Unlike other financial regulators (such as the SEC or the FCA), the German Financial Regulator BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) has not specifically addressed regulatory requirements for ICOs. However BaFin has assessed questions related to the regulatory classification of virtual currencies, generally, on various occasions and has published a number of articles on its website. As a general matter the use of the virtual currency is not subject to an authorization requirement in and of itself because it is simply a form of technology. However, according to BaFin, depending on the business model or business activities associated with the use of blockchain technology, an authorization may be required.
With regard to virtual currencies, BaFin has classified bitcoins as being “units of accounts” (Rechnungseinheiten), similar to IMF special drawing rights, and hence as “financial instruments” and has stated that this classification applies to all virtual currencies. The fact that virtual currencies are created through a decentralized open source technology, and no central issuer exists, is not relevant in this respect. By contrast, bitcoins are not legal tender and therefore are not currencies, foreign notes or coins.
The situation is different for digital means of payment which are backed by a central entity that issues and manages the units. Such companies usually carry out e-money business pursuant the German payment services supervisory act. Operators of platforms that act as “currency exchanges” offering to exchange legal tenders (“fiat currency”) against virtual (crypto) currencies (or such currencies against legal tenders), depending on the respective business model, carry out financial services or banking business. And, if such platform operators also target German customers, they will require a financial services or banking license. BaFin recently issued a cease and desist order against a Spanish entity that operated a trading platform where bitcoins and other instruments were traded. Since the operator of the platform purchased and sold the bitcoins in its own name but for the account of customers, the service qualified as a financial commission business which is considered a banking business and which was subject to an authorization by BaFin.
As noted above, there is no guidance from BaFin related to ICOs, However based on BaFin’s general interpretation and regulatory classification of bitcoins and of the blockchain technology, and depending on the characteristics of the tokens issued under an ICO, the offering could be subject to an authorization under the German banking act, the securities trading act, the investment code, the securities prospectus act or the payment services supervisory act. If, however, as with some recent ICOs, no freely transferable instruments are issued to investors, but only notional “tokens” are recorded in a blockchain ledger (and which do not create or represent rights in a company or in another financial instrument), no securities prospectus should be required if such ICO is targeting German investors. Furthermore, German product intervention rules may be applied by BaFin (e.g., in the interest of investor protection concerns to ban or restrict the offering of such investments). In any event, the use of the blockchain technology and the specific business model or offering would need to be assessed against the applicable German regulatory framework. Also, the German tax treatment of transactions within a blockchain ledger is still evolving.