Germany Lays Legal Groundwork for a Free Cryptocurrency Market

A German court has just ruled that the German Banking Act cannot regulate cryptocurrency. This legal bombshell took Europe’s fintech community by surprise, and many companies are moving quickly to take advantage of Germany’s newly-freed cryptocurrency market.

German Banking Regulations

Nearly all of Germany’s banking laws are derived from the European Union’s legislation, but Germany has full discretion to form its own national regulations. The German Banking Act, or the Kreditwesengesetz (“KWG”) contains Germany’s rules and regulations for all banking business in the nation.

Among other things, the KWG oversees banking activities. This includes deposits, loans, trading, storage, and management of securities. All banking businesses in Germany are required to obtain a banking license pursuant to the KWG. Any banking business without a proper license, issued by the German Regulator, Federal Supervisory Authority, or Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), is a violation of the KWG and is subject to criminal prosecution.

Cryptocurrency Investments in Germany Do Not Require a License

German courts are responsible for interpreting the gaps in laws between the European Union legislation and the discretionary national regulations. Cryptocurrencies, which do not constitute as money or currency and is outside the scope of any central bank, has fallen into the gap between the European Union legislation and the discretionary national regulations. This has provided Germany’s courts with a unique opportunity to craft important policy in European fintech regulation.

The Higher Regional Court of Berlin, the Landgericht, held just a few months ago that cryptocurrency fails to meet the statutory definition of “financial instruments” under the terms of the KWG. Therefore, it is not a violation of the law to pursue cryptocurrency investment activities in Germany without a banking business license, which is required for other regulated financial activities under the KWG.

Court Deems Bitcoin is Not a Regulated “Unit of Account”

Since 2013, BaFin has considered Bitcoin and other cryptocurrencies to be regulated financial instruments, so businesses that operate cryptocurrency trading activities without a KWG license were potentially liable for criminal prosecution. However, on September 25, 2018, the Higher Regional Court of Berlin ruled against BaFin, stating that the agency could not force its hand regulating cryptocurrencies. Specifically, the court held that Bitcoin, the world’s most popular cryptocurrency, does not qualify as a “financial instrument” because it does not meet the statutory definition or the conceptual requirement of being a “unit of account.” But how did the court reach this conclusion?

The court interpreted the regulatory definition of “unit of account” to be currency that has comparable value to goods and services. Because Bitcoin naturally fluctuates in value based on the activities of its network of users, it’s value in terms of goods and services is unpredictable. Thus, according to the German courts, Bitcoin is not a legally-recognized means of payment and, therefore, is not a currency subject to the KWG licensing requirements.

The legal nature of cryptocurrency remains unsettled and controversial across the globe. Regulation of international trade activities involving cryptocurrencies is left up to the discretion of individual nations. Fortunately for fintech enthusiasts, lawmakers are beginning to come around to the growing wave of cryptocurrency-based financial services. If the German courts are foreshadowing anything for cryptocurrency regulation in Europe, we can expect to see a freer, more open fintech market across the continent.