Quick Guide Crypto Assets: How they Classify within the Framework of Financial Market Law 3658404612, 9783658404611

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Hannah Appel

Quick Guide Crypto Assets How they Classify within the Framework of Financial Market Law

Quick Guide Crypto Assets

Hannah Appel

Quick Guide Crypto Assets How they Classify within the Framework of Financial Market Law

Hannah Appel Frankfurt University of Applied Sciences Frankfurt am Main, Germany

ISBN 978-3-658-40461-1    ISBN 978-3-658-40462-8 (eBook) https://doi.org/10.1007/978-3-658-40462-8 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 This book is a translation of the original German edition „Quick Guide Kryptowerte“ by Appel, Hannah, published by Springer Fachmedien Wiesbaden GmbH in 2021. The translation was done with the help of artificial intelligence (machine translation by the service DeepL.com). A subsequent human revision was done primarily in terms of content, so that the book will read stylistically differently from a conventional translation. Springer Nature works continuously to further the development of tools for the production of books and on the related technologies to support the authors. This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: Lektorat: Catarina Gomes de Almeida This Springer Gabler imprint is published by the registered company Springer Fachmedien Wiesbaden GmbH, part of Springer Nature. The registered company address is: Abraham-Lincoln-Str. 46, 65189 Wiesbaden, Germany

Preface

EUR 1.52 trillion – This value currently (as of 21.03.2021) equates to approximately 8,900 crypto assets.1 A comparison with the global stock market volume of EUR 79.98 trillion2 (as of 31.12.2019) shows that the global crypto market has not yet reached the scale of the stock market by far. However, interest in crypto assets is growing rapidly, as a look at the previous year’s data shows: On 29.03.2020, the total market capitalisation of circa 2,500 crypto assets was only EUR 152.19 billion.3 The market volume has thus increased tenfold within one year. Moreover, since Tesla’s billion-dollar investment in the cryptocurrency Bitcoin at the beginning of 2021, the market’s interest in crypto assets is to be taken seriously at the latest.4 Due to the momentous financial crisis of 2008, financial markets are regulated worldwide. The increasing emergence of crypto assets raises the question of to what extent the existing regulatory legal framework covers them. Comparable to the real estate bubble in the United States of America, which was the cause of the financial crisis, the market for crypto

 CoinMarketCap, 2021.  Statista, 2019. 3  Gschnaidtner, 2020, § 2 (17). 4  Lange/Heiny, 2021. 1 2

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assets continues to inflate.5 If the market’s interest in crypto assets keeps growing, the bursting of such bubbles could compromise financial stability if there is no or incomplete regulation of crypto assets. Ensuring financial stability is the primary objective of regulatory law. Another objective is the protection of consumers, which can only be achieved through legal certainty. The regulatory classification of crypto assets is thus of utmost relevance. However, due to the numerous forms of crypto assets and their complex technological background, a regulatory classification within the existing legal framework is partly challenging. In addition, in financial market law, there is the interplay of regulations on the national level and the level of the European Union (EU). As the member states of the EU sometimes have leeway in implementing EU directives, this can lead to a divergence in the regulatory classification of crypto assets at the national and EU level. As a result, Germany and Liechtenstein have already adopted national rules regulating crypto  assets, whereas the European Commission has only proposed a regulation on markets in crypto assets so far.6 At the EU level, thus, the legal provisions currently do not cover all crypto assets. Hence, this book deals with the regulatory classification of crypto assets in financial market law to gain insights into a possible need for further regulation. In particular, we will  explore whether the existing national (German) legal framework is sufficient to adequately regulate crypto assets. In addition to establishing a basic understanding of how crypto assets work, the aim is to construct a comprehensive overall picture of their regulatory treatment in Germany and to include possible implications of an EU initiative. Readers should find this book particularly useful as a guide when making investment decisions or setting up companies in connection with crypto assets. Additionally, this book can and should stimulate the jurisprudential discourse on regulating crypto assets. For this purpose, we will apply the relevant legal texts and administrative regulations of the German supervisory law to crypto assets with reference to related literature.  CoinMarketCap, 2021.  Deuber/Jahromi, MMR 2020, 576 (576); Siadat, RdF 2021, 12 (12).

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Chapter 1 of the book introduces the topic with basic knowledge about crypto assets. First, relevant terms relating to crypto assets and the various ways in which they can be structured are explained in more detail. Subsequently, the market players most important to crypto assets from a regulatory perspective are introduced. Since the need for regulation of financial products is closely linked to their positive and negative potentials, following an introduction to the technical basics, the main opportunities and risks of crypto assets are briefly outlined. Chapter 2 of the book deals with the classification of crypto assets in the various areas of the regulatory law of the financial market. Since German regulatory law is extensively based on EU requirements due to the Federal Republic of Germany’s membership in the EU, the basics of European financial market supervision are first explained. Subsequently, in the following two sections, we will classify the various forms of crypto assets in capital market and banking supervision law and outline the resulting legal consequences. Chapter 3 addresses developments at the national and EU level with a focus on the Liechtenstein Token and Trusted Technology Service Provider Act (TVTG) and the EU Proposal for a Regulation on Markets in Crypto-Assets (MiCAR). A comparison of the various regulatory approaches and a critical appraisal of them is provided in Chap. 4 before the book closes with a conclusion in Chap. 5. Frankfurt am Main, Germany

Hannah Appel

References CoinMarketCap (2021). Gesamtmarktkapitalisierung. https://coinmarketcap. com/charts/. Accessed: 21.03.2021. Deuber, D. & Jahromi, H. (2020). Liechtensteiner Blockchain-­Gesetzgebung: Vorbild für Deutschland? Lösungsansatz für eine zivilrechtliche Behandlung von Token. MMR, 576–581. Gschnaidtner, C. (2020). Die Ökonomik von Kryptotoken. In: Maume, P. et al. (Hrsg). Rechtshandbuch Kryptowerte (1. Aufl.). München: C.H. Beck.

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Lange, K. & Heiny, L. (2021). Warum Tesla-Chef Elon Musk 1,5 Milliarden Dollar in Bitcoin investiert. Manager Magazin Online. https://www.manager-­ magazin.de/finanzen/boerse/bitcoin-­k ryptowaehrung-­s teigt-­a uf-­ rekordhoch-­nach-­tesla-­investment-­a-­48541d55-­4ed7-­4b62-­9201-­66ee63b 2d93f. Accessed: 21.03.2021. Siadat, A. (2021). Markets in Crypto Assets Regulation – erster Einblick mit Schwerpunktsetzung auf Finanzinstrumente. RdF, 12–19. Statista. (2019). Wertentwicklung der weltweit an den Börsen gehandelten Aktien von 1980 bis 2019. https://de.statista.com/statistik/daten/ studie/199488/umfrage/wert-­des-­weltweiten-­aktienbestandes-­seit-­2000/. Accessed: 21.03.2021.

Contents

1 Basic  Knowledge regarding Crypto Assets 1 1.1 Definition of Terms  2 1.2 Design of Crypto Tokens  3 1.2.1 Currency Tokens  4 1.2.2 Investment Tokens  5 1.2.3 Utility Tokens  6 1.2.4 Hybrid Forms  7 1.3 Technical Principles  7 1.3.1 Distributed Ledger Technology  8 1.3.2 Blockchain  9 1.4 Market Participants in Relation to Crypto Assets 13 1.4.1 Issuers 13 1.4.2 Service Providers 14 1.5 Opportunities and Risks 18 1.5.1 Opportunities 18 1.5.2 Risks 19 References22 2 Regulatory  Classification of Crypto Assets27 2.1 Fundamentals of European Financial Market Supervision 28 2.2 Classification under Capital Market Law 30 ix

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2.2.1 Financial Instrument within the Meaning of the WpHG 30 2.2.2 Legal Consequences of Classification 34 2.3 Classification under Banking Supervisory Law 36 2.3.1 Financial Instrument within the Meaning of the KWG 36 2.3.2 Legal Consequences of Classification 43 References56 3 Developments  at the National and EU Level59 3.1 The Liechtenstein Token and Trusted Technology Service Provider Act 60 3.1.1 Legislative Background 61 3.1.2 Structure and Content 62 3.2 The EU Proposal for a Regulation on Markets in Crypto-assets67 3.2.1 Legislative Background 68 3.2.2 Structure and Content 69 References76 4 Comparison  and Critical Appraisal of the Regulatory Approaches79 4.1 Scope of Application 80 4.1.1 Utility Tokens 80 4.1.2 Investment Tokens 81 4.1.3 Tokenisation of Other Rights 82 4.2 Regulatory Methodology 84 4.3 Technology Neutrality 85 4.4 Chosen Regulatory Instruments 86 4.4.1 Standardised Information Document 86 4.4.2 Authorisation Procedure 87 4.4.3 Public Register 87

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4.5 Neglected Aspects 88 4.5.1 Endogenous Manipulation of the Network 88 4.5.2 Anonymity of Network Participants 89 4.5.3 Sustainability 89 References91 5 Conclusion93

Abbreviations

AMLD V Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU BaFin Federal Financial Supervisory Authority – Bundesanstalt für Finanzdienstleistungsaufsicht BGBl German Federal Law Gazette – Bundesgesetzblatt BKR Zeitschrift für Bank- und Kapitalmarktrecht BT-Drs Bundestag printed matter – Bundestagsdrucksache BuA Report and proposal – Bericht und Antrag CR Computer und Recht – Zeitschrift für die Praxis des Rechts der Informationstechnologie DBB German Central Bank – Deutsche Bundesbank DLT Distributed Ledger Technology DStR Deutsches Steuerrecht EBA European Banking Authority EEA European Economic Area EIOPA European Insurance and Occupational Pensions ErwG Recital – Erwägungsgrund ESAs European Supervisory Authorities ESMA European Securities and Markets Authority EU European Union xiii

xiv Abbreviations

EU Prospectus Regulation Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC EuZW Europäische Zeitschrift für Wirtschaftsrecht FATF Financial Action Task Force GwG German Money Laundering Act – Geldwäschegsetz GZ Reference – Geschäftszeichen ICO Initial coin offering KAGB German Capital Investment Code – Kapitalanlagegesetzbuch KWG German Banking Act – Kreditwesengesetz MAR Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (Market Abuse Regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC MiCAR Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937 MiFID Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on Markets in Financial Instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC MiFID II Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on Markets in Financial Instruments and amending Directives 2002/92/EC and 2011/61/EU MMR Multimedia und Recht – Zeitschrift für IT-Recht und Recht der Digitalisierung

 Abbreviations 

MTF NJW OTF RdF TEU TFEU TVTG

Multilateral Trading Facility Neue Juristische Wochenschrift Organised Trading Facility Recht der Finanzinstrumente Treaty on European Union Treaty on the Functioning of the European Union Token and Trusted Technology Service Provider Act of 03 October 2019 VermAnlG German Capital Investment Act – Vermögensanlagengesetz wbl Wirtschaftsrechtliche Blätter WM Zeitschrift für Wirtschafts- und Bankrecht – Wertpapiermitteilungen WpHG German Securities Trading Act – Wertpapierhandelsgesetz WpPG German Securities Prospectus Act – Wertpapierprospektgesetz ZAG German Payment Services Oversight Act – Zahlungsdiensteaufsichtsgesetz ZBB/JBB Zeitschrift für Bankrecht und Bankwirtschaft/ Journal of Banking Law and Banking ZHR Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht

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1 Basic Knowledge regarding Crypto Assets

What You Take Away from This Chapter • No universally accepted definition of the term crypto asset exists. • Although the terms crypto asset and crypto token are often used interchangeably, it is important to distinguish between them. • In practice, crypto tokens are divided into three main categories due to their diverse design options. • The technical basis for most currently known crypto assets is distributed ledger technology. The most prominent form of this is the blockchain. • The crypto market is bustling with various market players similar to traditional financial market participants. • Despite the many positive potentials of crypto assets, existing risks must not be disregarded.

A basic understanding of crypto assets is essential for assessing their regulatory significance. Due to the complexity and multi-layered nature of crypto assets, this chapter provides a general introduction to the topic.

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 H. Appel, Quick Guide Crypto Assets, https://doi.org/10.1007/978-3-658-40462-8_1

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1.1 Definition of Terms So far, there is no generally applicable, uniform definition for the term crypto asset.1 The German legislator indeed introduced the term crypto asset into the German Banking Act (Kreditwesengesetz – KWG) in the course of adapting the provisions under the Fifth Anti Money Laundering Directive (EU) 2018/843 (AMLD V) of 30 May 2018. An explanation of the term, detached from its regulatory classification, nevertheless seems appropriate to illustrate the actuality of the topic. The first body to publish a definition for crypto assets was the Financial Action Task Force (FATF) in October 2018, which, along with the Basel Committee, is one of the most important international bodies for combating and preventing money laundering and terrorist financing.2 The FATF has since used the term virtual asset in its recommendations, which strictly speaking cannot be considered the same as the term crypto asset.3 Accordingly, a virtual asset is “a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations.”4 The European Banking Authority (EBA) expanded the FATF definition in its report on crypto assets dated 09.01.2019 to include the element of cryptography and the type of technology used, thereby creating a definition of a crypto asset for the first time.5 According to the EBA, crypto assets are “assets whose perceived or inherent value depends ­primarily on cryptography and distributed ledger technology or similar technology, which are not issued or guaranteed by a central bank or public authority and which can be used as a medium of exchange and/or for investment purposes and/or to access a good or service”.6  Blassl/Sandner, WM 2020, 1188 (1189).  BaFin, 2020; Zöllner, BKR 2020, 117 (120). 3  FATF, 2019, p. 57. 4  FATF, 2019, p. 57. 5  EBA, 2019, pp. 1, 10 f. 6  EBA, 2019, p. 10 f. 1 2

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The European Central Bank (ECB), conversely, described crypto assets as “a new type of asset recorded in digital form and enabled by the use of cryptography that is not and does not represent a financial claim on, or a liability of, any identifiable entity.”7 Similar to this definition, Fromberger, Haffke and Zimmermann described a crypto asset relatively simply as “all tokens of the same type based on blockchain technology”.8 In the literature, the term crypto asset is often used interchangeably with the term crypto token, which, according to the classification just explained and from a technical point of view, is not precise enough. A crypto token is a collection of data in a digital database (the blockchain) that represents a value, a right or a claim.9 A token cannot be duplicated because it is individual and exclusive.10 The difference between a crypto asset and a crypto token is best illustrated by the example of the best-known crypto asset Bitcoin. The totality of all Bitcoin tokens represents the crypto asset Bitcoin.11 If we transfer this thought pattern to a classic fiat currency such as the Euro, all Euro coins and notes in circulation as well as the book money denominated in Euro are to be equated with the tokens, since they form the sum of the Euro value.

1.2 Design of Crypto Tokens Since there is some latitude in the design of crypto tokens, other areas of application for crypto tokens have been established since the development of the cryptocurrency Bitcoin.12 The differentiated design plays an important role in the regulatory classification of crypto tokens. Therefore, a classification of tokens is explained in more detail below. This  EZB, 2019.  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (377). 9  John, BKR 2020, 76 (76); Kaulartz, CR 2016, 474 (475). 10  Maute, 2020, § 4 (2 f.). 11  Fromberger/Haffke/Zimmermann, BKR 2019, 377. 12  Fromberger/Zimmermann, 2020, § 1 (68). 7 8

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classification has emerged in the literature and supervisory practice but is not universally valid due to its lack of legal foundation.13

1.2.1 Currency Tokens The first and best-known group are so-called currency tokens, which are also referred to as payment tokens or exchange tokens.14 Basically, currency tokens, like Bitcoin tokens, were designed to replace legal tender.15 The name currency token also suggests that it is a complementary currency. However, the German Central Bank (Deutsche Bundesbank – DBB) clarified in one of its publications that currency tokens only partially fulfil the money function.16 To be considered a currency, currency tokens would have to perform three functions: the exchange and payment function, the unit of account function, and the store of value function. An object that is to be used as a means of payment must first be generally accepted so that it can be used everywhere to receive economic consideration. Currency tokens receive their monetary value because market participants assign them this value due to their existence and general acceptance (intrinsic tokens).17 To date (21.03.2021), currency tokens such as Bitcoin tokens can only be used to make payments on online platforms, if at all.18 Currency tokens are therefore not accepted like classic fiat currencies such as the Euro or the US dollar, which is why they do not currently fulfil the exchange and payment function. To fulfil the unit of account function, the value of goods and services would have to be determinable by currency tokens.19 Since currency

 Kleinert/Mayer, EuZW 2019, 857 (858); Schäfer/Eckhold, 2020, § 16a (30).  Kaulartz/Matzke, NJW 2018, 3278 (3279); Zöllner, BKR 2020, 117 (119). 15  Nakamoto, 2008, p. 1. 16  On this and the following: DBB, 2019a, pp. 10 to 17. 17  Möllenkamp/Shmatenko, 2020, part 13.6, (30). 18  Bialluch-von Allwörden/von Allwörden, WM 2018, 2118 (2119). 19  DBB, 2019a, p. 17. 13 14

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tokens are subject to strong price fluctuations and thus their value is constantly changing, they are rarely used as a unit of account.20 As a rule, state central banks have the task of safeguarding the value of money and thus fulfilling the store of value function of money.21 Currency tokens can also be issued by a state authority, but in principle, there is no state central bank behind the vast majority of currency tokens.22 The value of currency tokens is thus not regulated and stabilised by government influence, as is the case with a traditional fiat currency. They are regularly subject to general market fluctuations and can, therefore, hardly be used as a reliable store of value. Due to this design, currency tokens have mainly been used as a speculative investment instrument so far.23 Currently, however, so-called stablecoins are established, whose value is linked to another value, usually a fiat currency, for stabilisation purposes.24 Price fluctuations of the coin shall be avoided by replicating the underlying fiat currency.25 With increasing acceptance among the population and the resulting increase in value stability, future use as a complementary, digital means of payment is quite conceivable.

1.2.2 Investment Tokens Another type of crypto token is the so-called investment token. This token class is characterised by the fact that membership and/or property rights are linked to the tokens.26 As a rule, investment tokens are structured in such a way that they grant the holder the right to participate in the profits of a company in the form of a dividend.27

 Zöllner, BKR 2020, 117 (119).  DBB, 2019a, p. 11. 22  Fromberger/Zimmermann 2020, § 1 (70). 23  Schäfer/Eckhold, 2020, § 16a (28). 24  Houben/Snyers, 2020, p. 34 f. 25  DBB, 2019b, p. 44. 26  BaFin, 2019, p. 5. 27  Hanten/Sacarcelik, RdF 2019, 124 (125). 20 21

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However, an investment token may also be associated with a co-­ management or voting right.28 Investment tokens with such a structure are also called security tokens.29 On the one hand, the issue of such tokens can thus serve to raise equity capital. On the other hand, an investment token can be structured similarly to an interest-bearing bond so that its issue increases the company’s debt capital share.30 If the reference point of the investment token is the right to an asset, it is called an asset token, also known as an asset-backed token.31 The value of the investment token is not created by supply and demand, as is the case with intrinsic tokens, but is based on an asset that actually exists, such as a company share (extrinsic token).32

1.2.3 Utility Tokens The tokens of the third group, the so-called utility tokens, also derive their value from an actually existing object.33 Utility tokens embody the right to a service or an economic good and are thus often referred to in the literature as digital vouchers.34 In contrast to investment tokens, the holders of utility tokens have no financial claim against the issuer of the token.35 The claim usually consists of the use of a digital platform of the issuer.36 For instance, a utility token can be used to grant access to a cloud and provide storage space therein.37

 Schäfer/Eckhold, 2020, § 16a (30).  Fromberger/Zimmermann, 2020, § 1 (72). 30  Bialluch-von Allwörden/von Allwörden, WM 2018, 2118. 31  Fromberger/Zimmermann, 2020, § 1 (75); Hahn/Wons, 2018, p. 12; Schäfer/Eckhold, 2020, § 16a (30). 32  Möllenkamp/Shmatenko, 2020, part 13.6, (31), (46). 33  Möllenkamp/Shmatenko, 2020, part 13.6, (31). 34  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (377); Kaulartz/Matzke, NJW 2018, 3278 (3279). 35  Kleinert/Mayer EuZW 2019, 857 (858). 36  Schäfer/Eckhold, 2020, § 16a (29). 37  Hönig, 2020, p. 34. 28 29

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Utility tokens can also be issued to allow only certain users to access an exclusive area of the issuer’s platform. Examples of such a use case are in-­ app purchases.38 An in-app purchase refers to the ability to buy additional features in a free app for a fixed price. This example shows that utility tokens cannot be used universally for payment but are linked to a specific service.39 Due to the lack of general validity, trading is only conceivable on secondary markets if there is demand for the product or service.40 Utility tokens are hence rarely suitable as a capital investment.

1.2.4 Hybrid Forms In the absence of a legal basis, the issuer of a token is free to link the token to any claims or rights. Consequently, in practice, a multitude of hybrids exists in addition to the forms outlined above.41 These combine properties and elements of the basic forms, which is why it is necessary to assess in each individual case which attribute of the token constitutes the focus of the legal classification of the token.42

1.3 Technical Principles To properly understand current developments in the regulation of crypto assets, it is necessary to understand the technologies behind crypto assets. The core technological basis of crypto assets is distributed ledger technology (DLT).43 Following its explanation, the blockchain, the best-known and most widely used DLT, will be discussed.44

 Bialluch-von Allwörden/von Allwörden, WM 2018, 2118 (2118).  Kaulartz/Matzke, NJW 2018, 3278 (3279). 40  Bialluch-von Allwörden/von Allwörden, WM 2018, 2118 (2118). 41  Schäfer/Eckhold, 2020, § 16a (30). 42  BaFin, 2019, p. 5. 43  Federal Ministry of Finance, 2019, p. 8 f. 44  Langenbucher/Hoche/Wentz, 2020, chapter 11 (2). 38 39

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1.3.1 Distributed Ledger Technology Ledger means general ledger or register. According to the principles of proper accounting, in the general ledger, all business transactions of a merchant’s business operation must be documented entirely, continuously, structured according to some criteria and in a permanent form.45 Another example of such a register is the land registry.46 Accordingly, a ledger not only reflects the current state but also documents the emergence of the state, thus emphasising previously defined information. The information stored in the register or ledger depends on the purpose the users of the ledger want to achieve through its use. A ledger can thus generally be described as a systematic collection of data for the permanent documentation of such facts and circumstances that are considered (legally) significant by its users.47 A central instance is responsible for coordinating and controlling the records in the ledger.48 Before a transaction is entered into the ledger, it initially checks whether the desired execution is legitimate. Where the check is positive, the central authority carries out the entry in the ledger.49 Taking the land registry as an example, the central authority making the entries in the land registry after proper verification is the land registry office, which is usually the district court of the relevant district.50 For example, the clearing house is also the central authority in securities transaction processing, as it records each transaction in a central register and verifies and approves them.51 The central authorities embody decisive key functions in the various transactions, which is why they are subject to high demands in terms of neutrality, trustworthiness and independence.52  Zwirner/Heyd, 2019, chapter A (81).  Pankratz, IT Governance 2019, p. 5. 47  Pankratz, IT Governance 2019, p. 5. 48  Schlund/Pongratz, DStR 2018, 598 (598). 49  Pankratz, IT Governance 2019, p. 5. 50  Duden Recht A – Z, 2015, p. 303. 51  Geiling, BaFinJournal 2016, p. 29. 52  Pankratz, IT Governance 2019, p. 5. 45 46

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DLT was developed with this dependency in mind. When used, a central control and coordination instance is no longer required.53 For this purpose, a decentralised network of equal users, a so-called peer-to-peer network,54 is set up, whose computer servers act as nodes.55 An identical copy of the ledger is stored on each server and continuously synchronised.56 A consensus mechanism ensures the equality of the participants.57 If a user wants to add a transaction to the ledger, she must propose this to the other participants.58 The other users then vote on the extension using an algorithmic procedure.59 Examples of such procedures are proof of work, proof of stake or proof of importance.60 In each of these procedures, the nodes have to solve a puzzle, which is more or less complex depending on the procedure.61 If all or the majority of users accept the transaction, the corresponding transaction is added to the ledger.62 The entry is made via an encrypted data record to protect against manipulation. Therefore, it cannot be deleted or changed once it has been added to the ledger.63

1.3.2 Blockchain Along with Tangle and Hashgraph, Blockchain is one of the most relevant application examples of DLT.64 It was developed in 2008 by the pseudonym Satoshi Nakamoto in connection with the cryptocurrency

 Geiling, BaFinJournal 2016, p. 29.  Schacht, 2019, p. 13. 55  Schäfer/Eckhold, 2020, § 16a (25). 56  Pankratz, IT Governance 2019, p. 5. 57  Subhash/Stadler, wbl 2020, p. 181 (186). 58  Pankratz, IT Governance 2019, p. 5. 59  Pankratz, IT Governance 2019, p. 5; Schäfer/Eckhold, 2020, § 16a (24 f.). 60  Schäfer/Eckhold, 2020, § 16a (25). 61  Million, 2019, p. 23. 62  Langenbucher/Hoche/Wentz, 2020, Chapter 11 (1); Langer, 2019, p. 243. 63  Subhash/Stadler, wbl 2020, p. 181 (186). 64  Schacht, 2019, p. 6. 53 54

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Bitcoin.65 In 2017, the market volume of the Blockchain industry was worth USD 708 million.66 Since the Blockchain is currently the basis for most transactions with crypto assets, we will only discuss this form of DLT. The main fields of application of the Blockchain are transactions of virtual value units, which can only be carried out between the participants of the respective network.67 The technology got its name because of how the transaction data is recorded in the ledger.68 The relevant information is grouped into blocks and inseparably chained together by reference to the previous block.69 Such a block consists of a header and a transaction body, which contains several transactions made via the blockchain as determined by the blockchain developer.70 The header, in turn, consists of several components, which vary depending on the consensus mechanism used.71 The first blockchain described by the pseudonym Satoshi Nakamoto in the Bitcoin whitepaper is based on the proof of work consensus mechanism.72 The block’s header contains the version number of the blockchain, the hash of the previous block, a timestamp, the difficulty, the hash of the current block and a nonce.73 The most important components are the two hash values.74 A hash is an alphanumeric value that is created using a mathematical function (known as a hash function or scatter function) and the forming of data structures (known as Merkle trees or hash trees) from the data in the header and all the transactions in the block.75 By including the multitude of transaction-specific data, the hash value ensures that each  Fromberger/Zimmermann, 2020, § 1 (3).  Schacht, 2019, p. 13 f. 67  Fromberger/Zimmermann, 2020, § 1 (4). 68  Million, 2019, p. 14. 69  Schäfer/Eckhold, 2020, § 16a (24). 70  Fromberger/Zimmermann, 2020, § 1 (13). 71  Million, 2019, p. 27 f. 72  Nakamoto, 2008, p. 1. 73  Nakamoto, 2008, p. 2 f.; Schacht, 2019, p. 40. 74  Fromberger/Zimmermann, 2020, § 1 (14). 75  Fill/Härer/Meier, 2020, pp. 5, 8, 10. 65 66

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block is unique, which is why it is regularly referred to as the fingerprint.76 Since each block also stores the hash value of the previous block in addition to its own hash value, a cryptographic concatenation is created that protects the blockchain from manipulation.77 The timestamp of the block is used both to record the time when the transaction was entered in the ledger78 and to prove that the data existed at that time.79 The difficulty and the nonce are the proof of work-specific components of the header. In proof of work, the participants in the network must solve a cryptographic puzzle in the form of a hash function to validate the transactions contained in the block, for which the nonce is required.80 The nonce is an arbitrary number lying in a previously delimited set of values.81 By inserting the nonce into the hash function, a hash value must be obtained that starts with a certain number of zeros.82 Since it is practically impossible to deduce the input value from the result of the function for hash functions used in blockchains, the nonce can only be found by trial and error.83 The difficulty of the block reflects the degree of difficulty of this cryptographic puzzle.84 Due to the trial-and-error process, network participants need high computing power to be able to solve the cryptographic puzzle. Thus, not all nodes usually participate in the validation of transactions.85 The users who participate in block creation are called miners. The overall process of block creation, i.e. the merging of transactions into blocks and their validation, is called mining.86  Kaulartz, CR 2016, 474 (475); Schacht, 2019, p. 9; Schrey/Thalhofer, NJW 2017, 1431 (1432).  Nakamoto, 2008, p. 2. 78  Schacht, 2019, p. 39. 79  Nakamoto, 2008, p. 2. 80  Nakamoto, 2008, p. 3. 81  Fill/Härer, 2020, p. 323 f. 82  Nakamoto, 2008, p. 3. 83  Pankratz, IT Governance 2019, p. 5 f.; Rosenberger, 2018, p. 67. 84  Schacht, 2019, p. 20. 85  Pankratz, IT Governance 2019, p. 6. 86  Fromberger/Zimmermann, 2020, § 1 (37). 76 77

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In most blockchains, the transactions contained in the transaction body refer to tokens.87 When a token is traded, the amount of data for which the token stands is not transferred to the recipient as in a classic transfer but is merely assigned to the recipient via the blockchain.88 It is, therefore, not a matter of the physical movement of data but rather of a change in the sovereignty of the database entry.89 The change of the allocation ratios on the blockchain is carried out by another cryptographic mechanism, the so-called public/private key concept.90 This is a method of asymmetric cryptography using a key pair to encrypt and decrypt data.91 With the public key, information is encrypted in a manner that it can only be decrypted with the corresponding private key, also by using hash functions.92 Each network participant possesses both a private and a public key.93 A participant can use the private key to decrypt transactions in which she is the recipient of the token.94 If the user is the sender of the token, she uses the private key to sign the transaction message digitally.95 The public key, in contrast, is an address within the blockchain to which tokens can be assigned96 and is thus comparable in its function to a classic account number.97 If a network participant wants to carry out a transaction, she needs the recipient’s public key for the transaction message. Thus, the public keys are made available to the general public, usually via the Internet.98 Before the sender submits the message to the network underlying the blockchain for execution, she signs and encrypts it with her private key. Using the  Fromberger/Zimmermann, 2020, § 1 (15).  Fromberger/Zimmermann, 2020, § 1 (15), (19). 89  Kaulartz/Matzke, NJW 2018, 3278 (3278). 90  Fromberger/Zimmermann, 2020, § 1 (15). 91  Pankratz, IT Governance 2019, p. 6. 92  Schacht, 2019, p. 9 f. 93  Schacht, 2019, p. 10. 94  Kaulartz, CR 2016, 474 (476). 95  Nakamoto, 2008, p. 2. 96  Fromberger/Zimmermann, 2020, § 1 (16). 97  Safferling/Rückert, MMR 2015, 788 (789). 98  Kaulartz, CR 2016, 474 (475). 87 88

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two keys, the other network participants can verify the data of the transaction.99 If all the data is correct, the transaction is added to the transaction body of the new block.100 Once the new block is attached to the blockchain, the token is assigned to the recipient, and he can now access the token with his private key.101

1.4 Market Participants in Relation to Crypto Assets In addition to the network participants and miners, there are other groups of persons who appear on the market in connection with crypto assets. Of regulatory relevance are issuers of crypto assets and service providers who take over various activities for the network participants after the initial issuance of the crypto asset tokens.

1.4.1 Issuers The initiator of a blockchain is, in principle, also the issuer of a crypto asset.102 He creates the tokens for the first time and deposits them digitally in the blockchain. The issuer then distributes the first crypto tokens to potential network participants, who can, in turn, create new tokens through mining.103 When setting up the blockchain, the initiator can determine the number of tokens representing the crypto asset.104 When initiating the Ethereum blockchain, for instance, the number of possible tokens was made variable, so that there can be an infinite number of Ether tokens.105 In contrast, when the cryptocurrency Bitcoin was developed, the  Pankratz, IT Governance 2019, p. 6.  Rosenberger, 2018, p. 18. 101  Fromberger/Zimmermann, 2020, § 1 (20). 102  Fromberger/Zimmermann, 2020, § 1 (79). 103  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (378). 104  Fromberger/Zimmermann, 2020, § 1 (6). 105  Rosenberger, 2018, p. 54. 99

100

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pseudonym Satoshi Nakamoto specified in its network protocol that a maximum of 21 million Bitcoin tokens may be created.106 However, only 50 Bitcoin tokens were deposited in the genesis block of the Bitcoin blockchain, so the remaining Bitcoin tokens can still be mined in the future.107 Nevertheless, it is possible to already deposit all tokens in the genesis block and thus prevent the creation of further tokens of the crypto asset.108 By specifying a fixed or variable number of tokens, the issuer can thus influence the de facto value of its crypto asset at the initiation. According to the principle of supply and demand, high demand for a limited supply of tokens leads to rising prices. Respectively, the infinite generation of Ether leads to a steady deflation of the crypto asset Ethereum. Since each additional transaction creates new Bitcoins to reward the miners, mining more Bitcoins increases the value of the crypto asset Bitcoin, as long as the demand for Bitcoins grows or stagnates at least. Although this increases the supply of existing Bitcoins, given the cap of 21 million Bitcoin tokens, the number of new tokens that can be generated decreases with each mining, which implies a shortage. The issuer is generally free to demand a return service for issuing the tokens.109 If the tokens are issued by a company for consideration, this is referred to as an initial coin offering (ICO).110 Similar to a share issue in an initial public offering, newly created tokens are offered to the public to raise capital for a company or an individual project.111

1.4.2 Service Providers The blockchain system is based on decentralisation. Due to its complexity, however, network participants regularly use the support of specialised third parties. The involvement of intermediaries is thus possible, but not  Fromberger/Zimmermann, 2020, § 1 (6).  Blockchain.com, n/a. 108  Schacht, 2019, p. 52. 109  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (378). 110  BaFin, 2018, p. 5. 111  Hönig, 2020, p. 3. 106 107

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mandatory, to ensure the functioning of the network. Service providers of particular importance are wallet providers, operators of trading platforms, and providers of tumbler services. Wallet Providers The service provided by wallet providers consists of the provision of so-­ called wallets.112 These serve the secure storage of the public and private cryptographic keys of network participants and are usually referred to as electronic wallets.113 However, since the wallet is usually only assigned the key with which the token can be accessed and not the token, i.e. the value itself, the comparison with a physical wallet is slightly imprecise.114 The term (digital) keychain seems more appropriate. A wallet can be designed in different ways. On the one hand, it is possible to store the cryptographic keys on a physical device such as a USB stick (hardware wallet) or convert them via online generators into a QR code that can be printed on paper (paper wallet).115 On the other hand, there are software wallets, which, in contrast to the analogue method of storage, require corresponding software on the computer (desktop wallet) or on the smartphone in the form of an app (mobile wallet) and online wallets, which store the cryptographic keys on servers, similar to a cloud.116 The regulatory practice also distinguishes between hot wallets and cold wallets.117 A hot wallet is characterised by its continuous connection to the Internet. Cold wallets, in contrast, are not permanently online, i.e. they are only connected to the Internet to carry out a token-based transaction. The type of wallet determines whether a service provider classifies as a custodial or non-custodial wallet provider, which has different regulatory consequences.118 Non-custodial wallet providers provide network participants with hardware or even software to store, secure, and custody the  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (378).  Safferling/Rückert, MMR 2015, 788 (790); Schlund/Pongratz, DStR 2018, 598 (599). 114  Fromberger/Zimmermann, 2020, § 1 (25). 115  Rosenberger, 2018, p. 22. 116  Rosenberger, 2018, p. 23 f. 117  cf. also in the following: EBA, 2019, p. 9; ESMA, 2019, p. 9. 118  Fromberger/Zimmermann, 2020, § 1 (26); Maume, 2020, § 12 (81 f.). 112 113

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cryptographic keys independently.119 Accordingly, a service provider that operates a website for converting cryptographic keys into QR codes and manufacturers of USB sticks classifies as non-custodial wallet provider. However, a custodial wallet provider assumes responsibility for the secure storage and custody of the keys.120 Operators of wallet apps or cloud-­ based online wallets regularly classify within this group.121 Operators of Trading Platforms Trading platforms for crypto assets allow participation in the crypto asset’s blockchain network even after the initial issuance of the tokens.122 By their very nature, secondary trading venues generally operate online.123 The mode of operation is similar to a classic online banking account, where various financial services can be carried out directly via the platform after entering the user’s login data.124 Trading platforms can be structured in different ways.125 On the one hand, we can differentiate in terms of the object of the transaction. Via crypto bureaus de change, investors can both exchange classic fiat currency for crypto tokens and monetise tokens in fiat currency.126 If only tokens of one crypto asset are exchanged for tokens of another crypto asset on a platform, this is referred to as crypto exchanges.127 On the other hand, we can distinguish with regard to transaction processing and the platform operator’s ability to influence transactions and tokens themselves.128 Platform that actually change the allocation of the token via the blockchain when a token transaction is executed are called on-chain trading

 Fromberger/Haffke/Zimmermann, BKR 2019, 377 (378).  EBA, 2019, p. 15. 121  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (378). 122  Fromberger/Zimmermann, 2020, § 1 (26); Maume, 2020, § 12 (88). 123  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (378). 124  Fromberger/Zimmermann, 2020, § 1 (90). 125  Fromberger/Zimmermann, 2020, § 1 (93). 126  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (378). 127  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (378). 128  Fromberger/Zimmermann, 2020, § 1 (94 f.). 119 120

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platforms.129 The counterpart are off-chain trading platform, which only adjust the virtual platform account balances of the participants to carry out the transaction and do not initiate an actual token transaction via the network.130 Concerning the possibility of exerting influence, we can distinguish between centralised and decentralised trading platforms.131 In the case of central trading platforms, the tokens are exchanged via a central public key controlled by the platform itself.132 The parties to the transaction are not known to each other. The execution of a token transaction on a decentralised trading platform, in contrast, takes place without such an intermediary. The platform operator merely mediates between the trading parties. Providers of Tumbler Services So-called tumblers allow token holders to anonymise the transactions associated with the token on the blockchain.133 Although the use of the cryptographic key pair means that no personal data of the owner is used to process the transaction, it is possible to conclude the identity of the owner via the public key.134 If a network participant wants to conceal the origin and prehistory of the token, she uses the services of a tumbler. To do this, she sends the token to a public key of the tumbler operator.135 To perform the anonymisation, the tumbler operator needs several tokens of the same crypto asset and several public keys he controls.136 For concealment, he splits all tokens of the same crypto asset in his possession into partial amounts and simulates numerous transactions via his public keys.137 Afterwards, he transfers a sum of tokens from these partial amounts, which has the same  Fromberger/Zimmermann, 2020, § 1 (94 f.).  Fromberger/Zimmermann, 2020, § 1 (94 f.). 131  DBB, 2019b, p. 43. 132  On this and in the following: Fromberger/Zimmermann, 2020, § 1 (97). 133  Fromberger/Zimmermann, 2020, § 1 (102), (106). 134  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (378 f.). 135  Fromberger/Zimmermann, 2020, § 1 (106). 136  Fromberger/Zimmermann, 2020, § 1 (106). 137  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (379). 129 130

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value as the user’s token sent at the beginning, to a public key named by the user.138 As a rule, however, the provider of the tumbler retains a share of around three per cent as a service fee.139 It is relevant for this procedure that not only tokens of a single user of the tumbler service are used, as otherwise blending is impossible.140

1.5 Opportunities and Risks The efforts of national and European legislators to regulate crypto assets are closely related to the opportunities and risks of crypto assets for the financial markets. Since most crypto assets on the markets are currently based on blockchain technology, we will only discuss the opportunities and risks of such crypto assets.

1.5.1 Opportunities The positive potentials of crypto assets arise primarily from the decentralised structure of their underlying networks. Satoshi Nakamoto explains in the Bitcoin whitepaper that the use of blockchain technology to control and organise the transaction makes the involvement of an intermediary obsolete.141 Instead, validation is distributed among all network participants, which leads to independence from governmental and institutional influence.142 Since the verification and processing of the transaction is now distributed among a higher number of actors, the handling of the process can be faster and more efficient.143 If a network participant loses the copy of the blockchain on its server due to a local technical problem, this does not lead to a full-scale loss of data, as a copy of the blockchain is stored  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (379).  Fromberger/Zimmermann, 2020, § 1 (106). 140  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (379). 141  Nakamoto, 2008, p. 1. 142  Schacht, 2019, p. 5. 143  Beinke et al., 2020, p. 138. 138 139

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on every node of the network.144 The tokens, and thus the crypto asset itself, thus remain intact. Theft of the tokens through manipulating a transaction is also almost impossible due to the immutability of the blockchain data.145 As a result of the cryptic concatenation of the blocks, the consensus mechanism, and the simultaneous storage of identical copies on every server in the network, an immensely high computing power would be required to change the data of the blockchain. Since tracking all transactions is possible at any time, using crypto assets as a means of payment or investment could increase the transparency of financial markets.146 The use of crypto tokens has the potential to reduce costs from the perspective of both the customer and the credit institutions or financial service providers.147 For instance, holders of crypto tokens do not have to pay any transaction fees because the miners receive a reward in return for validating the transactions, usually in the form of new tokens.148 Since the miners care about the value of the tokens due to this compensation system, they will regularly ensure that the transactions are carried out correctly.149 Insofar as credit institutions and financial service providers offer the management of crypto tokens, they can reduce the risk management costs as the risk of crypto assets failing is very low due to the transparency, traceability, and forgery-proof nature of blockchain technology.150

1.5.2 Risks It is precisely the aspect of cost reduction that makes an investment in crypto assets attractive for investors. In addition, despite the prevailing  Fromberger/Zimmermann, 2020, § 1 (1).  Flasshoff et al, BaFin Perspectives 2018, p. 35. 146  N.N., Risk Manager 2019, issue 10. 147  Beinke et al., 2020, p. 138. 148  Schacht, 2019, p. 20. 149  John, BKR 2020, 76 (78). 150  Beinke et al., 2020, p. 138. 144 145

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low-interest phase, the prospect of high returns through price gains persists. However, using crypto tokens as a speculative investment instrument leads to extreme price dynamics and the associated fluctuations in value, which in certain circumstances can lead to a total loss for the investor.151 The numerous ways in which crypto tokens can be designed and the technical complexity also mean that it is difficult for investors to understand how the investment model works.152 Since the investor himself is responsible for the safekeeping of the private keys, less technically savvy investors also represent a security gap for the network.153 The investor must always ensure that the program he uses for cryptographic encryption and safekeeping is up-to-date to be protected against hacker attacks. However, a crypto asset network can also be threatened from within. Validating transactions requires a high level of computing power, which can only be guaranteed with a high level of energy consumption and storage space.154 Since, in practice, these resources can only be provided by a few network participants, control can be allocated to a few nodes despite the decentralised structure of the blockchain.155 Provided these miners make up the majority of nodes in the network, they can manipulate any transaction, as they can influence the consensus mechanism in their favour through their majority. However, such centralisation of control is unattractive to investors, which is why investors would withdraw from the network if such manipulation became known. That would, in turn, be detrimental to the manipulating network participants due to the resulting collapse in the value of the tokens. Furthermore, the anonymity of the network participants is critical. Nowadays, crypto assets, mainly Bitcoin, are already used for payment in

 Gschnaidtner, 2020, § 2 (12 f.); BaFin, 2017.  BaFin, 2017. 153  N.N., Risk Manager 2019, issue 10. 154  BT-Drs 19/13.433, p. 3, 8. 155  Hönig, 2020, p. 119. 151 152

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the Darknet, the (global) online black market.156 Since tokens are only assigned to network participants via the cryptographic keys, the true identity of the crypto token holders remains obscured. For this reason, crypto assets are also frequently used for money laundering or terrorist financing.157 As technology is constantly changing and innovating very fast, the legal framework must also constantly adapt in order to protect consumers and stabilise financial markets adequately. Due to the increase in technically complex modes of operation, there is a risk that newly emerging instruments may remain misunderstood and proliferate undetected. That could result in the values created in the shadow economy no longer being controllable when discovered. Your Transfer into Practice Individuals looking to invest in crypto assets should ask themselves the following questions, among others: • Am I aware of how crypto assets work and of the different ways they can be structured? • Do I want to invest in crypto assets despite the risks involved, such as a possible total loss of my investment? • Am I willing to keep my wallets up-to-date with the latest and highest security standards to protect myself from hacker attacks? Individuals looking to start a business related to crypto assets should ask themselves the following questions, among others: • In what form do I want to be active in the crypto market? (Issuer, service provider, miner, etc.) • As an issuer, how do I want to structure my crypto assets and associated tokens? • How do I protect my crypto assets from losing value and the technology behind them from hacker attacks? • How do I ensure that my crypto assets are not used for terrorism and money laundering financing purposes?

156 157

 Gschnaidtner, 2020, § 2 (62).  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (377).

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Hanten, M. & Sacarcelik, O. (2019). Zivilrechtliche Einordnung von Kryptowährungen und ICO-Token und ihre Folgen. RdF, 124–131. Hönig, M. (2020). ICO und Kryptowährungen: Neue digitale Formen der Kapitalbeschaffung (1. Ed.). Wiesbaden: Springer. Möllenkamp, S. & Shmatenko, L.: Teil 13.6 Blockchain und Kryptowährungen, in: Hoeren, T. et al. (Hrsg.) (2020). Handbuch Multimedia-Recht (54. Ergänzungslieferung). München: C.H. Beck. Houben, R. & Snyers, A. (2020). Crypto-assets – key developments, regulatory concerns and responses. Study for the Committee on Economic and Monetary Affairs, Policy Department for Economic, Scientific and Quality of Life Policies. European Parliament. https://www.europarl.europa.eu/ RegData/etudes/STUD/2020/648779/IPOL_STU(2020)648779_EN.pdf. Accessed: 21.03.2021. John, D. (2020). Zur Sachqualität und Eigentumsfähigkeit von Kryptotoken. BKR, 76–81. Kaulartz, M. (2016). Die Blockchain-Technologie. CR, 474–480. Kaulartz, M. & Matzke, R. (2018). Die Tokenisierung des Rechts. NJW, 3278–3283. Kleinert, U. & Mayer, V. (2019). Elektronische Wertpapiere und Krypto-Token. EuZW, 857–863. Langenbucher, K., Hoche, M. & Wentz, J.: Kap. 11 Virtuelle Währungen, in: Langenbucher, K. et al. (Hrsg.) (2020). Bankrechts-Kommentar (3. Aufl.). München: C.H. Beck. Langer, M. (2019). Das liechtensteinische Steuerrecht (1. Aufl.). Wiesbaden: Springer. Maume, P.: § 12 Finanzdienstleistungsaufsichtsrecht, in: Maume, P. et al. (Hrsg.) (2020). Rechtshandbuch Kryptowerte (1. Aufl.). München: C.H. Beck. Maute, L.: § 4 Die Rechtsnatur von Kryptowerten, in: Maume, P. et al. (Hrsg.) (2020). Rechtshandbuch Kryptowerte (1. Aufl.). München: C.H. Beck. Million, C. (2019). Crashkurs Blockchain (1. Aufl.). Freiburg/München/ Stuttgart: Haufe. Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. https:// bitcoin.org/bitcoin.pdf. Accessed: 21.03.2021. Neulen, P. (Hrsg.) (2015). Duden Recht A – Z: Fachlexikon für Studium, Ausbildung und Beruf (3. Aktualisierte Aufl.). Berlin: Duden. N.N. (2019). Chancen und Risiken der Blockchain-Technologie für Finanzdienstleister. Bankv_rm_1910006. Risiko Manager (10), https://www. wiso-­n et.de/login?targetUrl=%2Fdocument%2FRISK__cc6a738b7bba5de490865201b33f9ecb09407629. Accessed: 21.03.2021.

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Pankratz, G. (2019). Blockchains und Distributed Ledgers – konzeptionelle Grundlagen, Einsatzmöglichkeiten und Grenzen. IT-Governance (30), 4–11. Rosenberger, P. (2018). Bitcoin und Blockchain (1. Ed.). Berlin/ Heidelberg: Springer. Schacht, S.: Die Blockchain-Technologie, in: Schacht, S. & Lanquillon, C. (Hrsg.) (2019). Blockchain und maschinelles Lernen (1. Ed.). Berlin/ Heidelberg: Springer. Safferling, C. & Rückert, C. (2015). Telekommunikationsüberwachung bei Bitcoins – Heimliche Datenauswertung bei virtuellen Währungen gem. § 100a StPO. MMR, 788–794. Schäfer, F. & Eckhold, T.: § 16a Crowdfunding, Crowdlending, Crowdinvesting, Kryptowährungen und Initial Coin Offerings (ICOs), in: Assmann, H.-D. et al. (Hrsg.) (2020). Handbuch des Kapitalanlagerechts (5. überarbeitete Aufl.). München: C.H. Beck. Schlund, A. & Pongratz, H. (2018). Distributed-Ledger-Technologie und Kryptowährungen – eine rechtliche Betrachtung. DStR, 598–604. Schrey, J. & Thalhofer, T. (2017). Rechtliche Aspekte der Blockchain. NJW, 1431–1436. Subhash, S. & Stadler, D. (2020). Die Emission von Wertrechten auf Basis verteilter elektronischer Register – Distributed Ledger Technology. wbl, 181–193. Zöllner, L. (2020). Kryptowerte vs. Virtuelle Währungen. BKR, 117–125. Zwirner C. & Heyd, S.: Kap. A Handelsbücher, in: Pelka, J. & Petersen, K. (Hrsg.) (2019). Beck’sches Steuerberater-Handbuch 2019/2020 (17. Aufl.). München: C.H. Beck.

2 Regulatory Classification of Crypto Assets

What You Take Away from This Chapter • The regulatory classification of crypto assets depends on the specific design of the crypto token in each individual case. • Investment tokens regularly qualify as financial instruments within the meaning of the WpHG and the KWG.  In contrast,  currency and utility tokens are merely financial instruments within the meaning of the KWG. • The regulatory classification entails various legal consequences, such as prospectus and information obligations or the requirement of a licence to operate. • Deviating from the EU requirements, the German legislator has established a comprehensive regulation of crypto assets in Germany by including the elements of crypto assets and crypto custody in the KWG. • Providers of tumbler services are nevertheless not covered by supervisory law.

The legal nature of crypto assets is essential for the legal capture of actual transactions. A distinct classification of crypto assets in the legal system creates legal certainty and confidence in the underlying technology. Given the lack of a universal legal definition of the term, both the civil and the regulatory character of crypto assets are widely discussed in the

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 H. Appel, Quick Guide Crypto Assets, https://doi.org/10.1007/978-3-658-40462-8_2

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literature.1 Due to the regulatory focus of this book, we will not discuss the various views on civil law classification. In the following, we will focus on how  crypto assets classify under capital market and banking supervisory law and what implications the respective classification entails.

2.1 Fundamentals of European Financial Market Supervision First, one has to understand  the interplay between national and EU supervision. According to the first sentence of Article 3 (3) of the Treaty on European Union (TEU) and Article 26 (1) of the Treaty on the Functioning of the European Union (TFEU), a central objective of the EU is the establishment and guarantee of a functioning internal market. Market freedoms in the form of the free movement of goods, persons, services, and capital are, according to Article 26 (2) TFEU, intended to serve the realisation of this objective. Therefore, the framework conditions of these market freedoms have been regulated in detail in Part Three, Titles II and IV TFEU. The second sentence of Article 114 (1) TFEU also empowers the European Parliament and the Council to adopt legal acts aligning the national law of the member states for the purpose of achieving the objectives of Article 26 TFEU. Due to the financial market crisis of 2007 and 2008, the European Parliament and the Council have increasingly used this possibility of harmonisation in banking and capital market law.2 Besides developing and revising solvency and market supervision regulations, such as the Capital Requirements Directive3 and the Markets in Financial Instruments Directive (MiFID)4, the Systemic Risk Board5 was established in 2010,  Cf. Kaulartz/Matzke, NJW 2018, 3278 (3280 f.); Kleinert/Mayer, EuZW 2019, 857 (857 f.); Maute, 2020, § 4; Omlor, ZHR 183 (2019), 294 (306 f.); Möllenkamp/Shmatenko, 2020, part 13.6, (29 f.). 2  Recitals 3 and 4 of Directive 2014/65/EU; Recitals 1 and 2 of Regulation (EU) No 1093/2010. 3  Directive 2013/36/EU. 4  Directive 2014/65/EU. 5  Regulation (EU) No 1092/2010. 1

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among other things. It provides macro-prudential oversight of the financial system at the EU level by monitoring, analysing, and assessing systemic risks and issuing clear warnings and recommendations.6 For micro-prudential supervision, three new EU level supervisory authorities (ESAs) have been established to cooperate with national supervisors: The European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA).7 The ESAs issue guidelines and recommendations and develop draft regulatory technical standards and implementing standards to harmonise financial supervision.8 Guidelines and recommendations are intended to assist national supervisory authorities, such as the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht  – BaFin), in interpreting EU law consistently.9 In contrast to regulations, these legal acts are generally not legally binding according to Article 288 (5) TFEU. Both the ESMA and the EBA as well as the BaFin have already commented on the regulatory classification of crypto assets in the existing EU and national legal frameworks.10 In this regard, the Markets in Financial Instruments Directive II (MiFID II) plays a significant role. Since the German legislator implemented the requirements of MiFID II with the Second Act Amending Financial Market Regulations11, the focus of the following classification will be on German law. German supervisory law consists on the one hand of banking supervision law, which deals in particular with the supervision of the establishment and operation of credit and financial services institutions.12 This is the so-called institutional supervision, whose most important legal basis is the German Banking Act (Kreditwesengesetz –  KWG). On the other hand, German supervisory law comprises operational supervision in the  Recitals 6, 10 and 11 of Regulation (EU) No 1092/2010.  BaFin, 2016. 8  Article 8 (1), point (a) of Regulation (EU) No 1093/2010; Article 8 (1), point (a) of Regulation (EU) No 1094/2010; Article 8 (1), point (a) of Regulation (EU) No 1095/2010. 9  Recital 26 of Regulation (EU) No 1093/2010. 10  EBA, 2019; ESMA, 2019. 11  BGBl 2017 I p. 1693. 12  BaFin, 2019a. 6 7

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form of capital market supervision, which is intended to regulate the transactions and behaviour of the participants in the capital market.13

2.2 Classification under Capital Market Law The regulations on capital market law in Germany are primarily found in the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG), the German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB) and the German Capital Investment Act (Vermögensanlagengesetz  – VermAnlG).14 Other capital market regulations such as the German Stock Exchange Act (Börsengesetz) or the German Securities Deposit Act (Depotgesetz) will not be part of the legal analysis of this book.

2.2.1 Financial Instrument within the Meaning of the WpHG The key connecting factor of the WpHG is the concept of a financial instrument within the meaning of section 2 (4) WpHG, which is based on Article 4 (1), point (15) in conjunction with Section C of Annex I MiFID II.15 Accordingly, financial instruments are securities within the meaning of section 2 (1) WpHG, units in investment funds within the meaning of section 1 (1) KAGB, money market instruments within the meaning of section 2 (2) WpHG, derivatives within the meaning of section 2 (3) WpHG, emission certificates, rights to subscribe for securities and investments within the meaning of section 1 (2) VermAnlG. Since the BaFin considers it possible to classify tokens as securities, as shares in an investment fund or as investments in the senses just mentioned due to their flexible design options, we will discuss these financial instruments in more detail below.16  Kumpan, 2020, WpHG § 2 (3 f.).  Hakenberg, 2020. 15  BaFin, 2018, p. 1 f. 16  BaFin, 2018, p. 2. 13 14

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Security within the Meaning of the WpHG Based on Article 4 (1), point (44) MiFID II, the definition of securities in section 2 (1) WpHG comprises three features: transferability, trade ability on the financial or capital markets, and “comparability”17 with the financial instruments listed in section 2 (1) numbers 1 to 3 WpHG. Furthermore, both regulations stipulate the negative criterion of means of payment. Accordingly, liquid assets such as cash or cheques do not constitute securities within the meaning of the WpHG or MiFID II.18 The wording of section 2 (1) WpHG makes it clear that, in contrast to the concept of securities under civil law, securitisation of the security is not necessary. Consequently, one must consider the criterion of transferability separately from the transfer provisions under civil law. The BaFin declares the possibility of documenting the security holder in a technology such as DLT as already sufficient for proof of ownership.19 A token can be transferred to another network participant by a new assignment. The assignment process is irrevocably documented in the distributed ledger. Thus, a token basically fulfils the criterion of transferability. The trade ability on the financial or capital markets is closely linked to the classification structure specified in section 2 (1) WpHG. The interpretation of the term financial market under EU law is to be understood broadly, which is why, according to the BaFin, crypto trading platforms can be regarded as financial or capital markets within the meaning of the WpHG and the MiFID II.20 Only if an instrument conveys the same rights and is determinable by type and number of units, it can be traded on such a market.21 Therefore, it must be fungible. To be able to affirm this prerequisite, each crypto asset and the associated tokens must be assessed individually. For instance, the tokens of the cryptocurrency Bitcoin are tradable because the tokens are subject to standardisation through Nakamoto’s whitepaper. However, if an issuer equips its tokens

 Weitnauer, BKR 2018, 231 (233).  Kumpan, 2020, WpHG § 2 (12). 19  BaFin, 2018, p. 2. 20  White, BaFinJournal 2019, p. 9. 21  Kumpan, 2020, WpHG § 2 (7). 17 18

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with individual customer-specific characteristics, trade ability on financial or capital markets is precluded.22 Finally, tokens must represent membership or ownership rights or comparable rights to qualify as securities within the meaning of the WpHG or the MiFID II.23 This criterion in particular requires a concrete examination in each case, as the supervisory authorities regularly apply the principle of substance over form.24 This means that it is not the designation of the crypto token but the concrete form of the claims associated with the token that is decisive for the regulatory classification. With regard to the token categories described in Sect. 1.2 of this book, only investment tokens fulfil this criterion and thus the concept of securities under the WpHG and the MiFID II. In addition, hybrid tokens may also qualify as securities within the meaning of the WpHG and the MiFID II, provided that the focus of their function is on the representation of membership or ownership rights.25 Currency tokens and utility tokens do not fall under the definition of a security and therefore do not fall within the scope of the WpHG or the MiFID II. Share in an Investment Fund within the Meaning of the KAGB Depending on its design, a token may also qualify as a share in an investment fund within the meaning of the first sentence of section 1 (1) KAGB. In EU law, the equivalent is a unit in collective investment undertakings within the meaning of Section C.3 of Annex I MiFID II. An investment fund as defined in the first sentence of section 1 (1) KAGB is any collective investment undertaking that collects capital from several  investors to invest it in accordance with a defined investment strategy for the benefit of these investors and that is not an operationally active company outside the financial sector. This legal definition is the

 Kumpan, 2020, WpHG § 2 (7).  BaFin, 2018, p. 2. 24  Weiß, BaFinJournal 2019, p. 9; Kleinert/Mayer, EuZW 2019, 857 (859). 25  BaFin, 2019b, p. 4. 22 23

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generic term for all types of funds.26 Using the example of a real estate fund, it becomes clear that only investment tokens and hybrid forms with a corresponding focus can meet the requirements for a share in an investment fund within the meaning of the KAGB.27 Real estate funds regularly pool the capital of investors to invest it in a large number of buildings. Profits are generated through the purchase, sale, or rental of real estate. By contributing their capital the investors acquire a right to this generated fund  income. This right represents a financial claim, which can be digitally represented in the form of an investment token. Currency tokens and utility tokens do not generally represent any asset-related rights, which is why such structured tokens do not qualify as units in an investment fund within the meaning of the KAGB or as units in collective investment undertakings within the meaning of the MiFID II. Investment Product within the Meaning of the VermAnlG To the extent that a token does not fall within the definition of a security under the German Securities Prospectus Act (Wertpapierprospektgesetz – WpPG) or the definition of a share in an investment fund within the meaning of the KAGB as just described, it may meet the requirements of section 1 (2) VermAnlG and thus would be nevertheless treated as a financial instrument within the meaning of the WpHG in the form of an investment product pursuant to section 2 (4) number 7 WpHG.  The definition of securities in section 2 (1) WpPG, which is based on Article 2, point (a) of Regulation (EU) 2017/1129 (EU Prospectus Regulation) in conjunction with Article 4 (1), point (44) MiFID II, is consistent with the concept of securities in the WpHG, which is why reference can be made on this point to the explanations on security within the meaning of the WpHG in Sect. 2.2.1 of this book.28

 Volhard/Jang, 2021, KAGB § 1 (2).  Cf. Weitnauer, BKR 2018, 231 (234). 28  Kumpan, 2020, WpHG § 2 (5). 26 27

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Classification as an investment product is also subsidiary to the qualification as a deposit business within the meaning of the second sentence of section 1 (1) KWG. Eventually, an instrument must represent one of the cases of application described in section 1 (2) numbers 1 to 7 VermAnlG to qualify as an investment product. In its information letter the BaFin clarifies that tokens can only meet the requirements of an equity investment product (section 1 (2) number 1 VermAnlG), a patriarchal loan (section 1 (2) number 3 VermAnlG), a subordinated loan (section 1 (2) number 4 VermAnlG), a profit participation right (section 1 (2) number 5 VermAnlG) or another investment (section 1 (2) number 7 VermAnlG).29 Likewise, the actual design of the individual tokens is decisive for the qualification as an investment product within the meaning of the VermAnlG. The instruments mentioned by the BaFin regularly serve the issuer to finance their undertakings.30 Currency tokens are generally intended to fulfil a payment function. Additionally, utility tokens represent vouchers for specific services. In general, the issuance of these two token classes does not primarily pursue the goal of raising funds. Only crypto tokens designed as investment tokens have a financing character so that a regulatory classification as an investment product within the meaning of the VermAnlG can only be considered for tokens designed accordingly.

2.2.2 Legal Consequences of Classification If a token meets the requirements of a financial instrument within the meaning of the WpHG, various legal consequences are triggered. Both issuers and companies offering services in context with such tokens must comply with the requirements of securities supervision. Given the abundance of securities supervision regulations, only the most relevant provisions are outlined below.

 BaFin, 2018, p. 3.  Schwarz van Berk. 2018, § 42 (4).

29 30

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First of all, in the case of public offerings of tokens in Germany, a prospectus obligation may arise from the classification as a financial instrument. For investment tokens that meet the definition of a security under the WpHG or the MiFID II, this obligation may arise from Article 3 (1) of the EU Prospectus Regulation, as the definition of a security under Article 2, point (a) of the EU Prospectus Regulation also refers to Article 4 (1), point (44) MiFID II. If a token qualifies as a share in an investment fund, the obligation to publish sales prospectuses and key investor information is based on the various provisions of the KAGB. Classification of the publicly offered investment token as an investment product results in the obligation to publish a sales prospectus pursuant to section 6 VermAnlG. Furthermore, issuers and service providers must comply with the various obligations of the WpHG. Of particular importance are the conduct, organisation and transparency obligations of Chapter 11 WpHG, as well as the information obligations under sections 48 et seq. WpHG. In its recommendation the ESMA clarifies that, in particular, the transparency requirements of Directive 2013/50/EU regarding  the information on issuers whose securities are authorised for trading on a regulated market shall be respected by issuers offering crypto tokens.31 These requirements were mainly incorporated into the WpHG by the German Transparency Directive Implementation Act32. They primarily comprise periodic and ongoing disclosure obligations. The qualification of a token as a financial instrument may also lead to the application of Regulation No. 596/2014, the Market Abuse Regulation (MAR), as its scope is also based on the concept of a financial instrument within the meaning of the MiFID II. If the token fulfils the additional requirements of Article 2 MAR, insider dealing, the unlawful disclosure of inside information and market manipulation  concerning the token are prohibited pursuant to Articles 14 and 15 MAR. Article 17 MAR also contains an ad hoc disclosure obligation.33

 ESMA, 2019, p. 23 f.  BGBl I No. 46 2029. 33  Kleinert/Mayer, EuZW 2019, 857 (860). 31 32

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2.3 Classification under Banking Supervisory Law To ensure the stability of the financial system, undertakings in Germany that conduct banking business commercially or on a scale which requires commercially organised business operations are, in principle, directly supervised by the BaFin, the DBB or the ECB regarding their incorporation and business operations.34 The activities requiring authorisation are defined in section 1 (1) sentence 2 KWG (banking business) and section 1 (1a) sentence 2 KWG (financial services). As in capital market law, the key connecting factor for banking business and financial services is the concept of a financial instrument. Due to the implementation of the MiFID II, the definitions of section 2 WpHG and section 1 KWG have been aligned but are not entirely identical with regard to the subgroups.35

2.3.1 Financial Instrument within the Meaning of the KWG The term financial instrument under banking supervision law is defined in section 1 (11) sentence 1 KWG. In section 1 (11) sentence 1 number 10 KWG, crypto assets are explicitly mentioned as a subcategory of a financial instrument within the meaning of the KWG.  However, this category was developed as a catch-all, wherefore we will discuss the precedence groups of financial instruments similar to securities, foreign exchange and units of account, and derivatives first.36 As in capital markets law, the legal classification of tokens depends on their specific design in each case.37 Since, at the time of writing, no case has been identified in which tokens are structured in analogy to money market instruments or

 BaFin, 2019a.  Kumpan, 2020, WpHG § 2 (5). 36  BT-Drs 19/13.827 p. 110. 37  BaFin, 2019b, p. 11. 34 35

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emission certificates, these subgroups of financial instruments within the meaning of the KWG will not be elaborated on in this book. Financial Instruments Similar to Securities Regarding financial instruments similar to securities within the meaning of section 1 (11) sentence 1 numbers 1 to 5 KWG, reference can be made to the explanations in Sect. 2.2.1 of this book, due to the alignment by the MiFID II. According to the BaFin, investment tokens used purely for investment purposes can, in principle, meet the requirements of an investment product within the meaning of the VermAnlG (number 2), a debt instrument (number 3) or an investment fund within the meaning of the KAGB (number 5).38 Utility tokens and currency tokens do not qualify as financial instruments similar to securities. Foreign Exchange or Units of Account Foreign exchange within the meaning of section 1 (11) number 6 KWG are “foreign means of payment denominated in foreign currency with the exception of foreign notes and coins”.39 Foreign notes and coins are cash of a currency in circulation abroad. Thus, all non-cash means of payment of a foreign currency, such as bank deposits, bills of exchange, cheques and money orders, constitute foreign exchange.40 Tokens, including currency tokens, cannot be subsumed under this definition because, as explained in detail in Sect. 1.2.1 of this book, they do not generally fulfil the characteristics of a currency. However, tokens may qualify as units of account within the meaning of section 1 (11) number 6 KWG, which, although they are not legal tender, are treated in the same way as foreign exchange.41 There is no commonly accepted definition of a unit of account.42 The BaFin has

 BaFin, 2021.  Schwennicke, 2021, KWG § 1 (249). 40  BaFin, 2021. 41  Schwennicke, 2021, KWG § 1 (249). 42  Spindler/Bille, WM 2014, 1357 (1361). 38 39

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therefore established a broad understanding of the term in regulatory, administrative practice.43 In the view of the supervisory authority, complementary currencies issued under private law, such as currency tokens, fall within the definition of a unit of account.44 The German legislator confirmed this regulatory classification of currency tokens in the explanatory memorandum to the Fourth EU Money Laundering Directive Implementing Act.45 In literature, however, this interpretation is regarded critically to some extent.46 One of the reasons for the critical evaluation of the classification is a ­decision by the Berlin Court of Appeal,47 which denied the qualification of Bitcoin as a unit of account within the meaning of section 1 (11) number 6 KWG.  Utility and investment tokens do not regularly meet the criteria of a unit of account due to their typical design. Derivatives Section 1 (11) sentence 5 KWG defines derivatives generally as future or options contracts in the form of a purchase, exchange or similar transaction, which are to be settled with a time lag and whose value is derived directly or indirectly from the price or measure of an underlying (forward contracts). Furthermore, section 1 (11) sentence 5, points (a) to (f ) KWG contain a catalogue of possible underlying assets, which are aligned with the MiFID II.48 In addition to the units of account just explained (point (b)), this list also includes securities (point (a)). Since the original definition of a security was deleted from the KWG in 2013, the MiFID II must be used to define it.49 Accordingly, investment tokens can, in any case, serve as an  underlying  asset for forward contracts. However, pure utility tokens do not qualify as securities within  Schäfer, 2016, KWG § 1 (287).  BaFin, 2021. 45  BT-Drs 19/13.827 p. 110. 46  Spindler/Bille, WM 2014, 1357 (1362); Terlau, 2017, § 55a (161). 47  KG, Urt. v. 25.09.2018 – (4) 161 Ss 28/18 (35/18). 48  Schwennicke, 2021, KWG § 1 (269). 49  Maume, 2020, § 12 (17). 43 44

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the meaning of Article 4 (1), point (44) MiFID II. Also, they do not fall under the definition of a unit of account. Hence utility tokens are not classifiable in the catalogue of underlying assets. Currency tokens, as opposed to the latter, can be the subject of a futures transaction since they regularly classify as units of account. Cryptoc Assets Since 01.01.2020, crypto tokens may qualify as crypto assets under section 1 (11) number 10 KWG subsidiary to the other subgroups of financial instruments. The term was included with the implementation of the AMLD V into German law. The latter provides for an extension of the scope of obligations under money laundering law to counteract the potential for abuse of virtual currencies.50 Therefore, due to the amendment by the AMLD V, the material scope of Directive (EU) 2015/849 now also includes service providers who exchange virtual currencies into fiat money and vice versa (Article 2 (1), point (3)(g) AMLD V) and providers of electronic purses (Article 2 (1), point (3)(h) AMLD V). However, the requirements of Union law refer only to virtual currencies, which are defined in Article 3, point (18) AMLD V as digital representations of value that is not issued or guaranteed by a central bank or public authority, is not necessarily attached to a legally established currency and does not possess a legal status of a currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically. The German legislator, in contrast, has extended the definition when implementing. On the one hand, this entails the inclusion of means of payment and investments as purposes of use of crypto assets and, on the other hand, in the addition of how these purposes are to be determined. Pursuant to the fourth sentence of section 1 (11) KWG crypto assets are digital representations of value that are not issued or guaranteed by a 50

 Recital 8 of Directive (EU) 2018/843.

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central bank or public authority and do not possess the legal status of currency or money, but are accepted by natural persons or legal entities as a means of exchange or payment on the basis of an agreement or actual practice or serve investment purposes and can be transferred, stored and traded electronically [emphasis added]. To comply with recital 10 of the AMLD V, the German legislator included an exception in section 1 (11) sentence 5 KWG, which excludes electronic money within the meaning of the German Payment Services Oversight Act (Zahlungsdiensteaufsichtsgesetz – ZAG) and certain monetary assets from the definition.51 However, the EU wording does not provide for such a negative definition. The German legislator justifies the extension of the definition by stating that the limitation to the purpose as a mean of exchange in the statutory definition is not in accordance with recital 10 of the amending Directive.52 Hence, “all potential uses of virtual currencies”53 are to be covered by the AMLD V. The enumerated fields of application of tokens (“as means of exchange, investment, store-of-value products or use in online casinos”54) would also indicate a broader scope than the actual definition implies. In principle, it is possible to use a broad interpretation of the concept of a means of exchange so that all types of tokens would qualify. However, apart from the deviations from recital 10, a narrow understanding of the notion seems preferable from an economic point of view.55 Furthermore, recitals of secondary legislation are not legally binding, whereas secondary legislation, according to Article 288 (2) and (3) TFEU, is. Based on this understanding, the definition of virtual currency under Union law only includes currency tokens. Investment and utility tokens do not fall within the scope, as they do not fulfil the function of a means of exchange in the narrower sense.

 BT-Drs 19/13.827 p. 110.  BT-Drs 19/13.827 p. 110. 53  Recital 10 of Directive (EU) 2018/843. 54  Recital 10 of Directive (EU) 2018/843. 55  Cf. Fromberger/Haffke/Zimmermann, BKR 2019, 377 (380); Zöllner, BKR 2020, 117 (121). 51 52

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The definition of crypto assets in the fourth sentence of section 1 (11) KWG, in contrast, does cover investment tokens and some utility tokens due to the additional purposes.56 By their very nature, investment tokens serve investment purposes, wherefore their subsumption under the definition is not questionable. In the absence of a legal definition of the investment purpose, however, utility tokens require closer examination.57 The legislator states that “pure electronic vouchers for the purchase of goods or services of the issuer or a third party in exchange for the provision of a corresponding counter value, which are only intended to have an economic function through redemption towards the issuer and which are therefore not tradable and which, due to their design, do not reflect an investor-like expectation of the performance of the voucher or the general business performance of the issuer or a third party in terms of value or calculation”,58 do not fall within the scope of the requirements under money laundering law. Presumably, the German legislator intended to regulate the trading of utility tokens on secondary markets with this justification. The legislator did not further explain the investor-like expectation in the explanatory memorandum. Investors regularly expect an increase in the value of their invested capital. If there is a demand for the service represented in the utility token and the issuer of the token does not issue any further tokens of this type, the value of the utility token increases. For this reason, utility tokens can, in principle, serve an investment purpose. The premises are thus misleading to some extent. The investor-like expectation does not necessarily result from the issuer’s token design but rather from the market interest. Furthermore, the conclusion is erroneous  that tokens which are intended to have an economic function only through redemption towards the issuer and are, therefore, non-tradable.59 A contractual agreement on the token may indeed provide that the token is intended to be redeemable only against the issuer. By including the criterion, the legislator even  BT-Drs 19/13.827 p. 110.  Resas/Ulrich/Geest, ZBB/JBB 1/2020, p. 26. 58  BT-Drs 19/13.827 p. 110. 59  Similarly Fromberger/Haffke/Zimmermann, BKR 2019, 377 (384). 56 57

42 

H. Appel

clarifies that tokens can, in principle, be used de facto for other purposes in deviation from agreements with the issuer. As utility tokens can be traded on a secondary market, they can also develop an economic value towards other market participants. Only the issuer can prevent the trading of utility tokens by using a so-called lock-up.60 This is a “technical transfer lock”61, which prevents further allocations to other public keys after the token has been issued to the public key of the buyer for the first time. Accordingly, the lack of trade ability does not result from the purpose of the token but from its technical design. In addition, the definition of the fourth sentence of section 1 (11) KWG already presumes trade ability for qualification as a crypto asset, which is why mentioning it again seems questionable. Therefore, when classifying utility tokens under banking supervision law, one must first assess whether the purchasers of the token can derive investor-like expectations from an agreement, such as an increase in the value of the capital invested. If this is not the case, one must consider the actual use. In the case of an initial public offering, however, this is not possible, so utility tokens that are not based on a respective agreement do not initially fall under the definition of a crypto asset pursuant to the fourth sentence of section 1 (11) KWG. According to the derogation of section 1 (11) sentence 5 KWG, electronic money as well as some payment instruments and transactions within the meaning of the ZAG do not fall within the concept of crypto assets. A qualification of a crypto token as electronic money within the meaning of section 1 (2) sentence 3 ZAG, based on Directive 2009/110/ EC, requires that the tokens are issued in exchange for legal tender as well as grant a right of return and that third parties accept the tokens as means of payment.62 This exception of the scope is consistent with the EBA’s view that crypto assets may, in principle, qualify as electronic money.63 If tokens of a crypto asset are used in interconnected payment systems and  Fromberger/Haffke/Zimmermann, BKR 2019, 377 (384).  Fromberger/Zimmermann, 2020, § 1 (68). 62  BaFin, 2019b, p. 10. 63  EBA, 2019. 60 61

2  Regulatory Classification of Crypto Assets 

43

for payment transactions of providers of electronic communication networks or services, they are also excluded from the scope of the KWG.64

2.3.2 Legal Consequences of Classification Classification of a crypto token as a financial instrument within the meaning of the KWG entails various legal consequences. Of utmost importance for supervisory law is the requirement of authorisation for certain activities that are commercial in nature or, to an extent, that requires business operations to be conducted commercially. The licensing requirements can arise from the KWG, the ZAG or the KAGB. Anyone who fulfils the criteria for an activity requiring an authorisation qualifies as a credit or financial services institution, a capital management company or a payment institution. Pursuant to section 2 (1) of the German Money Laundering Act (Geldwäschegsetz  – GwG), these groups are obliged to comply with the provisions of money laundering law. Indeed, the various types of authorisations are generally related to the specific business activity and not to the operator of the activity itself. Nevertheless, in the interest of clarity, an explanation is provided below of which activities requiring authorisation are relevant for the individual market participants described in Sect. 1.4 of this book. The details of the offences will only be dealt with if particularities for crypto-related activities exist. In general, however, this is not the case.65 Issuers With regard to the required authorisation for issuers, one can distinguish between the creation, issuance and public offering of the tokens. Generation of the tokens by initiating the crypto asset does not constitute an activity requiring authorisation.66 Additionally, commercial activity is not evident herein. It is generally possible to tokenise assets for one’s use without wanting to place them on the financial markets. Regulation of pure creation would therefore be excessive.  Resas/Ulrich/Geest, ZBB/JBB 1/2020, p. 27.  BaFin, 2019b, p. 12. 66  BaFin, 2019b, p. 12. 64 65

44 

H. Appel

The initial offering of crypto tokens by an issuer to third parties also does not qualify as an activity requiring authorisation.67 It is only when the tokens are actually issued that an authorisation may be required. Depending on the design of the tokens and the rights related to them.68 If the tokens are issued in exchange for cash or book money, the issuance could be classified as operating a deposit business within the meaning of section 1 (1) sentence 2 number 1 KWG and thus entail an authorisation requirement pursuant to section 32 (1) sentence 1 KWG, to the extent that the issuer has endowed the tokens with an unconditional promise of repayment to the investors upon initialisation of the crypto asset.69 The issuance in exchange for complementary currencies, such as tokens of another crypto asset, does not fulfil the requirement of the  deposit ­business.70 If a company issues specially created tokens only against Bitcoins or Ether, for example, it does not need to apply for authorisation under the KWG. If the issuance qualifies as a deposit business pursuant to section 1 (1) sentence 2 number 1 KWG, the issuer is to be classified as a credit institution and thus obliged to comply with the requirements of money laundering law according to section 2 (1) number 1 GwG. Insofar as the tokens are accepted as means of payment by third parties in addition to the issuance of the tokens in exchange for legal tender and the granting of an unconditional redemption claim, the KWG authorisation is not pertinent due to the derogation of section 1 (11) sentence 5 KWG. Instead, the issuer requires authorisation under section 11 ZAG to operate the e-money business.71 In this case, the issuer is subject to the obligations of money laundering law according to section 2 (1) number 3 GwG. Under certain circumstances, the initiator of a crypto asset could also classify as the operator of a capital management company, which would entail an authorisation requirement pursuant to sections 44 (1) sentence 1 number 1 and 20 (1) KAGB.72 Prerequisite for this is that the issuer  BaFin, 2019b, p. 12.  Maume, 2020, § 12 (86). 69  BaFin, 2019b, p. 9, Schwennicke, 2021, KWG § 1 (11 f.). 70  BaFin, 2014b. 71  BaFin, 2019b, p. 10. 72  BaFin, 2019b, p. 10. 67 68

2  Regulatory Classification of Crypto Assets 

45

gives an undertaking according to section 1 (1) KAGB that he will invest the capital collected through the issuance in accordance with a defined investment strategy for the benefit of the investors. By qualifying as a capital management company, the issuer falls within the scope of those obligated under money laundering law pursuant to section 2 (1) number 9 of the GwG. Wallet Provider In Germany, the obligation to supervise wallet providers under money laundering law, imposed by Article 2 (1), point (3)(h) AMLD V, was implemented through the introduction of the crypto custody business. According to Article 3, point (18) AMLD V, a custodian wallet provider is an entity that provides services to safeguard private cryptographic keys on behalf of its customers to hold, store and transfer virtual currencies. Instead of including a new obligated party in section 2 GwG, the German legislator has introduced the crypto custody business as a new type of financial service in the catalogue of services requiring an authorisation pursuant to section 1 (1a) sentence 2 number 6 KWG, so that crypto custodians as financial services institutions now fall within the scope of obligated parties in accordance with section 2 (1) number 2 GwG.73 The legal consequences for wallet providers operating in Germany are thus more extensive than intended by the EU legislator. The latter did not aim to make wallet providers subject to authorisation but merely to monitor their activities under money laundering law.74 The German legislator justifies its more far-reaching approach with the need to protect customers from the not insignificant risks associated with cryptocurrencies.75 Pursuant to section 1 (1a) sentence 2 number 6 KWG, the  crypto custody business is defined as the custody, management and protection of crypto assets or private cryptographic keys used to keep, store or transfer  BT-Drs 19/13.827, p. 109.  Recital 8 of Directive (EU) 2018/843. 75  BT-Drs 19/13.827, p. 109. 73 74

46 

H. Appel

crypto assets for others. In principle, the mere presence of one of the variants is already sufficient to fulfil the offence of the  crypto custody business.76 Also, in this respect, the German legislator exceeds the required level of the EU standards. The definition of a custodian wallet provider under EU law only refers to virtual currencies. These only include currency tokens. By using the term crypto asset, the scope of the German definition is also extended to investment and some utility tokens, resulting in a comprehensive regulation of the crypto market. According to the German legislator, the crypto custody business is subsidiary to the deposit and the restricted custody business.77 However, despite some parallels to the deposit business, parts of the literature as well as the BaFin, hold the view that, due to the lack of securitisation of the right represented by the token, the custody of crypto tokens cannot be classified as a deposit business pursuant to section 1 (1a) sentence 2 number 5 KWG and that this subsidiarity is therefore irrelevant.78 Nevertheless, the BaFin’s administrative practice with regard to deposit business can be used as a guide when interpreting the criteria.79 In line with the custodial activities of the deposit business, the German legislator understands custody within the meaning of section 1 (1a) sentence 2 number 6 KWG as the custody of crypto assets providing services for third parties.80 The explanatory memorandum to the law explicitly refers to the custody of service providers “who store their customers’ crypto assets in a collective portfolio without the customers themselves knowing the cryptographic keys used in the process”81. Custody means transferring the token into the service provider’s domain so that the token is accessible to the service provider.82 A token passes into the other person’s domain by being assigned to that person’s public key. The wallets explained in Sect. 1.4.2 of this book only refer to the storage of private keys and not of crypto assets themselves. However, so-called omnibus  BT-Drs 19/13.827, p. 109.  BT-Drs 19/13.827, p. 109. 78  BaFin, 2020a; Maume, 2020, § 12 (79); Rennig, BKR 2020, 23 (27). 79  Maume, 2020, § 12 (84); Rennig, BKR 2020, 23 (28). 80  BT-Drs 19/13.827, p. 109; Resas/Ulrich/Geest, ZBB/JBB 1/2020, p. 29. 81  BT-Drs 19/13.827, p. 109. 82  Behrens/Schadtle, WM 2019, 2099 (2103); Schwennicke, 2021, KWG § 1 (50). 76 77

2  Regulatory Classification of Crypto Assets 

47

wallets and multi-signature wallets are likely to meet the criteria for secure holding on a regular basis.83 In using the term management, the legislator has also drawn inspiration from the deposit business.84 Management in the context of the crypto custody business means “in the broadest sense, the ongoing exercise of the rights arising from the crypto asset”85. In addition to the right to dispose of the crypto asset, the exercise of voting or co-management rights or the use of the service linked to the token, for example, is also likely to be regarded as an administrative activity. In any case, the service provider must be granted access to the owner’s private key for the ongoing exercise of the right to sell or use the service. If the service provider only fulfils notification or monitoring obligations, the owner does not need to disclose the private key to the service provider.86 Protection is understood to be “both the digital storage of the private cryptographic keys of third parties provided as a service and the storage of physical data carriers (e.g. a USB stick or a sheet of paper) on which such keys are stored”87. In this context, it is essential to note that if the service recipient uses the hardware or software independently, without the service provider being able to access the stored information as intended, an activity requiring authorisation pursuant to section 1 (1a) sentence 2 number 6 KWG does not arise.88 Accordingly, a person who secures her tokens within a hardware or paper wallet located in her domain does not qualify as a crypto custodian requiring authorisation. However, if the person transfers the hardware or paper wallet to a third party, this third party will qualify as a crypto custodian if the service is performed commercially. The provision of a software wallet also does not constitute crypto custody within the meaning of section 1 (1a) sentence 2 number 6 KWG, as the service consists solely in creating the software and not storing the crypto asset or the private key.89 Providing an online  Resas/Ulrich/Geest, ZBB/JBB 1/2020, p. 29.  Resas/Ulrich/Geest, ZBB/JBB 1/2020, p. 30. 85  BT-Drs 19/13.827, p. 109. 86  Schwennicke, 2021, KWG § 1 (51). 87  BT-Drs 19/13.827, p. 109. 88  BT-Drs 19/13.827, p. 109. 89  Behrens/Schadtle, WM 2019, 2099 (2103); Resas/Ulrich/Geest, ZBB/JBB 1/2020, p. 31. 83 84

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H. Appel

wallet, in contrast, regularly qualifies as crypto custody within the meaning of the KWG.90 Only service providers who “do not offer their services explicitly for storage of private cryptographic keys” are excluded.91 If, for instance, a token owner uploads a classic Word document containing his private keys to a cloud storage such as OneDrive, Microsoft is not subject to banking supervision. The criterion of acting on behalf of others is fulfilled if the activity is carried out for a third party outside the own company, not by way of disclosed agency.92 Since there is no reason for customer protection in the case of own custody due to the lack of a provider-user relationship, and it nevertheless does not pose any risks for the markets, it appears ­appropriate not to subject this form of crypto custody under the supervision of the BaFin. A wallet provider only has to apply for an authorisation pursuant to sections 32 (1) sentence 1, 1 (1a) sentence 2 number 6 KWG if he provides crypto custody on a commercial basis or to an extent that requires a commercially established business. The BaFin has not yet commented on the interpretation of this criterion. In analogy to the deposit business, the custody of cryptographic keys for five or more customers or of a total of at least 25 crypto assets is likely to be considered a commercial service.93 Operator of Trading Platforms In practice, service providers usually offer trading in crypto tokens or private keys in addition to custody.94 In this case, the authorisation for the crypto custody business alone does not suffice. Moreover, trading platforms that only want to provide commercial trading of crypto assets as a service must also obtain authorisation according to section 32 (1) sentence 1 KWG. The underlying activity requiring authorisation depends on the specific design of the platform, which can be very different in principle.95 According to the BaFin, the activities of operators of trading platforms requiring authorisation include the operation of principal broking services according to section 1 (1) sentence 2 number 4 KWG, underwriting  Behrens/Schadtle, WM 2019, 2099 (2103).  BT-Drs 19/13.827, p. 109. 92  BaFin, 2020a. 93  Rennig, BKR 2020, 23 (28). 94  Behrens/Schadtle, WM 2019, 2099 (2102). 95  Patz, BKR 2019, 435 (436). 90 91

2  Regulatory Classification of Crypto Assets 

49

business according to section 1 (1) sentence 2 number 10 KWG, a multilateral trading facility (MTF) according to section 1 (1a) sentence 2 number 1b KWG or an organised trading facility (OTF) according to section 1 (1a) sentence 2 number 1d KWG as well as the provision of investment or contract broking according to section 1 (1a) sentence 2 number 1 or number 2 KWG, of investment advice according to section 1 (1a) sentence 2 number 1a KWG, of placement business according to section 1 (1a) sentence 2 number 1c KWG, of portfolio management according to section 1 (1a) sentence 2 number 3 KWG, of proprietary trading pursuant to section 1 (1a) sentence 2 number 4 KWG and of asset management according to section 1 (1a) sentence 2 number 11 KWG.96 If a platform fulfils one of the criteria of a banking business according to section 1 (1) sentence 2 KWG, it constitutes a credit institution and is subject to the obligations under money laundering law according to section 2 (1) number 1 GwG. If the trading platform operates within the scope of a financial service requiring authorisation according to section 1 (1a) sentence 2 KWG, it qualifies as a financial services institution and is thus subject to obligations pursuant to section 2 (1) number 2 GwG. Principal Broking Service  With regard to the fulfilment of the authorisation required principal broking service, the BaFin has specifically formulated four criteria for crypto platforms based on the legal definition of section 1 (1) sentence 2 number 4 KWG.97 First, the various participants of the platform must have a right of direction concerning the transaction details, such as the quantity and price of the transactions. Second, the trading partners must be unknown to each other. Third, the transaction must be carried out by the trading platform in its own name for the account of the trading partners, which means that the economic advantages and disadvantages arising from the transaction must affect the trading partners themselves and not the platform. Lastly, the platform must commit towards the participants to report on the course of the transactions as well as to transfer the traded crypto assets. With regard to the crypto service providers described in Sect. 1.4.2 of this book, centrally 96 97

 BaFin, 2019b, p. 11 f.  On this and the following: BaFin, 2020b.

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H. Appel

structured trading platforms probably meet the criteria for principal broking service pursuant to section 1 (1) sentence 2 number 4 KWG on a regular basis.98 In addition to the obligation to obtain authorisation for the trading of investment tokens, the trading platform is required to execute its customer orders to the best of its ability pursuant to section 2 (8) number 1 WpHG in conjunction with section 82 WpHG.99  Multilateral Trading System  Operating an MTF is the most important business in the market.100 Pursuant to section 1 (1a) sentence 2 number 1b KWG, such a system exists if it brings together a large number of persons’ interests in the purchase and sale of financial instruments within the facility according to set rules in a way that results in a purchase agreement for these financial instruments. The existence of a set of rules containing provisions on membership, admission to trading in financial instruments, trading between members, notifications of executed transactions and disclosure obligations is decisive.101  It is also crucial that the members of the system cannot determine their contracting party themselves because the matching has to take place automatically via software or protocols.102 Trading, therefore, does not take place bilaterally with the platform’s  operator but between a large number of members of the system. Consequently, the system has a marketplace function.103 The system’s operator exclusively brings together the parties to a potential transaction, which is why only decentrally structured trading platforms fulfil the requirements for operating an MTF if a corresponding set of rules is in place. Central trading platforms can only qualify as MTFs if they stipulate in the underlying rulebook that the economic consequences of trading are

 Similarly Maume, 2020, § 12 (70).  Patz, BKR 2019, 435 (440). 100  Maume, 2020, § 12 (47). 101  BT-Drs 16/4028, 56. 102  BaFin, 2020b. 103  Schwennicke, 2021, KWG § 1 (100). 98 99

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solely borne by the members.104 However, this would be unusual for the design of a centrally structured trading platform. According to the BaFin, platforms where users make the transaction of their placed crypto assets conditional on reaching a price threshold fulfil the criteria of an MTF.105 By trading investment tokens, the requirements of sections 63 et seq. WpHG, in particular sections 72 and 74 WpHG, also apply to the operation of an MTF.106 Organised Trading System  Similar to an MTF, an OTF is operated within the meaning of section 1 (1a) sentence 2 number 1d KWG, which also constitutes a financial service requiring an authorisation. An OTF is a multilateral system, but it is not an organised market or MTF and brings together the interests of a large number of third parties in the purchase and sale of bonds, structured financial products, emission certificates or derivatives within the system in a way that leads to a contract for the purchase of these financial instruments.  The decisive difference to MTFs is the operator’s  discretion, for instance, with regard to the matching of participants, the granting of access or the forwarding of orders.107 Since only debt instruments within the meaning of section 1 (11) sentence 1 number 3 KWG can be traded on OTFs, only transactions in investment tokens similar to such a debt instrument can be carried out on an OTF accordingly.108 Consequently, the operator of the OFT is obliged to comply with the special requirements of sections 72 and 75 WpHG.109 Proprietary Trading  Furthermore, crypto services may qualify as proprietary trading. The prerequisite for this is, pursuant to section 1 (1a) sentence 2 number 4 letter a KWG, the continuous offering to purchase and sell financial instruments at prices set by the bank for its own account using its own capital or, pursuant to section 1 (1a) sentence 2 number 4  Maume, 2020, § 12 (50).  BaFin, 2020b. 106  Patz, BKR 2019, 435 (438). 107  Schwennicke, 2021, KWG § 1 (107e). 108  Maume, 2020, § 12 (60); Schwennicke, 2021, KWG § 1 (107f ). 109  Maume, 2020, § 12 (59). 104 105

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letter c KWG, to purchase or sell financial instruments for its own account as a service for others.  It is necessary to differentiate between proprietary trading and proprietary business that does not require authorisation within the meaning of section 1 (1a) sentence 3 KWG. The BaFin states that the service must specifically contribute to creating and maintaining the market instead of merely participating in it.110 Market management, fixed-price and open transactions, as well as clearing and transactions safeguarding interests, are regularly to be qualified in the sense of proprietary trading.111 The BaFin also classifies the exchange of currency tokens into legal currencies and vice versa as proprietary trading if the trader publicly advertises that she regularly buys and sells such tokens.112 According to the BaFin’s second guidance letter, it can be assumed that exchanging investment and utility tokens into legal currencies and vice versa for own account also fulfils the offence of proprietary trading.113 Since the law does not specify what type of consideration must be given when trading the financial instrument, it is evident that the exchange of tokens of one crypto asset for tokens of another crypto asset for one’s own account also qualifies as proprietary trading.114 Crypto exchanges such as anycoindirect or stormgain would consequently require an authorisation according to section 32 (1) sentence 1 KWG. Crypto services can also classify as systematic internalisation, a specific form of proprietary trading pursuant to section 1 (1a) sentence 2 number 4 letter b KWG. Accordingly, it is systematic internalisation in proprietary trading when the entity trades, often for  its own account, in an organised and systematic manner outside an organised market or a multilateral trading facility by providing a system accessible to third parties to transact business with these third parties. Whether it is frequent, systematic trading is determined in accordance with section 1 (1a) sentence 5

 BaFin, 2020b.  Schwennicke, 2021, KWG § 1 (125). 112  BaFin, 2020b. 113  BaFin, 2019b, p. 11. 114  Maume, 2020, § 12 (64). 110 111

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KWG; whether there is trading on a substantial scale is determined in accordance with section 1 (1a) sentence 6 KWG. The central element of the definition for the classification of trading platforms is the frequent execution of token transactions for their own account. A centrally structured trading platform that regularly executes transactions via its own public keys and uses tokens from its own portfolio for this purpose will  most likely be classified as a systematic internaliser.115 Also, in the case of systematic internalisation, an investment service is provided according to section 2 (8) number 2 letter b WpHG when transactions relating  to investment tokens are executed, which also results in further obligations under the WpHG.116 Investment and Contract Broking  Trading platforms for crypto assets can also operate in the form of investment broking or contract broking. According to section 1 (1a) sentence 2 number 1 KWG, investment broking is the brokering of business involving purchasing and selling financial instruments.  Therefore, the business activity of the trading platform shall be the deliberate and ultimate causation of the willingness to conclude a concrete transaction by forwarding the investors’ declarations of intent.117 The trading platform thereby becomes active as a messenger for the service recipient.118 However, if the  platform operator only offers contact possibilities for sellers and buyers without naming a concrete transaction, it does not qualify as investment broking. A platform that, for example, only publishes the public keys of prospective buyers or sellers of a crypto asset for everyone is generally not to be classified as an investment broker. The platform cannot influence who accesses the information and which specific transaction is carried out by retrieving the public keys, so the element of influence is not likely to be fulfilled.

 Patz, BKR 2019, 435 (438).  Maume, 2020, § 12 (68). 117  BaFin, 2017. 118  Maume, 2020, § 12 (73). 115 116

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However, if registration of the interested parties is required for accessing the public keys, the transaction can only be carried out with the service provider  participating, so that investment broking may be presumed.119 The actual execution of the transaction is nevertheless the responsibility of the parties to the transaction, as the platform is only involved in arranging the willingness to conclude the transaction. Decentrally structured trading platforms regularly operate in this form, so they generally classify as investment brokers under section 1 (1a) sentence 2 number 1 KWG.120 Additionally, the BaFin subsumes the offering of “regionally structured lists of persons or companies offering VC [Virtual Currencies] for sale or purchase”121 under the criteria of investment and acquisition brokerage. Contract broking according to section 1 (1a) sentence 2 number 2 KWG (and also portfolio management according to section 1 (1a) sentence 2 number 3 KWG) may be applicable if the trading platform acts on a disclosed agency basis for the seller or buyer of a crypto asset instead of being  a  messenger.122 Contract broking is the purchase and sale of financial instruments on behalf of and for the account of others. Although a contract broker provides a declaration of intent on behalf of the service recipient, this constitutes a separate declaration of intent on the part of the service provider.123 Since the platform acts with the power of representation for the user, it has discretionary power as a contract broker with regard to the submission of the offer or the acceptance.124 In contrast to the operation of an MTF, the service provider may influence which parties enter into a contract.125 Therefore, contract broking pursuant to section 1 (1a) sentence 2 number 2 KWG can only be considered for centrally structured trading platforms which, as an intermediary, take over the contract negotiations on behalf of the service recipient.  Patz, BKR 2019, 435 (440).  Maume, 2020, § 12 (71). 121  BaFin, 2020b. 122  BaFin, 2017. 123  BaFin, 2014a. 124  BaFin, 2014a; Maume, 2020, § 12 (75). 125  Patz, BKR 2019, 435 (440). 119 120

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Since no particularities arise for crypto tokens, which classify as financial instruments, from the prerequisites of the other possible authorisation criteria (financial portfolio and asset management, investment advice as well as placement business), and they are therefore applicable in the same way as for classic financial instruments,126 they are not further elaborated. Providers of Tumbler Services The classification of tokens as a financial instrument has no regulatory relevance for providers of tumbler services. Their service cannot be subsumed under the catalogue of banking business or financial services requiring an authorisation pursuant to section 1 (1) sentence 2 and (1a) sentence 2 KWG. In addition, the ZAG or the KAGB explicitly exclude an authorisation requirement. As a result, providers of tumbler services do not fall within the scope of the GwG. The AMLD V did not provide for an extension of the catalogue of obligated persons. Hence the German provisions comply with the EU requirements. Your Transfer into Practice Individuals looking to invest in crypto assets should ask themselves the following questions, among others: • What kind of crypto assets do I want to invest in? • Do I feel sufficiently protected by the regulatory measures to invest? • What level of third-party support do I need when buying/selling crypto tokens? • Do I want to use third-party services to hold my crypto assets/tokens/keys? Individuals looking to start a business related to crypto assets should ask themselves the following questions, among others: • What are my obligations under securities law as an issuer of crypto assets? For example, do I comply with the prospectus obligation? • In what form do I want to offer my service? • Do I meet all the criteria for the relevant financial service? • Do I have all the necessary documents to apply for a licence in accordance with section 32 KWG?

126

 BaFin, 2019b, p. 11.

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References BaFin (2014a). Hinweise zum Tatbestand der Abschlussvermittlung. https:// www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Merkblatt/ mb_091204_tatbestand_anlagevermittlung.html. Accessed: 21.03.2021. BaFin (2014b). Hinweise zum Tatbestand des Einlagengeschäfts. https://www. bafin.de/SharedDocs/Veroeffentlichungen/DE/Merkblatt/mb_140311_tatbestand_einlagengeschaeft.html. Accessed: 21.03.2021. BaFin (2016). Europäische Aufsicht. Die Einordnung eines Kryptotoken als Finanzinstrument. Accessed: 21.03.2021. BaFin (2017). Hinweise zum Tatbestand der Anlagevermittlung. https://www. bafin.de/SharedDocs/Veroeffentlichungen/DE/Merkblatt/mb_091204_tatbestand_anlagevermittlung.html. Accessed: 21.03.2021. BaFin (2018). Aufsichtsrechtliche Einordnung von sog. Initial Coin Offerings (ICOs) zugrunde liegenden Token bzw. Kryptowährungen als Finanzinstrumente im Bereich der Wertpapieraufsicht, GZ: WA 11-QB 4100–2017/0010. Hinweisschreiben. https://www.bafin.de/SharedDocs/ Downloads/DE/Merkblatt/WA/dl_hinweisschreiben_einordnung_ICOs. html. Accessed: 21.03.2021. BaFin (2019a). Bankenaufsicht. https://www.bafin.de/DE/DieBaFin/Aufgaben Geschichte/Bankenaufsicht/bankenaufsicht_node.html. Accessed: 21.03.2021. BaFin (2019b). Zweites Hinweisschreiben zu Prospekt- und Erlaubnispflichten im Zusammenhang mit der Ausgabe sogenannter Krypto-Token, GZ: WA 51-Wp 7100–2019/0011 und IF 1-AZB 1505–2019/0003. https://www. bafin.de/SharedDocs/Downloads/DE/Merkblatt/WA/dl_wa_merkblatt_ ICOs.html. Accessed: 21.03.2021. BaFin (2020a). Hinweise zum Tatbestand des Kryptoverwahrgeschäfts. https:// www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Merkblatt/mb_200302_ kryptoverwahrgeschaeft.html?nn=13733456. Accessed: 21.03.2021. BaFin (2020b). Virtuelle Währungen/Virtual Currency (VC). https://www. bafin.de/DE/Aufsicht/FinTech/VirtualCurrency/virtual_currency_artikel. html. Accessed: 21.03.2021. BaFin (2021). Hinweise zu Finanzinstrumenten nach § 1 Abs. 11 Sätze 1 bis 5 KWG. https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Merkblatt/ mb_111220_finanzinstrumente.html. Accessed: 21.03.2021. Behrens, A. & Schadtle, K. (2019). Erlaubnispflichten für Bank- und Finanzdienstleistungen im Zusammenhang mit Kryptowerten nach Umsetzung der Fünften EU-Geldwäscherichtlinie. WM, 2099–2104.

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EBA (2019). Report with advice fort he European Commission on crypto-­ assets. https://www.eba.europa.eu/eba-­reports-­on-­crypto-­assets. Accessed: 21.03.2021. ESMA (2019). Advice on initial coin offerings and crypto-assets, ESMA50–157–1391. https://www.esma.europa.eu/document/advice-­initial-­ coin-­offerings-­and-­crypto-­assets. Accessed: 21.03.2021. Fromberger, M., Haffke, L. & Zimmermann, P. (2019). Kryptowerte und Geldwäsche. BKR, 377–386. Fromberger, M. & Zimmermann, P.: § 1 Technische und rechtstatsächliche Grundlagen, in: Maume, P. et al. (Hrsg.) (2020). Rechtshandbuch Kryptowerte (1. Aufl.). München: C.H. Beck. Hakenberg, M.: Kapitalmarktrecht, in: Weber, K. (Hrsg.) (2020). Creifelds kompakt. Rechtswörterbuch (3. Ed.). München: C.H. Beck. Kaulartz, M. & Matzke, R. (2018). Die Tokenisierung des Rechts. NJW, 3278–3283. Kleinert, U. & Mayer, V. (2019). Elektronische Wertpapiere und Krypto-Token. EuZW, 857–863. Kumpan, C.: WpHG § 2 Begriffsbestimmungen, in: Schwark, E. & Zimmer, D. (Hrsg.) (2020). Kapitalmarktrechts-Kommentar (5. Aufl.). München: C.H. Beck. Maute, L.: § 4 Die Rechtsnatur von Kryptowerten, in: Maume, P. et al. (Hrsg.) (2020). Rechtshandbuch Kryptowerte (1. Aufl.). München: C.H. Beck. Maume, P.: § 12 Finanzdienstleistungsaufsichtsrecht, in: Maume, P. et al. (Hrsg.) (2020). Rechtshandbuch Kryptowerte (1. Aufl.). München: C.H. Beck. Möllenkamp, S. & Shmatenko, L.: Teil 13.6 Blockchain und Kryptowährungen, in: Hoeren, T. et  al. (Hrsg.) (2020). Handbuch Multimedia-Recht (54. Ergänzungslieferung). München: C.H. Beck. Omlor, S. (2019). Kryptowährungen im Geldrecht. ZHR (183), 294–345. Patz, A. (2019). Handelsplattformen für Kryptowährungen und Kryptoassets. BKR, 435–443. Rennig, C. (2020). KWG goes Krypto. BKR, 23–29. Resas, D., Ulrich, N. & Geest, A. (2020). Kryptoverwahrung nach dem KWG: Der Versuch einer Konturierung des neuen Erlaubnistatbestands. ZBB/JBB (1), 22–35. Schäfer, F.: KWG § 1 Begriffsbestimmungen, in: Boos, K.-H. et  al. (Hrsg.) (2016). KWG – CRR-VO (5. Aufl.). München: C.H. Beck. Schwarz van Berk, P.: § 42 Vermögensanlagengesetz, in: Pöllath, R. et al. (Hrsg.) (2018). Private Equity und Venture Capital Fonds (1. Aufl.). München: C.H. Beck.

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Schwennicke, A.: KWG § 1 Begriffsbestimmungen, in: Schwennicke, A. & Auerbach, D. (Hrsg.) (2021). Kreditwesengesetz (KWG) mit Zahlungsdiensteaufsichtsgesetz (ZAG) Kommentar (4. Aufl.). München: C.H. Beck. Zitiert: Bearbeiter in KWG mit ZAG Kommentar Gesetz § Rn. Spindler, G. & Bille, M. (2014). Rechtsprobleme von Bitcoins als virtuelle Währung. WM, 1357–1369. Terlau, M.: § 55a Elektronisches Geld, virtuelle Währungen (Bitcoins, Ether Coins), in: Schimansky, H. et al. (Hrsg.) (2017). Bankrechts-Handbuch (Bd. I, 5. Aufl.). München: C.H. Beck. Volhard, P. & Jang, J-H.: KAGB § 1 Begriffsbestimmungen, in: Weitnauer, W. et al. (Hrsg.) (2021). KAGB Kommentar (3. Aufl.). München: C.H. Beck. Weiß, Hagen (2019). Tokenisierung. BaFinJournal. https://www.bafin.de/ SharedDocs/Veroeffentlichungen/DE/Fachartikel/2019/fa_bj_1904_ Tokenisierung.html. Accessed: 21.03.2021. Weitnauer, W. (2018). Initial Coin Offerings (ICOs): Rechtliche Rahmenbedingungen und regulatorische Grenzen. BKR, 231–236. Zöllner, L. (2020). Kryptowerte vs. Virtuelle Währungen. BKR, 117–125.

3 Developments at the National and EU Level

What You Take Away from This Chapter • The Liechtenstein Token and Trusted Technology Service Provider Act takes a pioneering role with regard to the regulation of crypto assets. • In addition to supervisory provisions, the TVTG also contains civil law clauses. • The European Commission published a proposal for a Regulation on Markets in Crypto-assets on 25 September 2020. • This proposal  primarily contains regulatory requirements for crypto assets in financial market law. The proposal consists of a multi-level system with regard to the degree of regulation.

Apart from Germany, other member states of the EU have also identified the need for regulating crypto assets and thus have enacted respective national regulations.1 Particularly noteworthy in this regard is the Liechtenstein Token and Trusted Technology Service Providers Act (TVTG), which established an essential legal framework for token-related market participants in Liechtenstein. However, other Member States, such as Malta and France, have already developed and adopted discrete  ESMA, 2019, p. 48 f.

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legal provisions to regulate the crypto market in 2018 and 2019.2 However, at the EU level, legislation is progressing more gradually. On 25 September 2020, slightly more than two years after the first tokenregulating legislation within the European Economic Area (EEA), a proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets (MiCAR) was published by the European Commission.3

3.1 The Liechtenstein Token and Trusted Technology Service Provider Act The TVTG, which came into force in the Principality of Liechtenstein on 01 January 2020, takes a pioneering role with regard to regulating crypto assets. It is the first law in the German-speaking area that has established a clear legal framework for crypto assets. As a member of the EEA, the Principality of Liechtenstein participates in the European Single Market.4 As a result, the Principality must comply with the rights and obligations of the single market, even if it is not a member of the EU.5 According to Article 26 (2) TFEU, this includes, in particular, the four market freedoms, i.e. the free movement of goods, persons, services and capital. As the financial services sector is primarily based on the freedom to establish and provide services and the free movement of capital, legal acts on this are regularly incorporated into the EEA Agreement.6 Regulating crypto assets on the EU level could affect the TVTG, depending on the design of the regulation. However, it is also possible that the EU legislator will follow the example of the Principality of Liechtenstein. Due to its pioneering role and potential role model function, we will discuss  the TVTG in more detail below, unlike the French and Maltese regulations.  Deuber/Jahromi, MMR 2020, 576 (576).  COM/2020/593 final. 4  Government of the Principality of Liechtenstein, n/a. 5  Álvarez Lopez/Rakstelyte, 2020. 6  Parenti, 2020. 2 3

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3.1.1 Legislative Background Article 2 (1) (a) TVTG defines trustworthy technologies (TT) as technologies through which the integrity of tokens, the clear assignment of tokens to TT identifiers and the disposal over tokens is ensured. Hence, the Liechtenstein legislator has chosen a technology-neutral and abstract term to cover not only blockchain technology, but also to take into account the high speed of technological innovation.7 As the first statutory objective, Article 1 (2) (a) TVTG states ensuring of trust in digital legal communication, in particular, in the financial and economic sector, and the protection of users on TT systems. The objective of promoting innovation has found its way into the legislation through the creation of optimal, innovation-friendly and technology-neutral framework conditions for the provision of services on TT systems in Article 1 (2) (b) TVTG. Accordingly, the Liechtenstein Legislator created a legal framework to protect both token owners and token-related service providers from abuse. The government of the Principality pursued a broad regulatory approach, as the legal framework covers not only financial market-related services but all manifestations of the token economy.8 In this context, the token economy is understood as all applications representing a right or an asset in a token and all services performed in connection with these mappings.9 As the Liechtenstein legislator formulated the  TVTG as a framework law, special legal regulations may attach higher requirements to some token-based applications.10 For instance, the provider of a token designed as a currency token must, in principle, comply with the more specific standards of financial market legislation.11 The provisions of the TVTG are to be seen as a supplement.12

 BuA No. 2019/54, p. 55 f.  BuA No. 2019/54, pp. 6, 46, 54. 9  BuA No. 2019/54, p. 5 f. 10  BuA No. 2019/54 p. 36. 11  BuA No. 2019/54, p. 44 f. 12  BuA No. 2019/54, p. 121. 7 8

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However, establishing legal certainty is not only intended to serve consumer protection. By providing a uniform framework, the Liechtenstein government hopes to be able to fully exploit the potential of blockchain technology as well as subsequent generations and thereby strengthen the Liechtenstein financial centre.13 Token-based payments and financial investments are becoming increasingly attractive so that their legal enabling and ensuring can lead to an increased establishment of respective service providers in Liechtenstein. Therefore, the government of the Principality of Liechtenstein expects a broad range of employment opportunities for the region and is thus also pursuing strategic objectives with the legislation.14

3.1.2 Structure and Content In addition to general provisions (Chapter I) and a civil law section (Chapter II), which regulates the civil law qualification of tokens and their transfer, the TVTG contains regulatory framework conditions (Chapter III), in which the rights and obligations of TT service providers are standardised. The act concludes with the transitional and final provisions in Chapter IV. General Provisions The general provisions contain, in addition to the objectives of the act explained above, a catalogue of legal definitions in Article 2 (1) TVTG. This is a particularity since the terms listed therein had not been legally defined in the German-speaking area until the TVTG entered into force. The Liechtenstein legislator has used some neologisms to describe the blockchain-specific terms in a technology-neutral way. For example, the TT key pursuant to Article 2 (1) (e) TVTG corresponds to the private key. TT identifier according to Article 2 (1) (d) TVTG stands for the public key, which acts as an address. The term TT service provider is also specified in Article 2 (k) to (t) TVTG.  BuA No. 2019/54, pp. 48, 52.  BuA No. 2019/54, p. 52 f.

13 14

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The definition of the term token in Article 2 (1) (c) TVTG is of particular importance, as it introduces a new independent legal object.15 Accordingly, a token is understood to be a piece of information on a TT system which can represent some claims or rights of memberships against a person, rights to property, or other absolute or relative rights and is assigned to one or more TT identifiers. If such a token is created or issued by a TT service provider with its registered office in Liechtenstein, it falls within the scope of Article 3 (2) (a) TVTG and is a domestic asset within the meaning of Article 4 TVTG.  The application  scope of the TVTG may further be opened by choice of law pursuant to Article 3 (2) (b) TVTG. Creating these new assets entailed that their legal consequence, particularly their transfer, had to be legally determined.16 Due to its immateriality, a token within the meaning of the TVTG does not qualify as a thing (corporeal object), but in terms of the transfer, it bears a resemblance to the transfer of a corporeal object, which is why the application of the property law principles on the transfer of ownership was initially envisaged.17 To prevent a profound intervention in Liechtenstein property law by reformulating large parts of it and still apply property law in a functionally adequate manner18, Article 5 TVTG introduced the concepts of power of disposal and right of disposal, which are modelled on possession and ownership under property law.19 Civil Law Provisions Another particularity is the introduction of the legal offence of the transfer in Article 6 TVTG, particularly paragraph 3. According to Article 6 (1) (a) TVTG, disposal is the transfer of the right of disposal of the token. In Liechtenstein, the disposal transaction is “the legal transaction by which a right is transferred, encumbered, amended or cancelled”.20 However, in contrast to German property law, the principle of causality  BuA No. 2019/54, pp. 6, 62.  BuA No. 2019/54, p. 61. 17  BuA No. 2019/54, p. 62. 18  BuA No. 2019/54, p. 185. 19  BuA No. 2019/54, pp. 63, 185. 20  BuA No. 2019/54, p. 68. 15 16

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applies generally rather than the principle of abstraction.21 Given the immutability of the entry in a TT system, unauthorised disposal of the token would lead to a discrepancy between the material and the actual legal situation.22 If, for example, an unauthorised person were able to gain unauthorised access to the wallet of a token owner and thereby gain control over the private key by using the private key for a transaction, she would trigger both an obligation and a disposal transaction. However, since she lacks the authorisation to transfer the token, the obligation transaction is invalid. According to the principle of causality, this would result in the disposal transaction being  equally invalid. However, this cannot be displayed in the network due to the ultimacy of the transaction after validation. To prevent this discrepancy between the formal and actual legal situation, the Liechtenstein legislator introduced the principle of abstraction for the disposal of tokens by Article 6 (3) TVTG.23 The reversal of an invalid transaction is thus executed under the provisions of the law of enrichment (ex-nunc) rather than under the provisions of property law (ex-tunc). In the last four articles of the civil basis, the Liechtenstein legislator regulated the effects of disposal, the legitimacy and exemption, the acquisition in good faith and the cancellation of tokens. Since these do not present any particularities, we will not discuss  these in more detail  in this book. Regulatory Framework The third chapter regulates the registration and supervision of TT service providers with headquarters or place of residence in Liechtenstein and their rights and obligations, Article 11 (1) TVTG. It constitutes the largest part of the TVTG. Of the various TT service providers within the meaning of Article 2 (1) (k) to (t) TVTG, the token issuer and token generator, as well as the TT key depositary and TT token depositary, are particularly noteworthy. The Liechtenstein law deliberately distinguishes between issuance, i.e. the public offering of tokens in one’s name or on behalf of a principal  Translation from German to English: Deuber/Jahromi, MMR 2020, 576 (580).  BuA No. 2019/54, p. 69. 23  BuA No. 2019/54, p. 69. 21 22

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pursuant to Article 2 (1) (k) TVTG, and the generation of tokens according to Article 2 (1) (l) TVTG. According to the government of Liechtenstein, a token can represent any right.24 For example, if the owner of an object generates a token representing the ownership rights in the physical object, he generates a token but does not automatically offer it for sale to a broad public. If we would not distinguish between generation and issuance, in this example, the generator of the token would only fall under the TVTG when he offers the token to the general public. By distinguishing between generation and issuance, the government of Liechtenstein had attempted to take into account the broad regulatory approach and to cover the entire spectrum of the token economy.25 Since there is a particular risk of abuse and manipulation in a public offering of tokens due to the large audience of prospective buyers and the anonymity of the market participants, the Liechtenstein legislator saw a need for regulatory action from the perspective of buyer protection.26 Such risks also exist, according to the government of Liechtenstein, in the custody of TT keys and tokens, which is why the service providers of such custody are also regulated by the TVTG.27 TT key depositaries within the meaning of Article 2 (1) (m) TVTG include, for instance, wallet providers that store the private keys of token owners on a cloud-based server.28 In contrast, the TT token depositary possesses the power of disposal over the token itself, which is regularly the case with crypto exchanges.29 Since crypto exchanges usually also offer custody of the private keys to carry out their customers’ transactions more efficiently, they can simultaneously fulfil the criteria of both TT key depositary and TT token depositary. Pursuant to Article 12 (1) TVTG, TT service providers must register in the TT Service Provider Register before providing a service for the first time. In addition to professional practice, this registration is linked to  BuA No. 2019/54, p. 78.  BuA No. 2019/54, p. 78. 26  BuA No. 2019/54, p. 79. 27  BuA No. 2019/54, p. 76 f. 28  BuA No. 2019/54, p. 76. 29  BuA No. 2019/54, p. 78. 24 25

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some minimum requirements for TT service providers, such as, for example, under Article 13 (1) (b) and (c) TVTG, their reliability or their technical suitability. Furthermore, it is essential for registration to cover the necessary minimum capital according to Article 16 TVTG, to fulfil organisational requirements such as the establishment of an appropriate organisational structure according to Article 13 (1) (f ) TVTG or to guarantee internal procedures and control mechanisms according to Article 13 (1) (g) TVTG. The regulatory section of the TVTG also includes storage and record-­ keeping obligations under Article 26 TVTG, reporting obligations under Article 28 TVTG, publication obligations under Article 29 et seq. TVTG, and requirements for the outsourcing of tasks under Article 27 TVTG. This structure and content of the regulatory requirements with which TT service providers must comply evoke the provisions of European financial market legislation, especially the minimum requirements for risk management. The government of the Principality of Liechtenstein justified the analogy to financial market law, particularly the alignment with the regulation of account information service providers, on the one hand, with the fact that some tokens already fall under financial market supervision anyway due to their design as currency or investment tokens.30 On the other hand, it argues that the financial system has already proven to be reliable with regard to the requirements for the quality of the service, as customers have the corresponding trust.31 Particularly noteworthy, however, is the obligation to prepare and publish basic information and to notify the issuance of the token pursuant to Article 30 TVTG. By imposing this obligation, the Liechtenstein government hoped to improve the buyers’ understanding of the purpose, the mode of operation, and the opportunities and risks of the tokens offered, which, in turn, serves legal certainty.32 Before investing in a token, the buyer,  thus, has the opportunity to inform herself sufficiently and to assess whether she considers the token or the TT service provider trustworthy.  BuA No. 2019/54, pp. 44 f., 85.  BuA No. 2019/54, p. 47. 32  BuA No. 2019/54, p. 79 f. 30 31

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Article 29 (b) TVTG and Article 30 (c) TVTG also clarify that although the issuer of the token generally has to report the issuance to the Financial Market Authority of the Principality of Liechtenstein, the latter does not assess the suitability of the TT system used. The technical assessment of the functioning of the offered service is the task of the TT service providers themselves.33 The regulatory requirements can thus be understood as support for informed, autonomous decisions. At the same time as the TVTG, the Law on the Amendment of the Due Diligence Act entered into force, which deals with the implementation of the requirements of the AMLD V.  However, the Liechtenstein legislator exceeded the implementation scope in expanding the circle of obligated parties.34 Pursuant to Article 3 (1) (r) in conjunction with Article 2 (1) (l) of the Due Diligence Act, TT exchange service providers who exchange virtual currencies or payment tokens for other virtual currencies or payment tokens are nevertheless regulated under money laundering law. Conversely, the AMLD V only stipulated the inclusion of service providers who exchange virtual currencies for fiat money.

3.2 The EU Proposal for a Regulation on Markets in Crypto-assets At the  EU level, the publication of the FinTech Action Plan by the European Commission on 8 March 2018 initiated the creation of a uniform legal framework.35 Thus, the European supervisory authorities EBA and ESMA were instructed to examine the extent to which the existing supervisory regulations already cover crypto assets.36 Based on the work of the ESAs, the European Commission developed a strategy for digital finance in the EU, which aims, among other things, at a comprehensive

 BuA No. 2019/54, p. 84.  BuA No. 2019/54, p. 96. 35  COM/2018/0109 final. 36  COM/2018/0109 final, p. 7. 33 34

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uniform regulation of crypto assets within the EU.37 Alongside the strategy, a draft Regulation on Markets in Crypto-assets (MiCAR) has been published.38 We will elaborate on its content below.

3.2.1 Legislative Background Both the EBA and the ESMA have concluded in their analyses of the application of the existing regulatory framework to crypto assets that the regulatory provisions, in particular the MiFID II, on the one hand, do not cover all forms of tokens and, on the other hand, constrain the use of DLT in the financial services sector.39 As one of the objectives of the EU Digital Finance Strategy is to ensure a technology-neutral and innovation-­ friendly regulatory framework, the MiCAR aims to address the identified shortcomings and provide legal certainty.40 The impracticable classification of some tokens under existing legal standards also has the effect that consumers and investors are not adequately protected and, thus, a crypto market with integrity cannot be guaranteed.41 By introducing the MiCAR, the European Commission hopes to achieve an appropriate level of consumer and investor protection as well as market integrity.42 Another objective of the MiCAR is to ensure financial stability. It is true that, according to national and European supervisory authorities, crypto assets do not yet pose a significant risk to the stability of the financial system.43 However, the increased emergence of stablecoins may change this unexpectedly.44

 COM/2020/591 final, p. 11.  COM/2020/593 final, p. 1. 39  EBA, 2019, p. 29; ESMA, 2019, p. 37. 40  COM/2020/593 final, p. 2 f. 41  EBA, 2019, p. 29; ESMA, 2019, p. 1. 42  Recital 5 of COM/2020/593 final. 43  EBA, 2019, p. 29; ESMA, 2019, p. 39. 44  Recital 4 of COM/2020/593 final. 37 38

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Stablecoins are tokens that are, similar to a derivative, linked to another asset, usually a fiat currency, and thus reflect the performance of that asset.45 They feature elements of value stabilisation so that they are essentially less volatile and can thus be used as a means of payment.46 Although only private-sector versions of stablecoins currently exist, state cryptocurrencies in the form of stablecoins that reflect the value of the national currency are also conceivable.47 The stability of value is likely to make stablecoins more attractive to a broad mass of investors than more volatile tokens, with the result that their spread could lead to systemic relevance.48 Furthermore, due to the possible fragmentation of the market, the supervisory authorities view single national legislation independently of the EU as critical.49 The EU, therefore, considers the legal act of a regulation in the form of full harmonisation to be a proven means of achieving the aforementioned objectives.50 As more specific objectives, the proposal additionally mentions the expansion of financing possibilities in the form of initial coin offerings and security token offerings, as well as the reduction of the risk of misuse of crypto assets for illegal purposes.51

3.2.2 Structure and Content The proposal of the MiCAR is structured in nine titles with a total of 126 articles. Title I, which deals with the subject matter, the scope and definitions, is followed by specific rules on the issuance of asset-referenced tokens (Title III), electronic money tokens (Title IV) and crypto-assets other than asset-referenced tokens or e-money tokens (Title II). Title V contains provisions on authorisation and operating conditions for crypto-­ asset service providers, whereas Title VI stipulates rules to prevent market  Houben/Snyers, 2020, p. 34 f.  Recital 9 of COM/2020/593 final. 47  Auffenberg, BKR 2019, 341 (344). 48  COM/2020/593 final, p. 3. 49  EBA, 2019, p. 17; ESMA, 2019, p. 40. 50  COM/2020/593 final, p. 7, 9. 51  COM/2020/593 final, p. 7, 160. 45 46

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abuse in relation to crypto-assets. Title VII specifies the powers and duties of the competent supervisory authorities, as well as administrative measures and sanctions. Title VII enables the adoption of delegated and implementing acts, followed by Title IX, which concludes the proposal with transitional and final provisions. Due to the abundance of articles, the following section focuses on the most significant regulations. Subject Matter, Scope and Definitions Article 1 MiCAR reflects the subject matter of the MiCAR. In addition to the admission to trading of crypto-assets, the EU legislator primarily aims to regulate the supervision and authorisation of issuers of crypto-assets and crypto-asset service providers. The EU proposal contains transparency and disclosure requirements, as well as consumer protection provisions and measures to prevent market abuse. According to Article 2 (1) MiCAR, these requirements apply to all persons engaged in the issuance of crypto-­ assets or persons that  provide services related to crypto-assets in the EU. According to Article 2 (2) MiCAR, financial instruments or structured deposits within the meaning of the MiFID II, electronic money within the meaning of Directive 2009/110/EC, provided that it does not constitute electronic money tokens within the meaning of the MiCAR, deposits within the meaning of Directive 2014/49/EU and securitisations within the meaning of Regulation (EU) 2017/2402 are to be excluded from the material scope of application. Pure investment tokens, which by their nature qualify as financial instruments within the meaning of the MiFID II, would therefore not fall within the scope of the MiCAR. In this context, the distinction between e-money and e-money tokens seems remarkable. According to Article 3 (1), point (4) MiCAR, electronic money tokens within the meaning of the MiCAR are crypto-assets whose primary purpose is to be used as a means of exchange and for which a nominal currency that is legal tender is used as a reference basis to achieve value stability. The crucial element of distinction from traditional e-money shall be the claim towards the issuer to exchange the e-money at any time at the nominal value of the nominal currency.52  Recital 10 of COM/2020/593 final.

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E-money tokens within the meaning of the MiCAR are thus not endowed with a right of redemption or exchange. Nevertheless, they must not be placed on par with the category of currency tokens. In addition, the MiCAR introduces a classification of tokens that deviates from the generally accepted categorisation to date and creates two additional token classes for this purpose. It distinguishes between asset-­ referenced tokens within the meaning of Article 3 (1), point (3) MiCAR, electronic money tokens within the meaning of Article 3 (1), point (4) MiCAR and utility tokens within the meaning of Article 3 (1), point (5) MiCAR. The definition of Article 3 (1), point (5) MiCAR is in line with the general understanding of utility tokens. In contrast to the German regulatory approach, the definition of the MiCAR thus includes all utility tokens, that is, also those that do not serve an investment purpose and only have an economic function towards the issuer. Asset-referenced tokens are, according to Article 3 (1), point (3) MiCAR, crypto-assets that purport to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets. Together with the category of e-money tokens, they form the stablecoins described above.53 A common criterion for the various tokens is the superordinate term crypto-asset, defined under Article 3 (1), point (2) MiCAR as a digital representation of value or rights which may be transferred and stored electronically, using DLT or similar technology. This definition, as well as the definition of DLT in Article 3 (1), point (1) MiCAR, shall be understood broadly, so that all crypto assets that did not previously fall under the regulatory requirements are covered in the future.54 Article 2 (3) to (6) MiCAR contains a list of exceptions to the personal scope. In particular, Article 2 (3), point (d) MiCAR is prominent.55 Accordingly, crypto-asset services provided exclusively within a group are not regulated by the MiCAR. For instance, if a subsidiary keeps all private  COM/2020/593 final, p. 12.  Recital 8 of COM/2020/593 final. 55  Siadat, RdF 2021, 12 (13). 53 54

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keys of the group, the scope of the MiCAR does not apply. If the business of a group company also consists of crypto custody, but for companies and persons outside the group, and if the first subsidiary in turn also keeps the private keys of the clients of the other subsidiary, the exception of Article 2 (3), point (d) MiCAR does not apply. Article 2 (4) to (6) MiCAR provides further exemptions for already regulated entities. The EU legislator included the most relevant definitions in Article 3 MiCAR. Especially the definitions of an issuer of crypto-assets and an offer to the public as well as of the catalogue of crypto-asset services in Article 3 (1) MiCAR are a central component. The various forms of trading platforms are covered in single offences and defined by law. The differentiation between issuers and service providers is essential with regard to the resulting requirements and obligations. Supervision of Issuers of Crypto-Assets Pursuant to Article 3 (1), point 6 MiCAR, issuers of crypto-assets are legal persons who offer to the public any crypto-assets or seek the admission of such crypto-assets to a trading platform for crypto-assets. In this context, a public offer within the meaning of Article 3 (1), point (7) MiCAR is understood as an offer to third parties to acquire a crypto-asset in exchange for fiat currency or other crypto-assets. According to Article 4 (1) MiCAR, the prerequisites for public offers or admission to trading of crypto-assets are the corporate form of a legal entity, the preparation, notification and publication of a cryptoasset white paper and compliance with the requirements of Article 13 MiCAR.  Issuers of asset-­referenced tokens and e-money tokens must comply with further authorisation requirements under Article 15 and Article 43 MiCAR. Concerning the preparation, notification and publication of the crypto-asset white paper, Article 4 (2) MiCAR permits facilitations for certain issuances in order to ensure the principle of proportionality.56 The crypto-asset white paper is the central connecting factor for the other legal norms of the MiCAR. Both the obligations for issuers contained in the MiCAR and the civil liability provisions of Articles 14, 22  Recital 15 of COM/2020/593 final.

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and 47 MiCAR, as well as the powers of the supervisory authorities with regard to the prohibition or withdrawal of authorisation, are based on its content. Parallels to the prospectus obligations under securities law are indeed apparent here.57 According to Article 5 MiCAR, the white paper must describe the issuer and its project, as well as specific features, risks and technical functions of the crypto-asset. The EU legislator justifies the  introduction of such an information document with consumer protection.58 In addition to the content and form of the crypto-asset white paper, Article 6 MiCAR contains provisions on marketing communications relating to a public offer or admission to trading. In this context, the EU legislator also provides for more specific requirements regarding asset-­ referenced tokens and e-money tokens in Articles 17, 25, 46 and 48 MiCAR. The notification and publication of the documents are carried out according to the exact same requirements, also included in the MiCAR. In contrast to white papers of asset-referenced tokens, the issuance of crypto tokens that are neither asset-referenced tokens nor e-money tokens does not require prior approval of the white paper by the supervisory authority, according to Articles 7 (1), 46 (9) MiCAR. Although the wording of Article 7 (1) MiCAR only specifies that ex-ante approval is not required, which could be concluded that ex-post approval by the supervisory authority is necessary. However, using the term notification indicates that the EU legislator did not intend an ex-post approval procedure. Instead, formal notification to the competent supervisory authority is sufficient.59 Crypto-asset white papers of asset-referenced tokens, in contrast, have to go through the approval procedure described in Articles 15 et seq. MiCAR. Another requirement for the public offering or admission to trading of crypto-assets that are neither asset-referenced tokens nor e-money tokens is compliance with the obligations of Article 13 MiCAR. These tend to be very general with vague terms such as act honest, fair and professional or communicate in a fair, clear and not misleading manner. In addition to  So also Siadat, RdF 2021, 12 (17).  Recital 14 of COM/2020/593 final. 59  Siadat, RdF 2021, 12 (18). 57 58

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the manner of trading and communication, Article 13 MiCAR contains a disclosure obligation regarding conflicts of interest and the duty to treat all crypto-asset holders in principle equally and to act in their best interest. With regard to the issuance of asset-referenced tokens, the EU legislator extends the issuers’ obligations by reporting obligations towards the holders of the tokens and the competent supervisory authorities according to Articles 26, 29 MiCAR, the obligation to establish a complaint handling procedure according to Article 27 MiCAR, provisions on corporate governance in terms of Article 30 MiCAR, own funds requirements according to Article 31 MiCAR and the obligation to have reserve assets according to Articles 32 et seq. MiCAR. With the latter, the EU legislator intended to ensure the stability of the tokens’ value and to serve as a basis for the calculation of own funds requirements.60 For the issuance of significant asset-referenced tokens and significant e-money tokens, Article 41 and Article 52 MiCAR prescribe specific obligations. Another noteworthy aspect of MiCAR is the facilitation of cross-­ border issuance of crypto-assets within the EU stipulated in Article 10 MiCAR, which can be compared, for example, to the EU passporting regime for credit institutions or e-money and payment services institutions. To the extent that an entity would already be authorised to operate in the crypto market in one Member State of the EEA, it would not need to apply for further authorisation to carry out its activities in another Member State. In addition, it is worth mentioning that for issuers of asset-referenced tokens, the EU legislator included specific rules on their acquisition (Title III, Chapter 4) and their orderly wind-down (Title III, Chapter 6). Supervision of Crypto Service Providers The catalogue of crypto-asset services in Article 3 (1), point (9) MiCAR is broadly defined so that market players may fall within more than one category. Crypto exchanges that exchange both traditional fiat currencies for crypto tokens and vice versa, as well as crypto tokens of one crypto asset for crypto tokens of another crypto asset, provide a crypto-asset  Recitals 36 and 37 of COM/2020/593 final.

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service within the meaning of Article 3 (1), points (9)(c) and (d) MiCAR.  Depending on their design, their business activities may also qualify as operating a trading platform according to Article 3 (1), point (9)(b) MiCAR, as executing orders for crypto-assets on behalf of third parties pursuant to Article 3 (1), point (9)(e) MiCAR or as receiving and transmitting orders for crypto-assets on behalf of third parties under Article 3 (1), point (9)(g) MiCAR. Pursuant to Article 53 (1) MiCAR, such crypto-asset services may only be provided by legal persons having a registered office in a member state and have been authorised as crypto-asset service providers. The application for authorisation must contain all the information listed in Article 54 MiCAR and be submitted to the competent supervisory authority for assessment according to Article 55 MiCAR.  If the assessment result is positive, the competent authority adds the crypto-asset service provider to a public register established by the ESMA pursuant to Article 57 (1) MiCAR. Article 58 MiCAR would also extend the passporting regime to crypto-asset service providers. In addition to the general conduct of business obligations (Article 59 MiCAR), which correspond to the requirements for issuers of crypto-­ assets, Article 60 MiCAR establishes prudential safeguards in the form of a fixed amount, and Article 61 MiCAR sets out organisational requirements for crypto-asset service providers. The latter include provisions already known from existing EU banking supervision law, e.g., regulations on the reliability and professional suitability of management bodies or internal control mechanisms. Crypto-asset service providers shall also be obliged to inform the competent authorities on an ongoing basis according to Article 62 MiCAR and to keep their clients’ crypto-assets and funds safe pursuant to Article 63 MiCAR. Like issuers of asset-referenced tokens, crypto-asset service providers are required to establish a complaint handling procedure in accordance with Article 64 MiCAR. In addition, Article 66 MiCAR provides provisions for outsourcing. Chapter 3 of Title IV also sets out specific obligations for each crypto-­asset service. The EU legislator justifies this by stating that the various activities naturally entail particular risks requiring specific

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treatment.61 Thus, pursuant to Article 67 (3) MiCAR, custodians of crypto-assets would have to develop a custody policy to ensure the safekeeping of crypto-assets. Such a custody policy would be irrelevant for advisors on crypto-assets within the meaning of Article 73 MiCAR, as their original activity does not generally provide for custody. Lastly, Chapter 4 of Title IV also seeks to introduce specific provisions regarding the acquisition of a crypto-asset service provider. Your Transfer into Practice Individuals looking to invest in crypto assets should ask themselves the following questions, among others: • Do I want to acquire a token generated or issued in Liechtenstein? • If yes, is the service provider registered in the TT Service Provider Register? • Do I want to wait until the MiCAR is finally enacted before investing in crypto assets? Individuals looking to start a business related to crypto assets should ask themselves the following questions, among others: • Are the Liechtenstein framework conditions more favourable for my company than the existing German regulations? • What impact would the adoption of the MiCAR have on my business? • How can I prepare myself/my business for the possible new requirements?

References Álvarez Lopez, M. & Rakstelyte, A. (2020). Der Europäische Wirtschaftsraum (EWR), die Schweiz und der Norden. Europäisches Parlament. https://www. europarl.europa.eu/factsheets/de/sheet/169/der-­europaische-­wirtschaftsraumewr-­die-­schweiz-­und-­der-­norden. Accessed: 21.03.2021. Auffenberg, L. (2019). E-Geld auf Blockchain-Basis. BKR, 341–345. Deuber, D. & Jahromi, H. (2020). Liechtensteiner Blockchain-Gesetzgebung: Vorbild für Deutschland? Lösungsansatz für eine zivilrechtliche Behandlung von Token. MMR, 576 –581.  Recital 59 of COM/2020/593 final.

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EBA (2019). Report with advice for the European Commission on crypto-­ assets. https://www.eba.europa.eu/eba-­reports-­on-­crypto-­assets. Accessed: 21.03.2021. ESMA (2019). Advice on initial coin offerings and crypto-assets, ESMA50–157–1391. https://www.esma.europa.eu/document/advice-­initial-­ coin-­offerings-­and-­crypto-­assets. Accessed: 21.03.2021. Houben, R. & Snyers, A. (2020). Crypto-assets – key developments, regulatory concerns and responses. Study for the Committee on Economic and Monetary Affairs, Policy Department for Economic, Scientific and Quality of Life Policies. European Parliament. https://www.europarl.europa.eu/ RegData/etudes/STUD/2020/648779/IPOL_STU(2020)648779_EN.pdf. Accessed: 21.03.2021. Parenti, R. (2020). Finanzdienstleistungspolitik. https://www.europarl.europa.eu/ factsheets/de/sheet/83/finanzdienstleistungspolitik. Accessed: 21.03.2021. Regierung des Fürstentums Liechtenstein (n/a). Liechtensteins Teilnahme am EWR. https://www.regierung.li/ministerien/ministerium-­fuer-­aeusseres/ diplomatische-­vertretungen/deutsch/bruessel-­b /aktuelles/europäischerwirtschaftsraum/. Accessed: 21.03.2021. Siadat, A. (2021). Markets in Crypto Assets Regulation – erster Einblick mit Schwerpunktsetzung auf Finanzinstrumente. RdF, 12–19.

4 Comparison and Critical Appraisal of the Regulatory Approaches

What You Take Away from This Chapter • Each of the regulatory approaches has advantages and disadvantages. • While the approaches overlap in some aspects, adapting the MiCAR will ultimately fully harmonise the regulation of crypto assets in the EEA. • The approaches differ in scope, regulatory methodology, technology neutrality and the type of regulatory instruments chosen. • In the regulation of crypto assets, some aspects have been neglected so far, which will/should be taken into account in future legislative changes.

Both the national efforts of Germany and Liechtenstein, as well as the EU proposal regarding the regulation of crypto assets, are based on observations of the crypto market, analyses of the opportunities and risks and consultations with affected market participants. Due to the increasing market interest in crypto assets, the focus of the legislators is primarily on consumer and investor protection, as well as the creation of legal certainty. With the TVTG, the government of the Principality of Liechtenstein has created the most comprehensive legal framework for tokens, as the law, in addition to the regulatory provisions, also sets out requirements

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 H. Appel, Quick Guide Crypto Assets, https://doi.org/10.1007/978-3-658-40462-8_4

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for the civil law treatment of tokens. Both the amendment to the KWG and the proposal of the MiCAR regulate solely supervisory law issues, apart from civil liability arising from a flawed prospectus or crypto white paper. The legal nature of tokens under civil law is currently assessed diversely, not only in Germany.1 A uniform civil law regime within the EEA would be desirable, especially with regard to unlawful or erroneous transfers of ownership of tokens.

4.1 Scope of Application The different approaches also differ in terms of their scope of application. The TVTG covers all tokens, whereas in Germany, to date, only crypto assets that constitute financial instruments are regulated. In this context, we need to look closely at the different treatment of utility tokens.

4.1.1 Utility Tokens In contrast to the German regulatory approach, the MiCAR and the TVTG cover any form of utility tokens, regardless of whether they serve investment purposes or not. The German legislator explicitly excluded utility tokens that do not serve an investment purpose when amending the KWG when implementing the AMLD V. Accordingly, issuers of such tokens are not subject to prudential supervision. However, trading with these on secondary markets is already supervised in Germany. The German legislator probably based the exception on the consideration that pure utility tokens only develop their economic function vis-à-­ vis the issuer and thus do not qualify as a financial or payment instrument. Parts of the literature argue that the German approach is consequently preferable.2 Nevertheless, a detailed examination seems to be reasonable.  Kaulartz/Matzke, NJW 2018, 3278 (3280 ff.); Maute, 2020a, § 4; Omlor, ZHR 183 (2019), 294 (306 ff.); Möllenkamp/Shmatenko, 2020, part 13.6, (29 ff.). 2  Siadat, RdF 2021, 12 (15). 1

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The ability to use a utility token for investment purposes depends on its market demand and the presence of a lock-up. If the issuer includes a lock-up when generating the crypto asset, assigning the associated tokens to any other public key is not feasible. As a result, these tokens are excluded from trading on the secondary market due to a lack of transferability. Where such a lock-up does not exist, the market decides whether the service or product represented by the utility token is attributed a higher value. In principle, the attribution of a value can also happen after the issuance resulting in the issuer unintentionally issuing a utility token with an investment purpose. The uncertainty for issuers as to when an investor-like expectation is created may therefore justify a comprehensive obligation of authorisation and supervision within the meaning of the MiCAR and the TVTG with regard to investor protection.

4.1.2 Investment Tokens In contrast, the EU legislator especially excluded investment tokens from the scope of the MiCAR. In this context, according to Article 2 (6) MiCAR, companies already authorised under the MiFID II which provide crypto services are also intended to be privileged. They shall be exempt from the authorisation procedure described in Chapter 1 of Title V MiCAR. However, such crypto service providers would have to comply with the additional general obligations of Articles 59 et seq. MiCAR and the more specific requirements of Articles 67 et seq. MiCAR. In contrast to the German approach, which provides uniform rules for crypto service providers, the entry into force of the MiCAR would lead to more complex supervisory practices for crypto service providers already authorised under the MiFID II. Indeed, they would not have to go through multiple authorisation processes. However, they would have to comply with the requirements of several legal acts at any time, which would mean organisational effort, especially for smaller companies. That would hinder smaller companies from entering the market. In addition, the Member States of the EEA have been given leeway in the implementation of the requirements of the MiFID II due to the form of the legal act of the Directive. Different regulations for investment

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firms in the Member States could lead to competitive disadvantages for crypto service providers and corresponding issuers. Different legal provisions for various crypto assets also require that the explicit assignment of the crypto asset’s tokens to a token category is possible. However, hybrid forms regularly exist. For these, it would have to be assessed on a case-by-case basis where the main focus lies. On the one hand, this requires trained personnel at the supervisory authorities who can understand the complex arrangements and classify them legally. On the other hand, it would have to be ensured that each supervisory authority applies the same criteria and procedures when identifying the focus of the tokens in order to avoid competitive disadvantages. It is highly conceivable that different staff members of the same supervisory authority would come to varying classifications. Including investment tokens in the scope of the MiCAR and conversely introducing an exemption for crypto service providers in the MiFID II could create a consistent and less complex legal framework. The form of the legal act of the regulation would have the effect that the MiCAR would be automatically binding and directly applicable in a uniform manner in all member states of the EEA upon entry into force. Therefore, the provisions of the EU framework would not have to be incorporated into national law and would replace national regulations such as the German and Liechtenstein approaches. The envisaged passporting regime would lead to fair competition in the EU-wide crypto market.

4.1.3 Tokenisation of Other Rights In connection with the various areas of application, it is notable that the TVTG and the MiCAR cover tokenised rights to assets of all kinds due to the broad understanding of the term token or crypto-asset. In practice, property rights to movable objects, such as gold or oil, and real estate are already digitally represented by tokens.3 In addition, intangible assets such as rights to musical works are now also being tokenised.  Kaulartz/Matzke, NJW 2018, 3278 (3279); Maute, 2020b, § 6 (208), (211).

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For instance, the German musician Fynn Kliemann recently created 100 jingles, digitally depicted their rights in tokens and auctioned them off.4 If he had offered the tokens publicly in Liechtenstein, he would have had to comply with the requirements of the TVTG. It is reasonable to assume that the value of the jingles will change positively or negatively in the future, which is why the buyers of the tokens are likely to have investor-­like expectations. According to the definition of the KWG, these tokens would consequently certainly qualify as crypto assets relevant for regulatory purposes and thus as financial instruments. However, since the tokens have been issued without redemption rights, the artist is nonetheless not subject to institutional supervision. This example shows that assets which, in principle, do not constitute financial instruments can nevertheless be classified as such under German law as a result of tokenisation and may thus entail financial supervision under certain circumstances. That requires a critical view with regard to the regulatory objectives of the KWG. Conversely, the EU legislator intends to subject issuers of such one-off crypto assets to lower requirements pursuant to Article 4 (2), point (c) MiCAR. If the MiCAR enters into force in this form, issuers of one-off crypto assets would only have to comply with the obligations of Article 13 MiCAR, i.e. above all, act honestly, fairly and professionally, communicate fairly, clearly and truthfully with the holders of the crypto assets and identify, prevent, manage and disclose conflicts of interest. Compared to an authorisation requirement, which the Liechtenstein and German approaches provide for, the EU approach is more proportionate. Buyers of tokens representing rights to unique assets such as works of art or real estate will thus be adequately protected without subjecting the issuers of the tokens to overly stringent prudential requirements. As over-regulation is likely to lead to a paralysis of innovation which would be contrary to the objective of promoting it, the EU approach is preferable in this case.

 Kliemann, 2021.

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4.2 Regulatory Methodology Furthermore, the approaches differ in the nature of regulation. All three approaches stipulate that crypto assets already falling under the existing financial market regulation are subject to these more stringent requirements. For example, issuers of investment tokens in Germany must comply with the additional requirements of securities supervision due to their qualification as a financial instrument in the sense of the WpHG, in contrast to issuers of currency tokens and utility tokens. However, unlike the TVTG and the KWG, the MiCAR introduces additional gradations in the degree of regulation. It distinguishes between asset-referenced tokens, e-money tokens and crypto tokens that are neither of the two aforementioned types. Stablecoins are nevertheless subject to the TVTG and, depending on their structure, also to the KWG. However, only the MiCAR offers certain specific provisions. Essentially, the MiCAR provides for certain disclosure obligations for issuers and an obligation to maintain a reserve to secure asset-referenced tokens. It is questionable to what extent a distinct regulation of such token types is necessary. The European Commission justifies its plan with the fact that asset-referenced tokens will be in greater demand in the future than other crypto assets due to the promised stability of value and that they are consequently riskier in terms of consumer protection and financial market stability.5 As a rule, issuers try to ensure the stability of the stablecoin’s value by holding its counter value.6 However, currently, there is no legal obligation to do so. To date, issuers of stablecoins are also free to provide the stablecoins with or without a redemption claim.7 If the issuer issues the stablecoins with a redemption claim and meets the other requirements of section 1 (1) sentence 2 number 1 KWG, the investors’ investment would be protected at least by deposit protection if a counterparty defaults. Since the holding of the counter value of the issued stablecoins has not been subject to supervision so far, the initiators of stablecoins could exploit this to their advantage.  Recital 25 of COM/2020/593 final.  DBB, 2019, p. 44. 7  DBB, 2019, p. 44. 5 6

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The special regulations of the MiCAR would provide an obligation to hold an asset reserve and specifications for its safekeeping and investment. The value of the stablecoin would thus be secured so that even in the absence of a redemption claim against the issuer, the investment’s value is guaranteed when selling the token. The existing regulatory gaps would thus be closed. Therefore, a separate regulation of stablecoins and the measures proposed by the European Commission in this respect are reasonable for consumer protection.

4.3 Technology Neutrality A further examination of the objectives and their corresponding implementation also reveals differences in the technology neutrality of the wording. The Liechtenstein legislator formulated the TVTG in the most technology-neutral way. The use of concrete terms such as DLT or cryptography was completely dispensed with, as these are merely technical expressions.8 The TVTG refers to trustworthy technologies. Also, the term token is understood abstractly and not in a technological sense. In contrast to the German and the EU approach, the neutral wording ensures that regulation can keep pace with the speed of technological innovation. It is highly conceivable that digital representations will exist in the future, not based on cryptographic key pairs or digital ledgers. Unless these new technologies are comparable to DLT or cryptography, they will not fall under the KWG or the MiCAR, so the legislators may need to redraft the laws. However, with a view to proportionality, it still seems sensible to wait for the development of new technologies before subjecting their products to supervision. It should always be examined whether there are specific risks that require supervision. These depend on the design of the technology, which is de facto not yet foreseeable. Without tangible indications, the legislators cannot create a secure, conclusive and, most importantly, proportionate legal framework. In this respect, the approach of the German and the EU legislators is justifiable.  BuA No. 2019/54, p. 13.

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4.4 Chosen Regulatory Instruments With regard to the regulatory instruments, all three legislators essentially opted for the same measures. On the one hand, they want to supervise the issuance of crypto assets by publishing a corresponding information document. On the other hand, they want to regulate service providers operating in connection with crypto assets through an authorisation procedure upon their establishment and through ongoing supervision by the supervisory authorities.

4.4.1 Standardised Information Document With regard to the issuance of crypto assets, all three legislators provide for the requirement of a legally standardised information document to ensure consumer and investor protection. The different designation of the documents is immaterial, as the essential contents are similar. Such information documents have already been introduced for other financial instruments, such as securities or investment units, in the form of prospectuses or basic information in the EEA. However, the German approach, so far, only provides for a prospectus requirement for the issuance of investment tokens. For example, the BaFin already considered the issuance of security tokens to require such a securities prospectus under the WpPG in early 2019.9 Both the TVTG and the MiCAR, in conjunction with the MiFID II, stipulate a corresponding information document for all token categories. Due to the specific risks of crypto assets, the sometimes very complex technical functionalities and the increasing market interest, it seems reasonable to legally prescribe a mandatory information document for all token categories. Through the EU-wide legal regulation of securities prospectuses, it was possible, for instance, to regain investor confidence in the securities markets after the financial market crisis. In this respect, we can assume that the introduction of crypto white papers or basic information for all token categories will have similar effects. Appropriate  White, BaFinJournal 2019, p. 10.

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exemptions can also avoid over-regulation of minor issuances that do not pose a threat to financial stability.

4.4.2 Authorisation Procedure The requirements for authorising crypto service providers are basically the same in all the regulatory approaches discussed. Thus, the proven organisational requirements, such as fit and proper managing directors, internal control mechanisms or record-keeping and safekeeping obligations, can be found in all legal acts. However, only the MiCAR contains specific obligations for the various groups of crypto service providers. Without elaborating on the details of the provisions, the approach of the EU legislator seems reasonable. Crypto assets represent novel, disparate instruments from the digital world that are now entering the analogue legal system. The activities of crypto service providers can regularly be subsumed under the existing licensing requirements. Nevertheless, the technical background and manifold design possibilities of crypto assets, as well as the resulting complex functioning of the services themselves require additional protection mechanisms for investors. For instance, Article 67 (8) MiCAR provides that crypto custodians are liable to their clients for losses resulting from malfunctions or hacking up to the market value of the crypto assets lost. Neither the German nor the Liechtenstein approach contain such specific provisions on liability with regard to hacking. Moreover, specially tailored obligations for individual groups are appropriate in terms of proportionality, as they are only to be complied with by the relevant service providers.

4.4.3 Public Register Concerning the obligations of crypto service providers, the TVTG as well as the MiCAR, in contrast to the German approach, provide for a registration obligation in a register publicly maintained by the supervisory authorities. It is questionable whether such a public register is necessary at all. By their very nature, crypto services are used digitally via the

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Internet. The reliability of the providers is not always recognisable, which is why measures to protect consumers are necessary. Publicly accessible directories on the websites of national regulators, as envisaged by the TVTG, will allow prospective customers to learn about the provider and make a more informed decision before using a service. To date, crypto investors are likely to choose a provider by consulting online reviews and testimonials, which are known to be fake to some extent. A government-maintained register containing essential information about all nationally authorised service providers can counteract the influence of manipulated reviews. However, since not only national providers are usually displayed when searching for services via search engines, a register at the EU level is more practical and more desirable in terms of consumer protection than the national register envisaged by Liechtenstein. The register according to Article 57 MiCAR shall be published on the ESMA’s website and include all providers of crypto services within the EEA. Thus, the EU approach is preferable on this point.

4.5 Neglected Aspects Recalling the risks described in Sect. 1.5.2, it is clear from the above analysis that the legislators have not considered all potential negative impacts.

4.5.1 Endogenous Manipulation of the Network It is true, for example, that the MiCAR contains regulations on interference by third parties outside the blockchain network. Nevertheless, the legislators did not include the possibility of manipulation by participants in the network itself in their regulatory considerations. In this regard, the possible centralised control over a network due to the computing power required is of great importance. Especially the mining process is easily manipulatable by exercising control over the consensus mechanism. In addition, such manipulation is difficult to identify.10 The  Rückert, 2020, § 20 (26).

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ability to control the consensus mechanism also enables those in power to favour blocks that are advantageous to them. Possibly, by regulating the network itself, legislators fear hindering the innovation they intend to promote. Moreover, since the nodes of the networks are spread across jurisdictions around the world, as the example of Bitcoin shows, monitoring could be challenging.11 Nevertheless, from a consumer protection perspective, a concentration of control is a concern, so the legislators should consider the risk of investment loss due to a threat from within the network when regulating crypto assets.

4.5.2 Anonymity of Network Participants Another risk that the legislators have not sufficiently considered is the anonymity of the network participants. By monitoring the issuance of crypto assets, it is ensured that initiation by pseudonyms such as Satoshi Nakamoto is no longer possible. Nevertheless, the recipients of the initially issued tokens remain anonymous. The anonymity of the participants is almost an invitation to use crypto assets for criminal purposes, which is amplified by the possibility of disguising the origin of the crypto assets through tumblers. The misuse of crypto assets has the potential to threaten financial stability as market relevance increases. It is thus necessary to include tumbler service providers in the group of obligated parties under money laundering law.

4.5.3 Sustainability Although it seems sensible to promote innovation, the legislators have not accounted for the impact of technological progress on the ecological environment. Environmental protection may not be an objective of regulatory law. This point should nevertheless call into question the intentions of lawmakers. The Bitcoin network itself currently (as of 22 February 11

 Waidmann, 2021.

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2021) consumes as much electricity as the Netherlands to create new tokens over the course of a year, and the creation of Ethereum similarly requires an enormous amount of electrical energy.12 These two crypto assets thus form only 72% of the crypto market.13 So far, the consumption has been absorbed by countries such as Iceland, which generates more electricity than the country itself needs due to the available thermal energy.14 Since the crypto market tends to keep growing, demand for energy will increase nonetheless. If the crypto market ever reaches the stock market volume, which we cannot rule out entirely, this would have an immense impact on the environment. Appropriate provisions in supervisory law could encourage initiators of crypto assets to use mechanisms that require less computing power or otherwise be obliged to balance the environmental footprint.

Your Transfer into Practice Individuals looking to invest in crypto assets should ask themselves the following questions, among others: • Does the issuer provide a standardised information document, and do I understand it? • In which nation is the service provider whose services I want to use located? • Are the neglected aspects acceptable to me? Individuals looking to start a business related to crypto assets should ask themselves the following questions, among others: • Do I want to voluntarily provide my customers with an information document describing my crypto asset? • Can I possibly attract a broader mass of customers by considering the neglected aspects?

 Spinnler, 2021.  CoinMarketCap, 2021. 14  Wischmeyer, 2018. 12 13

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References CoinMarketCap (2021). Gesamtmarktkapitalisierung, eigene Berechnung anhand der Marktkapitalisierung. https://coinmarketcap.com/charts/. Accessed: 21.03.2021. DBB (2019). Krypto-Token im Zahlungsverkehr und in der Wertpapierab wicklung. Monatsbericht – Juli 2019. https://www.bundesbank.de/de/publikationen/berichte/monatsberichte/monatsbericht-­j uli-­2 019-­8 02234. Accessed: 21.03.2021. Kaulartz, M. & Matzke, R. (2018). Die Tokenisierung des Rechts. NJW, 3278–3283. Kliemann, F. (2021). NFT. Was zur Hölle is das? Wie geht das? Was hab ich als erster auf der Welt damit gemacht und warum rate ich dir (noch) davon ab. https://oderso.cool/blogs/update/nft-­wtf. Accessed: 21.03.2021. Maute, L.: § 4 Die Rechtsnatur von Kryptowerten, in: Maume, P. et al. (Hrsg.) (2020a). Rechtshandbuch Kryptowerte (1. Aufl.). München: C.H. Beck. Maute, L.: § 6 Verträge über Kryptotoken, in: Maume, P. et al. (Hrsg.) (2020b). Rechtshandbuch Kryptowerte (1. Aufl.). München: C.H. Beck. Möllenkamp, S. & Shmatenko, L.: Teil 13.6 Blockchain und Kryptowährungen, in: Hoeren, T. et al. (Hrsg.) (2020). Handbuch Multimedia-Recht (54. Ergänzungslieferung). München: C.H. Beck. Omlor, S. (2019). Kryptowährungen im Geldrecht. ZHR (183), 294–345. Rückert, C.: § 20 Phänomenologie, in: Maume, P. et al. (Hrsg.) (2020). Rechtshandbuch Kryptowerte (1. Aufl.). München: C.H. Beck. Siadat, A. (2021). Markets in Crypto Assets Regulation – erster Einblick mit Schwerpunktsetzung auf Finanzinstrumente. RdF, 12–19. Spinnler, T. (2021). Stromfresser Bitcoin. Tagesschau.de. https://www.tagesschau.de/wirtschaft/technologie/stromfresser-­b itcoin-­m ining-­1 01.html. Accessed: 21.03.2021. Waidmann, L. (2021). Die 5 größten Bitcoin Miner: Wer dominiert den MiningSektor? BTC-Echo. https://www.btc-­echo.de/news/die-­5-­groessten-­bitcoin-­ miner-­wer-­dominiert-­den-­mining-­sektor-­108986/. Accessed: 21.03.2021. Weiß, Hagen (2019). Tokenisierung. BaFinJournal. https://www.bafin.de/ SharedDocs/Veroeffentlichungen/DE/Fachartikel/2019/fa_bj_1904_ Tokenisierung.html. Accessed: 21.03.2021. Wischmeyer, N. (2018). In der Inselkälte rattern die Bitcoin-Server. SZ.de. https://www.sueddeutsche.de/digital/island-­in-­der-­inselkaelte-­rattern-­die-­ bitcoin-­server-­1.4181656. Accessed: 21.03.2021.

5 Conclusion

What You Take Away from This Chapter • Regulation of crypto assets has progressed significantly in recent years, though it is not yet finalised. • Harmonisation of the regulatory framework for crypto assets is imminent due to the EU approach. • Given the discussed need for optimising the regulatory approaches, an amendment of the MiCAR is expected before it is adopted.

The aim of this book was, building on the basic knowledge conveyed initially, to classify crypto assets within the existing legal framework of German supervisory law and to include current developments at the national and EU level in answering the question of the extent to which the regulatory requirements for the regulation of crypto assets are sufficient. In addition, the book should serve as a guide for investors and founders. First, the various terms used in connection with crypto assets were highlighted and explained in more detail. Thereby, we noted that, to date, no generally applicable definition of the term exists and that one should generally distinguish  between the term crypto token  and crypto asset. Subsequently, we examined the design options of crypto tokens. The division into three main categories – currency tokens, investment tokens, © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 H. Appel, Quick Guide Crypto Assets, https://doi.org/10.1007/978-3-658-40462-8_5

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and utility tokens – which is widespread in practice seems reasonable at first glance for a better understanding. However, due to the wide range of design options and the principle of substance over form, a case-by-case examination must be carried out in each case with regard to the regulatory classification. Hence, such designations are irrelevant to the administrative practice of the supervisory authorities. Applying the relevant laws of the financial market law as well as the administrative regulations of the BaFin entails that only crypto tokens designed as investment tokens can qualify as financial instruments within the meaning of the WpHG.  Accordingly, issuers and service providers that provide remunerated services in connection with investment tokens must comply with the obligations of the WpHG. Issuers of investment tokens are also obliged under the WpPG to publish a corresponding prospectus when issuing the tokens. As part of the examination of the national banking supervisory regulations, we determined that, due to the amendment of the KWG when implementing the AMLD V, the majority of crypto assets known to date are covered by the  regulation. The reason for this is the inclusion and legal definition of the catch-all category of crypto assets in the catalogue of financial instruments of the KWG. In the context of the explanations on the definition of crypto assets, we have noted that one cannot interpret the term investment purpose unambiguously. Qualification as a financial instrument within the meaning of the KWG entails the requirement of a license for business activities in connection with crypto assets and compliance with the obligations under money laundering law. We could subsume the majority of the business activities of the market participants relevant for regulatory purposes under the facts requiring authorisation. With regard to providers of tumbler services, we identified a regulatory gap. The comparison of the regulatory approaches led us to various findings: First, we identified different areas of application. The Liechtenstein and the EU approaches are more comprehensive than the German approach. By distinguishing between crypto assets with and without an investment purpose, the German legislator created an ambiguous term that may lead to uncertainty in the market and exploitation of the grey area. For this reason, we preferred an all-encompassing legal framework.

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In this context, however, it has been critically noted that assets that are fundamentally not financial instruments become subject to financial supervision through the tokenisation of rights in them. Therefore, regulation outside of financial market regulations is desirable. We assessed the MiCAR’s graduated regulatory system positively in contrast to the equal treatment of all token categories and crypto service providers of the Liechtenstein and the German approaches. Due to the specific provisions, the EU approach allows for a more proportionate regulation, which is more relevant in terms of promoting innovation. Likewise, the comparison of the technological neutrality of the requirements led us to conclude that, in the course of the principle of proportionality, regulation of still unknown future technologies should not take place at present. With regard to the selected regulatory instruments, we have identified predominantly consensus. In this context, we endorsed the extension of the obligation to publish an information document when crypto assets are issued to all types of tokens, as well as the introduction of an EEA-­ wide register of all crypto service providers. Finally, we raised aspects the legislators did not consider in their regulatory deliberations. Firstly, the approaches analysed do not contain any regulations protecting consumers from manipulation in the network itself. Furthermore, the regulatory gap concerning providers of tumbler services was considered critical from a money laundering and consumer protection law perspective. Lastly, we suggested that  the legislators include the long-term effects of a generous promotion of the crypto market on the environment in their regulatory considerations. In conclusion, regarding the research question, we thus can state that Germany’s existing regulatory legal framework covers the majority of currently known crypto assets. However, adapting the MiCAR would harmonise the treatment of crypto assets and crypto market participants, thereby improving supervision across the EEA. Despite the more specific requirements of the MiCAR, there is still a need for optimisation with regard to the particular risks of crypto assets until the final adoption of the regulation.

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Your Transfer into Practice Individuals looking to invest in crypto assets should ask themselves the following questions, among others: • Do I feel informed enough to invest in crypto assets? • Do I want to wait until the MiCAR is adopted before I invest so I can enjoy the benefits of the European Single Market? Individuals looking to start a business related to crypto assets should ask themselves the following questions, among others: • Am I aware of the regulatory obligations I must fulfil? • Do I want to incorporate my business before the MiCAR is entered into force to take advantage of any competitive advantages? • What benefits can I derive from the adoption of the MiCAR for my business?