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Germany: Court Holds That Bitcoin Trading Does Not Require a Banking License

(Oct. 19, 2018) On September 29, 2018, the Higher Regional Court of Berlin (Kammergericht Berlin, KG Berlin) held that trading in Bitcoin does not require a banking license because Bitcoin is not a financial instrument, in particular, not a unit of account, within the meaning of the German Banking Act. The defendant was therefore not conducting an illegal banking business punishable by imprisonment or a fine. The decision is directly at odds with the regulatory practice of the German Financial Supervisory Authority (BaFin), which classifies Bitcoin as a financial instrument and therefore makes commercial trading subject to authorization. (KG Berlin, Sept. 25, 2018, , Docket No. (4) 161 Ss 28/18 (35/18), Court Decisions of Berlin-Brandenburg website; Gesetz über das Kreditwesen [Kreditwesengesetz] [KWG] [Banking Act], Sept. 9, 1998, BUNDESGESETZBLATT [BGBl.] [FEDERAL LAW GAZETTE] I at 2776, as amended, German Laws Online website.)

Facts of the Case

The defendant operated an internet trading platform for Bitcoin and carried out principal brokerage services for sellers and buyers. Buyers had to register and put money in their accounts, with which they were able to purchase Bitcoin. Sellers offered their produced Bitcoin on the website. Payments of customers were made to an account of the C.bank B. and to a Polish account. In March 2013, a “Bitcoin hype” started and the defendant’s account balance increased from €209,832.16 (about US$242,089.36) to €2.45 million (about US$2.83 million) within a few days. On April 9, 2013, the Polish authorities froze his account because they suspected money laundering. The defendant hired an attorney who advised him to close the trading platform, which he did on April 11 and 12, 2013. (KG Berlin para. 3.)

He was subsequently criminally charged with negligently conducting a banking business without authorization, which is punishable by a term of imprisonment of up to three years or a fine, and sentenced to pay a fine. (Id. at 1; Banking Act § 54, para. 2.) He appealed the decision, and the Regional Court of Berlin (Landgericht Berlin) subsequently reversed the lower court’s decision, holding that Bitcoin trading was not subject to authorization and the defendant was therefore not criminally liable. The prosecution appealed the decision to the Higher Regional Court of Berlin. (KG Berlin para. 1.)

Legal Framework

Conducting banking business or providing financial services on a commercial basis or on a scale that requires commercially organized business operations in Germany requires authorization from BaFin. (Banking Act § 32, para. 1.) According to section 1 of the Banking Act, “conducting banking business” comprises, among other things, “the purchase and sale of financial instruments in the credit institution’s own name for the account of others (principal broking services).” (Id. § 1, para. 1, sentence 2, no. 4.) Section 1, paragraph 11 of the Banking Act contains an exhaustive list of financial instruments within the meaning of paragraph 1. Conducting banking business without authorization is punishable by a term of imprisonment of up to five years or a fine. (Id. § 54, para. 1.) If done negligently, the punishment is up to three years in prison or a fine. (Id. § 54, para. 2.)

Ruling

The Higher Regional Court confirmed the decision of the Regional Court of Berlin. It held that the virtual currency Bitcoin is not a financial instrument within the meaning of the Banking Act, in particular, not a unit of account according to section 1, para. 11, no. 7, and therefore does not require authorization from BaFin. (KG Berlin, paras. 6 & 8.)

According to the Court, the explanatory memorandum to the amendment of the Banking Act, which added “unit of accounts” to the list of financial instruments in 1997, does not contain any hints that the legislature meant to include cryptocurrencies as units of account. On the one hand, Bitcoin was first mentioned on the Internet in 2008/2009 and therefore could not have been part of the considerations at the time. Secondly, the Court held that the wording is also not open to an interpretation that would allow including Bitcoin. (Id. at 12.)

The Court stated that Bitcoin is issued neither by a central bank nor by a public body, and there is no universal issuer. In addition there is no central and definable authority that can regulate Bitcoin. The Court added that Bitcoin is neither a currency nor a classical means of payment, although it is accepted as a means of payment by certain economic actors, and it is highly volatile. (Id. at 13.) The Court concluded that Bitcoin is therefore missing a continuing value and general recognition that units of account generally have. (Id. at 14.)

Furthermore, the Court ruled that BaFin overstepped their competency when it classified Bitcoin as “units of account” and therefore made them subject to authorization. (Id. at 15 & 17.) It stated that an administrative agency may not encroach upon the competencies of the legislature to amend criminal norms. (Id. at 16.)

Finally, the Court declared that Bitcoin is not e-money as defined in the Second European Union E-Money Directive as implemented into the German Payment Services Supervision Act. (Id. at 20; Zahlungsdiensteaufsichtsgesetz [ZAG] [Payment Services Supervision Act] July 17, 2017, BGBl. I at 2446, German Laws Online website.) It explained that Bitcoin was already known when the Second E-Money Directive was implemented into German law, but the legislature did not explicitly include it in the Banking Act or the Payment Services Supervision Act, and did not make commercial trading subject to authorization by the BaFin. (KG Berlin, para. 28.)