A German court has declared that Bitcoin is not a financial instrument. Therefore, Bitcoin exchanges do not need any permission to operate. This court ruling has created a legal limbo in Germany’s crypto industry, as it is contradictory to the way German supervisory authorities have dealt with Bitcoin in the past.
The court ruling of the Berlin Court of Appeal has caused confusion amongst Germany’s growing Bitcoin community. Until recently, Bitcoin had been classified as a financial instrument by Germany’s Federal Financial Supervisory Authority “BaFin”. The recent court ruling, however, states that cryptocurrencies do not meet the criteria of a financial instrument as outlined in the German Banking Act (KWG).
This court ruling goes back to a case five years ago. A 16-year old started an online Bitcoin exchange, without the Bafin’s permission. The supervisors shut down the exchange, and the owner had to pay a fine for breaking financial market laws.
The convict challenged the court ruling, and the Berlin Court of Appeal agreed to his reasoning. According to the court’s decision on 25th September 2018, Bitcoin is no financial instrument as per the German Banking Act. Therefore, there is no need for Bitcoin exchanges to apply for a license.
The court ruling could affect not only Bitcoin trading but Germany’s entire blockchain industry
The court ruling could have important implications for the German blockchain industry. So far, Bitcoin was considered a financial instrument, and this position of the Bafin has created at least some legal certainty. Startups could develop their products, knowing they will be legally recognized. Users felt more confident, because the products they bought were regulated by the law.
Furthermore, the Bafin seems generally eager to create a blockchain-friendly regulatory framework. Felix Hufeld, head of the Bafin, said blockchain applications have promise in areas that “lack an effective control mechanism or trustworthy institutions.” The Bafin has also issued guidelines for ICOs and STOs, outlining the criteria tokens have to meet in order to be considered securities.
However, as the Bafin’s positions have now been challenged by a court, a legal limbo has come into existence. If Bitcoin is neither considered a financial instrument nor a currency, what is the legal status of Bitcoin then? And what does that mean for the future of ICOs and STOs? The answer is: We don’t know yet.
Bafin says it won’t change its interpretation of the law and keep shutting down unlicensed exchanges
While crypto observers are worried that Germany may now turn into a crypto wild west, the Bafin is rather unimpressed with the latest court ruling.
According to an official statement, Germany’s watchdog considers the court’s decision to be an isolated legal case that has no effects on the its handling of cryptocurrencies and other tokens. The supervisory authority therefore won’t change its course and Bitcoin exchanges that operate without permission will still get shut down.
However, as the court has taken an opposing view to the Bafin’s practices, it is unclear who is having the lead in Germany, and what which practices are actually considered legal.
The court ruling increases pressure on German law makers to create clear regulations
The Berlin Court of Appeal won’t have the last word in this matter. The judges have only stated that Bitcoin cannot be categorized as a financial instrument. They have not provided any alternative legal perspective on how to deal with cryptocurrencies.
Therefore, German lawmakers will have to step in and create clarity. “The government has no interest in an unregulated cryptocurrency market,” says Oliver Flaskämpfer, CEO of Bitcoin.de, one of the few licensed crypto exchanges in Germany. It is therefore likely, that new regulations will be introduced soon.
Germany could follow neighboring Liechtenstein’s example, which will introduce the first comprehensive regulatory framework for the blockchain industry in 2019. It is possible, that the court ruling in Berlin has woken up German lawmakers, and we might see more regulatory activity in the blockchain space soon.