July 13, 2020

Volume X, Number 195

July 13, 2020

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Initial Coin Offerings (ICOS) Under German Law

The raising of funds for cryptocurrency projects (also called Initial Coin Offerings or ICOs) gain more and more market interest. Although there is no specific and coordinated regulatory framework applicable to ICOs, it is not something happening in a completely unregulated area.

Whilst other financial regulators have treated cryptocurrencies as securities, the German regulator (BaFin) for the time being treats them in a similar way like the IMF’s special drawing rights (SDR/XDR) and, as a consequence, they are not regarded as currencies per se, but as units of account and therefore as financial instruments. BaFin further assumes that cryptocurrencies normally do not have an “issuer” for regulatory purposes and on this basis may regard the offering of or trading with cryptocurrencies with German residents as a provision of investment services which can only be made by entities either holding a domestic license or operating on the basis of a so-called European Passport or of an exemption from BaFin.

As they are not represented by physical (negotiable) documents of evidence, cryptocurrencies should normally not fall under German securities laws and also not under local investment funds legislation. On this basis, no mandatory prospectus would be required for the public offering of a cryptocurrency in Germany. For liability reasons, it is advisable, though, to have a document available for potential investors providing sufficient disclosure of the risks involved with trading the relevant cryptocurrency.

Since Germany already anticipated the MiFID II product intervention rules, BaFin would have the power to stop or ban the offer of a cryptocurrency if, e.g., there are significant investor protection concerns or a threat to the orderly functioning and integrity of financial or commodity markets or stability of the financial system. On this basis, measures against cryptocurrencies which are similar to those recently seen in other jurisdictions would be possible.

Copyright 2020 K & L GatesNational Law Review, Volume VII, Number 263


About this Author

Dr. Hilger von Livonius, KL Gates, retail products lawyer, institutional investors attorney

Dr. Hilger von Livonius concentrates his practice on banking, investment, and insurance regulatory matters with a specific focus on investment funds and debt capital markets (DCM), structured financial products, and derivatives. In these fields, he advises product manufacturers in connection with the issuance of financial products (both retail products and solutions for institutional investors). He also advises institutional market participants such as investment funds, insurance companies, and pension funds on their investments, in particular in the areas of real estate...

Dr. Philipp Riedl, KL Gates, bonded loans lawyer, securitization solutions attorney

Dr. Philipp Riedl focuses his practice on investment management. He structures and documents regulated investments for both retail and institutional investors. These investments comprise structured notes, including bonds payable to bearer and registered bonds, as well as bonded loans, securitization solutions, and special AIFs. 

In addition, he advises on the issuing, distribution and marketing of financial instruments, as well as on ongoing legal and transactional issues related to the law of negotiable instruments and investment law.

Another key area is legal guidance on derivatives and repurchase agreements (“repos”), particularly where national and international master agreements apply. He also assists in creating complex documentation for OTC transactions (“confirmation”), including swaps.