Specialist lawyer Lutz Auffenberg and his law firm Fin Law have specialized in the field of fintech and innovative technologies. In particular, blockchain technology and its regulation are at the center of his work. In his guest article he addresses the question of whether El Salvador’s Bitcoin advance could also affect German crypto regulation.
This article is first on the Fin Law Blog published.
The German legislature will not have expected this when crypto values were introduced as financial instruments: On June 9, 2021, the small Central American country El Salvador decided to make Bitcoin unrestricted legal tender. After the new law comes into force, payments in Bitcoin will be acceptable to everyone in El Salvador and will have legal effect. Prices can be expressed in Bitcoin, taxes and other public charges can be paid in Bitcoin. The passed law also expressly stipulates that profits from Bitcoin transactions, as well as transactions with other legal tender, are not subject to any capital gains tax. For El Salvador, which had not had its own national currency for about twenty years and instead relied on the US dollar for domestic trade, the new law represents a milestone in national monetary policy. But also in Europe and especially in Germany, the upgrading of Bitcoin to legal tender is unlikely to remain without legal consequences.
According to the definition in the Banking Act (KWG), which was only introduced at the beginning of 2020, crypto values are digital representations of a value that has not been issued or guaranteed by any central bank or public body and does not have the legal status of a currency or money, but is due to natural or legal persons an agreement or actual exercise is accepted as a means of exchange or payment or is used for investment purposes and which can be transmitted, stored and traded electronically. Digital representations of value, on the other hand, which have the status of a legal tender, cannot fall under the definition according to the unambiguous wording of the law. If the wording of the law has come into force, the legal consequence would have to be that bitcoins can no longer be classified as crypto values within the meaning of the KWG under German supervisory law. Since this result is almost certainly not wanted by either the legislature or the supervisory authorities, it must be seen in any case how BaFin in particular positions itself on this question.
Even if the wording of the definition of crypto values in the KWG seems to be clear, Bitcoin will continue to be a regulated financial instrument in Germany, at least as a unit of account. BaFin had never given up its longstanding administrative practice of classifying Bitcoin and comparable crypto currencies and continues to apply them. The legislature also emphasized in the materials on the justification for the inclusion of crypto values in the financial instrument catalog of the KWG that it considers the relevant administrative practice of BaFin to be legally effective. According to German supervisory law, bitcoins will therefore continue to be regarded as regulated financial instruments in the form of units of account, even if they no longer qualify as crypto values.
The new financial service of the crypto custody business, which was also introduced in January 2020, is available when customers are offered the custody, management and security of crypto assets or the associated private cryptographic keys. Anyone wishing to offer such services in Germany needs permission from BaFin beforehand. According to the legal definition, crypto custody that requires authorization can only refer to crypto values. The safekeeping of other financial instruments, however, is not part of the offense. The custody of units of account is also not recorded, which was the decisive aspect for the introduction of the crypto custody business in 2020. Strictly speaking, the safekeeping, administration or security of Bitcoins or the associated private keys should no longer represent crypto custody for others in Germany in the future. Here, too, the only decisive factor is the supervisory assessment by BaFin, which should therefore be awaited.
The definition of crypto values goes back to the definition of virtual currencies in the so-called fifth money laundering directive, which also requires that the digital representation of value is not legal tender. Conversely, legal tender cannot represent virtual currencies within the meaning of the directive. Since the EU member states had to implement the 5th Anti-Money Laundering Directive into national law by January 2020, the decision from El Salvador should also spark supervisory discussions on the rest of the continent. It turns out that with the wording of the definition of virtual currencies, the European guideline has chosen a solution that enables non-European countries to bring massive turbulence into European crypto regulation. Both the European Union and the German legislator should therefore take measures as soon as possible to remedy this technical error.