Unlike in most other European jurisdictions the regulatory practice in Germany has been to treat Bitcoins as units of account and as such financial instruments pursuant to Section 1 German Banking Act (Kreditwesengesetz, "KWG"). The practical consequence of this is that most commercial services surrounding Bitcoins and other cryptocurrencies (including trading, brokerage, operating exchanges, investment advisory etc.) will be regulated activities, requiring the relevant authorisation (licence) of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, "BaFin"). A person conducting banking business or providing financial services without the necessary authorisation will usually be ordered to immediately cease business operations and may be punished by a term of imprisonment of up to five years or a fine (Sections 37 and 54 para. 1 No. 2 KWG).
In the case in question the accused operated a Bitcoin trading platform without a licence from BaFin. The first instance court – the local court of Tiergarten in Berlin – ruled that he had acted negligently and ordered him to pay a fine pursuant to Section 54 para. 2 KWG. Upon appeal the accused was acquitted. The public prosecutor appealed such acquittal. The decision in relation to the appeal of the public prosecutor was issued by the 4th Criminal Senate of the Higher Regional Court of Berlin on 25.09.2018 (Az: (4) 161 Ss28/18). According to the Higher Regional Court of Berlin Bitcoins do not constitute units of account and are not financial instruments within the meaning of the KWG. Consequently the operation of a Bitcoin trading platform is not a regulated activity requiring a licence pursuant to the KWG. The acquittal of the accused was confirmed.
When stating its conclusions the court criticised BaFin for having exceeded its competencies in deciding to treat Bitcoins and other cryptocurrencies as units of account, arguing that this cannot have been the original intention of the legislator when it introduced units of account into the KWG. Further the court went on to distinguish Bitcoins from traditional currencies and other payment means, which arise on the basis of statute, as well as e-money, which necessarily involves an issuing authority. Whilst acknowledging that in the Hedqvist case (Decision of 22.10.2015 – C-264/14) the European Court of Justice referred to Bitcoins as a virtual currency, the Higher Regional Court of Berlin stated that this was done to distinguish Bitcoins from goods for the purposes of establishing any potential value added tax ("VAT") liability in exchange services between Bitcoin and traditional currencies (such VAT liability was denied).
The exact impact of the case remains to be seen. Whilst the lively Berlin crypto-scene is jubilant that the restrictive practice of BaFin, which is considered to have placed a stranglehold on the development of the German crypto-industry, will be reversed, it is important to note that BaFin is not bound by the decision of the Higher Regional Court of Berlin. Furthermore, given the disregard shown by BaFin of the second instance decision, whose conclusions were confirmed by the Higher Regional Court of Berlin, it seems unlikely that BaFin will change its practice lacking legislation or an express decision of an administrative court to the same effect. Market participants should therefore continue to take a cautious approach and seek legal advice and – where applicable – the authorisation of BaFin where the business model involves commercial services in respect of cryptocurrencies in Germany.
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