ICO: Legal Classification of Tokens – Update BaFin’s view

By Dr. Michael Jünemann, Johannes Wirtz

06-2019

Depending on the rights a Token conveys, it can be a Security Token, a Currency Token, a Utility Token or take a hybrid form. Legal literature and regulatory practice can at times diverge.

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In our article on legal classification of tokens we express our view that a crucial prerequisite for the classification as securities is the possibility of a bona fide acquisition. This view is based on legal literature, explanatory memoranda of courts, and reflects the need for finality and confidence in the capital markets.

However, in its journal, BaFin expresses the opinion that a statutory bona fide acquisition shall not be required for the classification as securities (nevertheless, the opposite view is expressed on BaFin’s website on prospectus requirements (English)). To BaFin the defining factor is only the negotiability of the respective product (e.g. a token). If the tokens of an ICO or STO represent the same kind of rights and can be determined by type and numbers, BaFin is likely to accept they meet the criteria of negotiability. Through this paradigm shift, BaFin creates a “security sui generis” to capture all security tokens as securities under prospectus requirements.

It remains to be seen whether BaFin’s approach will find judicial confirmation should a court be asked to adjudicate. Just last year, BaFin’s approach to qualify Bitcoin as financial instruments was challenged by Berlin’s superior court of justice.