Side blow on BaFin: Berlin Court of Appeal sees no criminal liability for trade with Bitcoins

The Berlin Court of Appeal ruled on 25 September 2018 (Case No. 161 Ss 28/18 - legally binding) that trading Bitcoins without a licence by Germany’s Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – "BaFin") was not a criminal act. A licence by BaFin was not required for the operation of a Bitcoin trading platform (from a criminal law point of view). BaFin's position otherwise had no meaning in criminal law.

It is currently unclear what impact the Court of Appeal ruling will have on German regulatory law.

Facts and proceedings of the case

The defendant was responsible for a company operating an internet trading platform (“Platform“) on which Bitcoins could be traded. The Platform brokered buyers and sellers of Bitcoins. After registering on the Platform, the buyers were able to deposit an amount of money into their account and us this money to purchase Bitcoins. Sellers could place their already created Bitcoins in their account. The customers’ payments were made to a Polish bank account, amongst others. During a period of “hype” on Bitcoins and corresponding trading platforms in March 2013, the balance of this account increased within a few days from approx. EUR 210,000 to EUR 2.45 million. Shortly thereafter, the bank account was blocked by Polish authorities because of suspicion of money laundering, and the website was shut down by the defendant shortly afterwards.

In the first instance, the defendant was sentenced to a fine for unauthorised provision of financial services (Finanzdienstleistungen) pursuant to section 54 para. 1 no. 2, para. 2 of the German Banking Act (Kreditwesengesetz – “KWG“). The defendant successfully appealed against this fine before the Berlin Regional Court. The subsequent appeal on law by the German Chief Prosecutor was dismissed by the Berlin Court of Appeal.

Trading Bitcoins did not require a licence

The Court of Appeal ruled that there was no criminal liability because trading in Bitcoins did not fall under the penal provision of section 54 para. 1 No. 2 KWG according to which it is a criminal offence to trade financial instruments (Finanzinstrumente) without a licence by BaFin. This means that if there is no financial instrument (Finanzinstrument), there is also no obligation to obtain a licence. In turn, this means that in this context there was no criminal liability for the lack of a licence.

This was because, according to the Court of Appeal (and contrary to the clear conception of BaFin), Bitcoins did not constitute financial instruments (Finanzinstrumente): in particular, they were not considered accounting units (Rechnungseinheiten) within the meaning of section 1 para. 11 sentence 1 no. 7 var. 2 KWG. Bitcoins could not be used to permanently compare different goods and services. This was because Bitcoins were not widely accepted as payment instrument (Zahlungsmittel) and fluctuated too much in their own value.

Court sharply attacks BaFin’s view

The court disagreed with BaFin’s view that Bitcoins were accounting units (Rechnungseinheiten) and therefore financial instruments (Finanzinstrumente). BaFin did not have the authority to define terms in criminal law. In criminal law, the legislator had to name terms in an understandable way. Only the criminal courts had the right to define these criminal terms even more clearly.

Significance of the judgment: criminal law

Since the judgment of the Court of Appeal is final, the Federal Supreme Court (Bundesgerichtshof – “BGH”) cannot rule otherwise in this case. It is possible, however, that other criminal courts may assess a similar situation differently. Therefore, the last word in criminal law has not yet been spoken.

Significance of the judgment: regulatory law

We assume that BaFin will shortly be taking a position on this criminal-law ruling by the Court of Appeal.

In any case, the assessment of the facts of the case from a criminal-law perspective may not be directly applied to regulatory.

The judgment – contrary to what some articles on the internet may suggest – does not therefore mean that from now on internet trading platforms are allowed to trade Bitcoins or even other forms of tokens (security tokens) without a licence (by BaFin).

In addition to a (possible) different criminal-law assessment by a different criminal court, BaFin can still take administrative measures (which generally do not have a suspensive effect – such as the prohibition of further business operations, reversal (Rückabwicklung) of businesses and concerns regarding the managing directors’ reliability (Zuverlässigkeit)).

Also, the judgment of the Berlin Court of Appeal relates exclusively to the assessment (for the purposes of criminal law) of Bitcoins (crypto tokens) in accordance with the KWG. However, there are numerous business models in which many other (in particular security) tokens are traded or are to be traded – in addition to crypto tokens such as Bitcoins, which may only represent a small proportion of the tokens traded. These (security) tokens may – regardless of this judgment – be qualified as securities (Wertpapiere) or investment products (Vermögensanlagen). Securities (Wertpapiere) and investment products (Vermögensanlagen) qualify as financial instruments (Finanzinstrumente) within the meaning of the KWG, irrespective of the judgement of the Court of Appeal. Trading these is therefore likely to trigger licensing obligations pursuant to KWG (and possibly other laws).