On 16 August 2019 the German Federal Financial Supervisory Authority (BaFin) published a new guidance note regarding crypto tokens (GZ: WA 51-Wp 7100-2019/0011 and IF 1-AZB 1505-2019/0003). The guidance note dealt with prospectus and licence requirements in connection with crypto tokens and is intended to complement the BaFin’s explanatory letter regarding the supervisory classification of crypto tokens as financial instruments in the area of securities supervision (GZ: WA 11-QB 4100-2017/0010). BaFin felt the publication of the guidance note was in order as it had received numerous – often unclear content-wise – inquiries regarding the legal classification of crypto tokens.
Not all crypto tokens are the same
BaFin reaffirms its ongoing administrative practice that crypto tokens are subject to existing financial market regulation depending on their concrete form. In BaFin’s administrative practice, a number of token categories have developed that allow an initial assessment of the regulatory classification. Broadly speaking, a distinction can be made between utility tokens, payment tokens and security tokens, whereby utility tokens are largely unregulated and security tokens are subject to the most stringent regulation. In this context, BaFin emphasises that in view of the numerous forms of crypto tokens that exist in the market, an assessment will need to be made in each individual case.
Utility tokens are crypto tokens that give access to certain services or products of the issuer. This type of token can be compared to a voucher. Utility tokens are generally not subject to financial market regulation as they are neither classed as securities under the Prospectus Regulation nor as investments under the German Asset Investment Act (VermAnlG) nor as financial instruments under the German Banking Act (KWG). Therefore, in general neither the issue nor the sale of such utility tokens is subject to a licence requirement. There is also no obligation to publish a prospectus.
Payment tokens (also known as virtual currencies or cryptocurrencies) are crypto tokens that are intended to serve as alternative means of payment. To this end, it is sufficient if the crypto tokens are easily transferable between the relevant users and if the issuer intends for them to include a payment function in their respective areas of use. BaFin qualifies such payment tokens as financial instruments, namely as units of account pursuant to Section 1 para. 11 sentence 1 no. 7 KWG. This results in the following consequences:
- The issuance of payment tokens is generally not subject to a licence requirement. There is also usually no obligation to publish a prospectus as payment tokens in general do not constitute securities or investments.
- However, companies trading payment tokens commercially are subject to supervision by BaFin. Depending on the structure of the exchanges, the following may be of particular relevance: proprietary trading, financial commission business, the operation of a multilateral trading system, investment brokerage, contract brokerage, issuing or placement business as well as deposit business. In addition, as exchanges are classed as credit or financial service institutions, they are subject to the German Anti-Money Laundering Act (GwG), requiring them to comply with anti-money laundering obligations.
Security tokens are characterised by the fact that they convey to their holders certain asset-related membership rights or rights under the law of obligations (e.g. right to dividend-like payments, co-determination rights, repayment rights, right to interest). Such security tokens are regularly considered to be financial instruments within the meaning of the German Banking Act (KWG) and generally also fall under the definition of securities within the meaning of the Prospectus Regulation or of investments within the meaning of the German Asset Investment Act (VermAnlG) or of investment assets within the meaning of the German Investment Act (KAGB). This results in the following consequences:
- Whether or not the issuance of security tokens is possible without a licence depends on the form of the relevant security token. It is conceivable that a licence may be required as a result of there being deposit business, e-money or investment business. In addition, any prospectus obligations under the Prospectus Regulation or the German Asset Investment Act (VermAnlG) must be observed in the context of initial security offerings.
- In addition, companies trading payment tokens commercially are subject to supervision by BaFin. Depending on the structure of the exchange, the following may be of particular relevance: proprietary trading, financial commission business, the operation of a multilateral trading system, investment brokerage, contract brokerage, issuing or placement business as well as deposit business. In addition, as exchanges are classed as credit or financial service institutions, they are subject to the German Anti-Money Laundering Act (GwG), requiring them to comply with anti-money laundering obligations.
- Additionally, further laws such as the German Securities Trading Act as well as the EU Market Abuse Regulation may apply.
Clarification of the legal classification applied by BaFin
If there are uncertainties about the regulatory classification of specific crypto tokens, for example in the run-up to an initial coin offering or an initial security offering, these can be clarified with BaFin. In order to reduce the processing time for such enquiries, BaFin has defined in its guidance note the minimum content of such enquiries which it requires to be able to answer enquiries regarding possible prospectus and authorisation obligations promptly and in a timely manner.
With its additional guidance, BaFin provides further details on its current administrative practice and thereby provides further clarity on the regulatory framework relevant to crypto tokens. However, it has also become clear that due to the variety of different forms crypto tokens can take as well as the complexity of financial market regulation, a detailed case-by-case assessment is still necessary.
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