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The Capital

PART 1. Legal regulation of cryptocurrencies and blockchain technologies in Germany and Italy

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States cannot but react to how rapidly modern financial technologies are developing. They are used to minimize risks, optimize trading, banking, and other transactions, and, accordingly, in a certain way affect the existing legal relationship. It cannot be argued that such influence has only positive properties: even if a smart contract is used during a transaction, situations of damage to one or another person are possible. The task of the legislator, in this case, is the formation of legal regulation of general and private aspects of the use of digital technologies in everyday life, which should keep pace with the rapid scientific and technological progress in order to prevent negative consequences for the economy, as well as to protect the interests of both the state and society as a whole, as well as and individuals.

A feature of modern digital technologies is the possibility of global application, in connection with which the issue of their legal regulation can be considered an international problem, and in such a situation, it seems useful to study the experience of different countries. Despite the fact that currently the technologies under consideration are not fully regulated anywhere, the greatest success in this direction, perhaps, has been achieved by Germany and Italy. An analysis of the legislation of the mentioned countries in this area will make it possible to draw a conclusion about the effectiveness of Western European legal regulation of relations related to the use of digital technologies, as well as the possibility of borrowing the norms of law and experience for the legal system of other countries.

Legal regulation of cryptocurrencies and blockchain technologies in Germany.

Germany became one of the first countries in Europe to pay attention to the development of cryptocurrency. In 2013, the Federal Financial Supervision Authority of the Federal Republic of Germany (BaFin) issued a decree according to which cryptocurrency (including bitcoin) was recognized as a unit of account and, accordingly, a payment (financial) instrument in accordance with the German Law on Credit Institutions of Germany. Thus, the rules on the regulation of payment instruments applied to cryptocurrencies.

The document is available here

The question of the legal nature and essence of cryptocurrency remained open. According to BaFin’s position expressed in this regulation, cryptocurrencies should not be classified as digital money. In accordance with the German Law on Supervision of the Payment System, digital money is considered to be electronic (including magnetic) values ​​that have monetary value and are issued by issuers for the purpose of making a payment. It should be emphasized that an important feature of digital money is the presence of a central issuer. Any cryptocurrencies, including Bitcoin, do not meet the latter criterion, therefore, they cannot be considered digital money under German law.

The document is available here

In February 2018, BaFin published ICO guidelines, according to which tokens or cryptocurrencies issued as part of an initial public offering can be either securities (and then subject to the regulation of the German securities law) or investments (and, accordingly, subject to the German money investment Law). This separation occurs on an individual basis in each individual ICO case.

The document is available here
The document is available here

The Bundesbank adheres to a similar point of view, believing that cryptocurrencies cannot be classified as electronic money, since they do not function as a currency and are not part of the German monetary system. The President of the Central Bank of Germany, Jens Weidmann, said that bitcoin cannot in any way relate to the digital currency since any means of payment must have a sign of price stability. In January 2018, the Federal Bank of Germany even warned private investors about the risk of investing in digital currency. However, the introduction of a ban on the circulation of cryptocurrency, according to the regulator, is not a necessary measure.

The document is available here

In addition, in February 2018, the German Federal Government issued a warning that raised issues of illegal cryptocurrency circulation. The government has explicitly expressed the position that cryptocurrency is not legal tender but merely replaces currency in certain private legal relationships. The publication of this document was caused by a large number of complaints from consumers of services in the cryptocurrency market. In particular, in February 2018, the Hesse Federal State Agency for Consumer Protection, based on such statements, began an investigation and verification of 20 professional participants in the cryptocurrency market.

An important element of legal regulation of any financial market is the institution of licensing. In Germany, persons providing services in the cryptocurrency market (platforms, etc.) and performing operations with cryptocurrencies on a permanent and commercial basis (carrying out speculative activities) must obtain a relevant BaFin license.

Thus, in Germany, there is already a certain understanding and attitude towards cryptocurrency among government bodies regulating the financial sector of the economy. In 2013, Germany took a decisive step towards its recognition, however, further research showed many risks and flaws, which led to a significant decrease in confidence in cryptocurrency at the state and supranational level. Today, the German authorities are skeptical about cryptocurrency, considering it a potential threat to the economy, and therefore there was a need for its legal regulation. At the same time, Joachim Würmeling, a member of the Board of Directors of the Bundesbank, believes that cryptocurrency can only be effectively regulated at the international level since domestic opportunities in this area are very limited.

The full article available here

Since blockchain technologies are not fully regulated by German law, it is worth paying attention to the German doctrine, which reveals their concept and characteristics.

The key doctrinal issue is the definition of blockchain. For example, scientists at the Frankfurt University of Applied Sciences understand it as a fraudulent distributed database in which authentic, immutable and logged transactions are made in the absence of any central participant. In other words, it is a decentralized database, within which the participants in one chain own common information.

The main features of the blockchain, according to Frankfurt researchers, are:

  • decentralization: data is stored not on one central server, but on computers of all parties: the blockchain is based on the Peer-to-Peer (P2P) system, thanks to which all participants in the chain have equal rights and can interact with each other directly, avoiding intermediaries;
  • universality: transactions are not necessarily financial in nature. Through the blockchain, in addition to financial transactions, any information can be transmitted, including text information, which, once recorded, can no longer be changed in the future.

To conduct transactions, a digital wallet is required, which consists of a public and private key. The private key cannot be transferred to anyone (similar to a PIN or other passwords), thanks to it all transactions are authorized, and the authenticity of the operation is confirmed. A public key is a cipher through which information is transmitted. Both the private and public keys are based on cryptography, which makes the operation confidential.

Very often in German doctrinal sources, one can find the classification of the blockchain into open (public) and closed types. An open (public) blockchain is a blockchain accessible to any participant with the necessary computer equipment. The largest such chain is Bitcoin (currently the most popular cryptocurrency). A private blockchain is a chain of a limited number of participants that requires an invitation to join. This type is used for relationships within a certain group that does not want to provide access to confidential information to third parties.

Considering blockchain technologies, German scientists touch on the concept of a smart contract, which is closely related to them. A smart contract is a program that contains and executes the terms of the concluded contract, thanks to which the parties to the contract can successfully solve the problems of trust in the counterparty, since the smart contract will be executed automatically and exactly as it was originally agreed, after all, make changes to the smart contract is not possible.

One of the important problems currently being solved by the German legal doctrine is the question of the possibility of referring smart contracts to the legal structure of an agreement within the meaning of the German Civil Code. In view of the fact that the concept of “smart contract” is not regulated either in the German Civil Code or in other regulations, the legal nature of this phenomenon also remains unclear. The conclusion of an agreement is the free expression of the will of the parties, however, since the program code is not able to express the will of the parties, being unreadable for a person, in the legal sense, a smart contract is not a contract, but only its expression in a computer language. In this regard, it is still necessary to conclude a regular contract, and the smart contract will be used as a means of its execution.

The document is available here

There is also another point of view on the legal nature of a smart contract, according to which the used program code is considered as the language of the text of the contract (along with foreign languages). With this understanding, the freedom of expression of the will of the parties is simply expressed in a different language, especially since the German Civil Code guarantees the freedom to choose the language of the text of the agreements. At the same time, it must be borne in mind that if a legal dispute arises, it will be necessary to involve an expert to consider the case.

The central problem of smart contracts remains control over the observance of civil law principles and norms when writing code. At present, it is impossible to control the legality of the given provisions, which raises the question: what to do with a smart contract, in the conditions of which violations of the law are committed? As noted above, it is impossible to change the terms of a smart contract. In addition, a smart contract must also be drawn up technically correctly: it must not contain errors that could disrupt or terminate its work. Both of these aspects must be taken into account when drafting a smart contract: it must meet both legal and technical requirements, but it is still difficult to control this.

Thus, we can conclude that the German doctrine pays great attention to the development of digital technologies and tries to fill the key gaps associated with their application, in particular, to solve the problems about the concept and features of the blockchain and the legal nature of a smart contract.

In the next part, we will talk about the legal regulation of cryptocurrency and blockchain technologies in Italy.

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