In 2013, the German Federal Financial Supervisory Authority (BaFin) concluded that Bitcoin (BTC) qualify as “Units of Account” which makes BTC to be seen as “financial instruments”. Transactions, therefore, shall subject to financial regulations. This conclusion was sealed into BaFin’s explanatory note on financial instruments under §1 Abs. 11 S. 1–3. As court decisions are rare, the legal industry followed BaFin’s conclusion. Now, in a verdict issued on 25 September 2018, the Superior Court of Justice (Kammergericht) of Berlin held: BTC are NOT financial instruments.
What did BaFin say in the first place?
BaFin sees crypto tokens as “units of account”.
Generally speaking, cryptocurrency tokens constitute financial instruments (units of account) within the meaning of the German Banking Act (Kreditwesengesetz — KWG).
What are “Units of Account” anyway?
These are units that are comparable to foreign currencies and are not legal tender. These include units of value, which have the function of private means of payment and other substitute currency, which is used as a means of payment in multilateral cleaning circles on the basis of private-law agreements.
An example could be the European Currency Unit (ECU). According to Investopedia, ECU is an obsolete concept since 1999 which means: -
the official monetary unit of the European Monetary System (EMS) before it was replaced by the Euro. The value of the ECU was used to determine the exchange rates and reserves among the members of EMS, but it was always an accounting unit rather than a real currency.
Another instance could be the Gold Standard which is a monetary system where a country’s currency has a value directly linked to gold. Again the Gold Standard is not currently used by any government.
How did Kammergericht arrive at a ruling that BTC is not a financial instrument?
In the judgment, the court was of the view that BTC 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. The court considers that this is not the case for BTC.
The court found that BTC misses a distinctly presentable or equivalent value. The highly volatile, unforeseeable durability of BTC’s value, together with its missing general public recognition, was of particular relevance for the court’s decision to deny BTC’s comparative value for goods and services.
The court found BTC not to qualify as e-money, either.
However, BTC has been seen as a financial instrument in the USA and Japan. Why?
Back in December 2017, CME Group (Chicago Mercantile Exchange) announced that it planned to launch BTC futures contracts in December 2018. NASDAQ also announced its plans to introduce similar derivative products. That indicates BTC was being actively pursued in the market and the regulators, in return, gave a green light to recognization of BTC accordingly.
In April 2017, the Financial Services Agency (FSA), being Japan’s financial regulator, passed legislation that recognized BTC as a legal method of payment. The Japanese regime also mandated cryptocurrency exchange operators with a domestic presence in Japan to register with the FSA and earn a license from the regulator. Having said that, in or about July 2018, due to the insufficient customer protection to crypto-investors, FSA is looking at bringing the cryptocurrency exchange sector under the purview of the Financial Instruments and Exchange Act (FIEA), to recognize and effect laws applicable to traditional securities firms and stock brokerages.
Impact to Cryptocurrency, BaFin and BTC after the ruling from Kammergericht
The implication of the court’s decision for other Currency Token must be examined carefully. If one sees all currency tokens as no longer subject to BaFin regulation, that would be grossly misconceived. Instead, all features of a Currency Token should be thoroughly assessed on a case-by-case basis.
Whether BaFin will revise its administrative practice in relation to permit applications and prohibition orders still remains to be seen as these would be mandated by decisions of administrative courts. The Superior Court of Justice’s verdict in a criminal case, as well as its interpretation, is at first not binding for BaFin.
BTC has characteristics that allow it to function as money and make it a useful payment method. However, its security issues and volatile price fluctuations make it less desirable for every-day transactions. This price volatility may, in turn, undermine BTC’s ability to serve as a store of value.