Initial Coin Offerings (ICOs) under German law

By Hilger von Livonius and Philipp Riedl

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.