgment of the Higher Regional Court of Berlin in September 2018[vii]. Since then, the legal uncertainty has increased significantly.
In the case of currency tokens, the classification according to civil law causes certain difficulties as they do not hold any rights. According to the prevailing opinion, currency tokens are not considered money[viii].
They are not considered claims in the absence of claim opponents and within the meaning of sec. 90 BGB[ix] they are not considered things in the absence of physicality. They are also not considered copyrighted software or a personal intellectual creation and currency tokens are not subject to any other right, there is only the factual possibility of access[x]. Yet there are debates on whether it can be considered a commodity protected by the property protection of Art. 14 GG (German Basic Law)[xi] or as “another right” by sec. 823 (1) BGB.[xii] The concept of property according to Art. 14 GG is broader than the (tangible) property concept according to the BGB and inter alia comprises claims.[xiii] Ultimately, currency tokens can only be classified as miscellaneous items according to civil law.[xiv]
Civil and regulatory classification of currency token
Despite the difficult civil-law classification of tokens, BaFin's statement clarified that, according to supervisory regulations, Bitcoin, and thus apparently currency tokens in general, are considered units of account and therefore financial instruments within the meaning of the KWG. After initial debates, this view was acknowledged by literature for a long time.
Units of account: BaFin undertook the legal classification in Germany at a relatively early stage. In 2013, it found that Bitcoin is considered a unit of account.[xv] In sec. 1 (11) sentence 1 no. 7 KWG, units of account and foreign currencies are qualified as financial instruments without being legally defined therein or somewhere else.[xvi]
Literature also struggles with finding a definition and in many cases, leaves it out entirely.[xvii] It can be stated that units of account must be comparable to foreign currencies.[xviii] Comparability with foreign currencies can be gathered from the fact that the market accepts currency tokens as a means of payment.[xix] The classic example for a unit of account is the International Monetary Fund's (IMF)[xx] special drawing right, an artificial currency that cannot be traded on the foreign exchange market.[xxi]
BaFin and large parts of literature thus conclude that currency tokens come under the concept of financial instruments within the meaning of the KWG[xxii] and their respective trade is subject to the reservation of authorisation of sec. 32 KWG.[xxiii] As of yet, BaFin has consequently been implementing its administrative practice. In April 2017 and at the end of January 2018, for instance, it ordered two different crypto exchanges to close unauthorized business.[xxiv]
The subsumtion of Bitcoin under the term of units of account is partly rejected.[xxv] BaFin would regard the concept of units of account as too broad. The Higher Regional Court of Berlin expressed its criticism particularly harshly and even speaks of BaFin "exceeding" its area of responsibility.[xxvi] The Higher Regional Court substantially rejects the classification of the Bitcoin as a unit of account due to the lack of "general recognition and the respective foreseeable stability of value". This would make it impossible to use Bitcoin as a means to compare various goods or services.[xxvii]
Rejection of the Classification as Units of Account
Another reason for rejecting the classification as a unit of account explained in literature is that the statute only comprises units of account in the narrower sense. These require a claim against an issuer. However, it is unclear whether the term is actually linked to the claim against an issuer as requested by the legislator.[xxviii] It is true that the typical examples are centralistic (special drawing right of the IMF and the European Currency Unit (ECU)), yet this common feature might also just be a coincidence and not a solid characteristic of the term “unit of account”.
It appears to be more central that the units of account in the narrower sense are mere calculation factors expressing the value of goods.[xxix] The Higher Regional Court of Berlin brought forward the Bitcoin's high volatility, yet this is not a persuasive argument against a unit of account as a plurality of exchange currencies is also subject to fluctuations.
However, Bitcoin – and other currency tokens even more – is lacking a central office determining the value (in the case of foreign currencies, rates are determined and published by the European Central Bank (ECB)).[xxx] There are various trading platforms for the Bitcoin, which, however, undertake different ratings and have an unclear regulation status in some cases. Further, the fluctuations of the virtual currency rates rather lessened as of late, which could also be understood as the end of a pricing process for this new currency.
Rightly, the significance of the regulation of units of account has to be considered in the interpretation. These lead to the general regulations for financial markets. With regard to these (e.g. trust in the functioning of the markets, investor protection), the regulation as a unit of account and the comparability of currency tokens with foreign currencies becomes apparent.[xxxi]
E-money: There is consensus that currency tokens (primarily with regard to Bitcoin) are not considered e-money within the meaning of sec. 1 (2) sentence 3 ZAG.[xxxii] A claim against an issuer is lacking.[xxxiii] This shows that a detailed structure is decisive: It is easily possible to structure a token in such a way that it can be exchanged for central bank money (fiat money[xxxiv]) with an issuer. While this is not the case for decentralized networks such as the Bitcoin, it is possible for issuer-driven tokens.
Technical structure is relevant
In the case of issuer-driven tokens, the classification as e-money can fail because of the fact that tokens can only be accepted by the issuer or be exchanged for other tokens. With regard to e-money, the acceptance of a third party (so-called third-party acceptance)[xxxv] as well as the issuing against payment of a sum would be required.[xxxvi] As much as the e-money feature is generally not applied to currency tokens in most cases, the more important it is to take a closer look at an ICO. As in this case – different from the decentralized Bitcoin network – an issuer issues the token, even small details can lead to the issuing of e-money.
Securities or capital investment: Tokens can be units of account and securities at the same time.[xxxvii] However, currency tokens are usually not considered a means of payment within the concept of securities.[xxxviii] Payment instruments include cash, checks and other liquid assets usually used as payment instruments.[xxxix]
Bitcoin, for instance, was classified as a "contractual means of payment" by the European Court of Justice (ECJ) (but only in a bill concerning turnover tax liability).[xl] While most Bitcoin transactions are carried out for speculative purposes,[xli] the mere profit expectation via a secondary market is not sufficient in order to substantiate the securities feature. It is therefore with justice that BaFin has not yet classified Bitcoin as securities.
As currency tokens are usually not charged with an interest or generate other revenues, they are not considered capital investments either. Furthermore, Currency tokens are not considered securities.[xlii] For the time being, there is also no change in the administrative practice of BaFin. Further prohibitions are to be anticipated. Yet, the accountability under criminal law is called into question. It remains to be seen how the administrative courts will decide.
* The authors thank Timo Förster for his support.
* This article was originally published in German language in Zeitschrift für das gesamte Kreditwesen 2018 (21-23), p. 1117-1121, p. 1222-1226.
[i] Jünemann/Wirtz, Kreditwesen 2018, 1117 [Banking].
[ii] Sometimes also referred to as cryptocurrency tokens or payment tokens.
[iii] Cf. for example ESMA's statement dated November 13, 2017, ESMA 50-157-829.
[iv] Cf. for example BaFin, Virtual Currency (VC), edited April 28, 2016.
[v] Cf. BaFin, Virtual Currency (VC).
[vi] Cf. BaFin, Virtual Currency (VC); BaFin, Bitcoins: Supervisory assessment and risks to users, dated February 17, 2014; BaFin, Cryp Trade Capital Ltd.: BaFin prohibits unauthorized banking business and orders winding-up, dated August 3, 2017.
[vii] Higher Regional Court of Berlin, judgment of September 25, 2018, docket no.: (4) 161 Ss 28/18 (35/18).
[viii] Shmatenko/Möllenkamp, MMR 2018, 495, 496.
[ix] Cf. Boehm/Pesch, MMR 2014, 75, 78; Lerch, JBB 2015, 190, 193 et seq.; Schlund/Pongratz, DStR 2018, 598, 600; Shmatenko/Möllenkamp, MMR 2018, 495, 497.
[x] Cf. Lerch, JBB 2015, 190, 196.
[xi] Cf. Lerch, JBB 2015, 190, 196.
[xii] Cf. Spindler/Bille, WM 2014, 1357, 1363; Lerch, JBB 2015, 190, 196; Shmatenko/Möllenkamp, MMR 2018, 495, 498.
[xiii] Cf. Fritzsche, in: BeckOK BGB, Bamberger/Roth/Hau/Poseck, 44th edition, as of: November 1, 2017, sec. 903 BGB, marg. no. 14.
[xiv] Cf. sec. 453 (1) Alt. 2 BGB; cf. Spindler/Bille, WM 2014, 1357, 1360; Schlund/Pongratz, DStR 2018, 598, 600.
[xv] Cf. BaFin, Bitcoins: Supervisory assessment and risks to users, dated February 17, 2014; also Parliamentary State Secretary Hartmut Koschyk's response to a parliamentary request by member of parliament Frank Schäffler dated August 7, 2013, Bundestag document 17/14530, p. 41.
[xvi] Cf. Schäfer, in: Boos/Fischer/Schulte-Mattler KWG, CRR directive, 5th edition 2016, sec. 1 KWG, marg. no. 287; Spindler/Bille, WM 2014, 1357, 1361.
[xvii] Cf. Spindler/Bille, WM 2014, 1357, 1361.
[xviii] Cf. Schwennicke in: Schwennicke/Auerbach, German Banking Act, 3rd edition 2016, sec. 1 KWG, marg. no. 249; Auffenberg, NVwZ 2015, 1184, 1187 [New journal of administrative law]; Higher Regional Court of Berlin, judgment of September 25, 2018, docket no.: (4) 161 Ss 28/18 (35/18).
[xix] Cf. Spindler/Bille, WM 2014, 1357, 1362; different interpretation Auffenberg, NVwZ 2015, 1184, 1187.
[xx] Cf. Schäfer, in: Boos/Fischer/Schulte-Mattler KWG, CRR, 5th edition, sec. 1 KWG, marg. no. 287; Sprengnether/Wächter, RdF 2014, 114, 116 [legal journal of rights of financial instruments].
[xxi] Cf. Otte, in: Ferrari/Kieninger/Mankowski et al., Internationales Vertragsrecht [international contract law], 3rd edition 2018, Art. 23 CMR [Contracts for the international carriage of goods by road], marg. no. 28.
[xxii] The KWG and the WpHG use different terms for "financial instruments".
[xxiii] Cf. BaFin, Bitcoins: Supervisory assessment and risks to users, dated February 17, 2014; Lerch, JBB 2015, 190, 200; Schwennicke/Auerbach, German Banking Act, 3rd edition 2016, sec. 1 KWG, marg. no. 249; according to Schenk/Grieser (RdF 2015, 29, 33), the European Banking Authority (EBA) considers virtual currencies similar to a unit of account.
[xxiv] Cf. BaFin, Cryp Trade Capital Ltd.: BaFin prohibits unauthorized banking business and orders winding-up; Crypto.exchange GmbH: BaFin orders cessation of unauthorized principal broking services, dated January 29, 2018.
[xxv] In some cases, the classification as a unit of account is at least not clearly confirmed; cf. Schäfer, in: Boos/Fischer/Schulte-Mattler, KWG, CRR, 5th edition 2016, sec. 1 KWG, marg. no. 287; Spindler/Bille, WM 2014, 1357, 1362; Sprengnether/Wächter, RdF 2014, 114, 116 et seq.; Schenk/Grieser, RdF 2015, 29, 33 et seqq.; Beck/König, JZ 2015, 130, 135 et seqq. [lawyer journal]; Lerch JBB 2015, 190 et seqq.; Beck NJW 2015, 580, 581 et seqq.; Auffenberg, NVwZ 2015, 1184; Higher Regional Court of Berlin, judgment of September 25, 2018, dockent no.: (4) 161 Ss 28/18 (35/18); Hanten/Stump, RdF 2018, 189.
[xxvi] Higher Regional Court of Berlin, judgment of September 25, 2018, docket no.: (4) 161 Ss 28/18 (35/18).
[xxvii] Higher Regional Court of Berlin, judgment of September 25, 2018, docket no.: (4) 161 Ss 28/18 (35/18).
[xxviii] Cf. Sprengnether/Wächter, RdF 2014, 114, 116.
[xxix] Cf. Sprengnether/Wächter, RdF 2014, 114, 116.
[xxx] Cf. Auffenberg, NVwZ 2015, 1184, 1187.
[xxxi] Cf. also Spindler/Bille, WM 2014, 1357, 1362.
[xxxii] Cf. Terlau, in: Casper/Terlau, ZAG (Payment Services Supervision Act), 1st edition 2014, sec. 1a ZAG old version, marg. no. 40, 50; Schwennicke, in: Schwennicke/Auerbach, German Banking Act, 3rd edition 2016, sec. 1a ZAG old edition, marg. no. 21; Findeisen, in: Ellenberger/Findeisen/Nobbe, Kommentar zum Zahlungsverkehrsrecht [commentary on payment transaction law], 2nd edition 2013, sec. 1a ZAG old version, marg. no. 53, 55; Zickgraf, AG 2018, 293, 307; BaFin fact sheet indications on the ZAG, edited on November 29, 2017; agreeing: Higher Regional Court of Berlin, judgment of September 25, 2018, dockent no.: (4) 161 Ss 28/18 (35/18).
[xxxiii] Cf. Sprengnether/Wächter, RdF 2014, 114, 116; Shmatenko/Möllenkamp, MMR 2018, 495, 496.
[xxxiv] In some literature the view is held that "fiat money" is a contemptuous term. However, it is also used by the EU (cf. 5th Directive on Money Laundering).
[xxxv] Cf. Terlau, in: Casper/Terlau, ZAG, sec. 1a ZAG old version, marg. no. 59; Fußwinkel/Kreiterling, publication series BaFinPerspectives, issue 1/2018 dated August 1, 2018, p. 54, 62.
[xxxvi] Cf. Terlau, in: Casper/Terlau, ZAG, sec. 1a ZAG old version, marg. no. 50; Fußwinkel/Kreiterling, publication series BaFinPerspectives, issue 1/2018 dated August 1, 2018, p. 54, 62.
[xxxvii] BaFin, advisory letter: Initial Coin Offerings: Advisory letter on the classification of tokens as financial instruments March 28, 2018, reference no.: WA 11-QB 4100-2017/0010.
[xxxviii] Cf. Hacker/Thomale: Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law, November 22, 2017, SSRN Electronic Journal, 10.2139/ssrn.3075820, available from SSRN: https://ssrn.com/abstract=3075820 or http://dx.doi.org/10.2139/ssrn.3075820, p. 29.
[xxxix] Cf. Bundestag document 16/4028, p. 54; Kumpan, in Schwark/Zimmer, Kapitalmarktrechts-Kommentar [commentary on capital market law], 4th edition 2010, sec. 2 WpHG, marg. no. 12; Fuchs, in: Fuchs, German Securities Trading Act, 2nd edition 2016, sec. 2 WpHG, marg. no. 10.
[xl] European Court of Justice's (ECJ) judgment of October 22, 2015 – C-264/14 (Hedqvist), DStR 2015, 2433.
[xli] Cf. Hacker/Thomale, loc. cit., p. 35.
[xlii] Currency tokens are also not regarded as securities in other jurisdictions, such as Switzerland (cf. FINMA), FINMA publishes ICO guidelines dated February 16, 2018) or the USA (cf. Jay Clayton, SEC, Statement on Cryptocurrencies and Initial Coin Offerings dated December 11, 2017).