In its “Bitcoin decision” of 25 September 2018, the Berlin Court of Appeal (case no.: (4) 161 Ss 28/18 (35/18)) ruled that trading Bitcoin was not a crime. Bitcoin are not financial instruments within the meaning of the German Banking Act, in particular, they are no units of account. At first glance, this may not sound exciting, but it is actually quite significant.
But one step at a time:
Background
The provider of a platform on which Bitcoin could be traded was sentenced to a fine in a court of first instance for a “negligent violation pursuant to S. 54 para. no. 2, para. 2 of the German Banking Act (KWG)”. This displeased the platform operator and it appealed the decision. On appeal, the operator was acquitted. This, in turn, displeased the public prosecutor’s office in Berlin and it too, then lodged an appeal. This laid the foundation for the first “Bitcoin judgement” from a higher court. So far, so good.
Background noise
What is interesting about the “Bitcoin decision” is not so much the acquittal as the reasons provided for the judgment. The subject of the criminal case was a negligent violation of S. 54 para. 1 no. 2, para. 2 KWG. What exactly does this mean? Let’s read law. S. 54 para. 1 no. 2 KWG which states:
Anyone who conducts banking business or provides financial services without the authorisation required under Section 32 para. 1 sentence 1, shall be punished by a term of imprisonment (…) or by a fine.
The following persons need an authorisation from the German Federal Financial Supervisory Authority (BaFin) pursuant to S. 32 para 1 sentence 1 KWG,
anyone wishing to conduct banking business or to provide financial services in Germany commercially or on a scale which requires commercially organised business.
The defendant was accused of having conducted banking business or providing financial services without having previously received the required authorisation from BaFin. The Berlin Court of Appeal left open whether trading Bitcoin on the platform operated by the defendant generally constitutes banking business in the form of principal financial broking services (S. 1 para. 1 sentence 2 no. 4 KWG) or a financial service in the form of investment broking (S. 1 para. 1a sentence 2 no. 1 KWG), contract broking (S. 1 para. 1a sentence 2 no. 2 KWG) or an operation of a multilateral trading facility (S. 1 para. 1a sentence 2 no. 1b KWG). In the opinion of the Berlin Court of Appeal, any Bitcoin brokered via the operator’s platform already do not constitute financial instruments, in particular not units of account (S. 1 para.11 sentence 1 KWG), taking this outside the ambit of the KWG.
With this, the Berlin Court of Appeal completely opposed the administrative practice of BaFin. BaFin qualified Bitcoin as “financial instruments in the form of units of account pursuant to S. 1 para. 1 sentence 1 KWG”.
Of course, the correct interpretation of legal terms can be argued in many ways. However, the Berlin Court of Appeal apparently did not agree with BaFin qualifying Bitcoin as “legally binding” units of account as they considered this to have been beyond the powers granted to BaFin within the parameters of the separation of powers. The Berlin Court of Appeal was very clear on this as it bluntly stated:
To the extent BaFin is of the opinion that Bitcoin is a complementary currency which is to be understood to fall within the term unit of account (…), it fails to recognise that it is not the task of the federal authorities to intervene (in particular) in criminal law by shaping the law. (…) The requirement of certainty set out in Article 103 para. 2 of the German Constitution requires (…) that the wording of criminal provisions be drafted in such a way that, as a general rule, the addressee of this rule can already predict on the basis of the wording of the relevant statutory provision whether a particular form of conduct is punishable by law or not. It is true that Section 6 of the KWG grants BaFin general supervisory powers regarding maladministration as well as general authority to order the issuing of administrative acts directed against institutions. (…) The aforementioned information notice (however) does not have the function of shaping the law and also cannot have such function. With the assertion that Bitcoin fall under the term of units of account within the meaning of S. 1 para. 11 KWG, BaFin exceeds its assigned area of responsibility. The legislator itself has to determine the conditions for criminal liability and may not leave this decision up to the executive authorities. (Emphases, additions and deletions made by us)
That was abundantly clear!
In a side note, the court deals with the question of whether Bitcoin constitutes e-money. It states that this is not the case since there already is no issuer. In that respect, the Berlin Court of Appeal and BaFin are in agreement.
What consequences does the “Bitcoin decision” have in practice?
Shortly after the publication of the judgement there were comments to the effect that the Bitcoin judgement creates legal clarity, and even legal certainty. I do not agree with either.
The decision was based on the facts of this particular case. Other criminal courts, but above all administrative courts, may decide differently on the question whether Bitcoin constitutes financial instruments or not. The general principle of equality of the legal system does not necessarily stand in the way of this. In light of this, I believe it to be premature to speak of legal clarity.
Legal certainty is not provided either. Nobody can make a reliable assessment of how BaFin will deal with the decision of the Berlin Court of Appeal. It would not be the first time that BaFin (initially) does not take into account a decision of the Berlin Court of Appeal. In the context of a (civil) appeal, the Berlin Court of Appeal partially rejected the administrative practice of BaFin regarding investment broking (KG Berlin, decision of 5 June 2014 – 22 U 90/13). It had decided that it did not constitute investment broking if the broking only related to the conclusion of a portfolio management contract. The legal dispute went up to the German Federal Supreme Court (BGH). The BGH referred the dispute-deciding question to the ECJ by way of a reference for a preliminary ruling (Case C-678/15). In its ruling of 14 June 2017, the ECJ answered the question referred in the negative, which led to the BGH rejecting the plaintiff’s appeal in its ruling of 10 October 2017, thereby negating the obligation to obtain authorisation. It was only on 13 July 2017 that BaFin updated its information notice on investment broking dated 17 May 2011 accordingly.
Experience therefore shows that we should not expect too much too early regarding increased legal certainty after the decision of the Berlin Court of Appeal of 25 September 2018.
In its digital edition, the German newspaper FAZ therefore correctly states the following result: “Defeat for BaFin – but no victory for crypto fans.” Market participants are still well advised to get information on whether their planned trade really does not require any authorisations and is not punishable by law before trading any “crypto currencies” commercially or participating in them.
Outlook
The Berlin Court of Appeal made it clear that the legislator itself would have to determine the conditions for criminal liability and that this decision should not be left to the executive authorities. Whether or not the legislator will take up this “recommendation for action” is currently not foreseeable. The issue of regulating “cryptocurrencies”, however, is not a question of if it will happen, but only of when. A suitable opportunity for this could be the transposition of the 5th EU Anti-Money Laundering Directive into German law. Within the framework of the implementation of this directive, the legislator could expressly stipulate that Bitcoin and other “cryptocurrencies” are units of account in the sense of the KWG.
We are not vain enough to believe that this article will trigger the legislator to set up the appropriate legal framework; there are more suitable idea providers (BaFin could place this idea much more easily and quickly with the German Federal Ministry of Finance). However, we are convinced that regulation can create trust and thus a market environment that provides the necessary fertile ground for this promising technology.
A final note from us: We will be discussing this topic in detail with market participants and experts from the crypto scene in one of our next episodes of PayTechTalk.
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