Bitcoin is by far the most prominent virtual currency. It started as an open source project of the anonymous creator Satoshi Nakamoto and continues to be further developed even today by a core of employees who work on the program code on a voluntary basis. While this kind of voluntary work may have been appropriate when Bitcoin was still in an early phase of its development, it is today becoming a growing problem as this currency has grown to be worth billions and even sometimes aspires to replace the global financial system.
From the outset, the developers of the virtual currency Ether (Ethereum project) therefore opted for a new model of project financing: the Initial Coin Offering (ICO). An ICO is a sale of units (tokens) of a virtual currency which is still in a very early phase of its development or even at the stage of a theoretical white paper only. Commonly, these tokens are sold against bitcoin (btc) or ether (eth) instead of national currencies like euros or US dollars.
Proceeds go to the project developers and are intended to ensure financial sustainability of the further development of the virtual currency on offer. The largest ICO to date, the sale of the so-called Bancor token brought its developers virtual currencies in an equivalent value of more than 150 million US dollars.
Thus, an ICO certainly has similarities with a traditional IPO of a company, combined with some elements of crowdfunding. Many German blockchain start-ups are interested in implementing an ICO, which raises the question of how to evaluate an ICO in terms of regulatory requirements under German law.
In this context, the main questions are whether the Federal Financial Supervisory Authority Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) has the right to grant or refuse permission and whether a prospectus is required for tokens offered in an ICO.
It is true that BaFin has classified Bitcoin and comparable virtual currencies as so-called “units of account” i.e. as financial instruments within the meaning of the Banking Act (Kreditwesengesetz; "KWG"). However, as the mere sale of said instruments constitutes neither a banking transaction nor a financial service, an obligation to obtain a permission under the Banking Act can be excluded.
Regulation under the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz; “ZAG”) can also be ruled out given that no transfer of amounts of national money or e-money is involved.
In addition, no prospectus may be required for tokens offered by way of an ICO under the German Securities Prospectus Act ( Wertpapierprospektgesetz ) because virtual currencies do not meet the definitions laid down in the Securities Trading Act (Wertpapierhandelsgesetzes).
However, regulation under the Asset Investment Act (Vermögensanlagengesetz , "VermAnlG") may apply and could entail a prospectus requirement for a public offering of tokens. In this context, the structure of the tokens offered in the ICO will be decisive.
A distinction is to be made between simple tokens, the so-called plain vanilla products, which do not entitle their holders to any rights other than ownership itself, and tokens endowing their holders with an additional subscription right for other tokens in accordance with specific rules.
There are numerous technical possibilities for granting subscription rights with tokens. While plain vanilla tokens will hardly be classified as asset investments, tokens with additional features might be considered as asset investments pursuant to Sec. 1 (2) No. 1 of the German Asset Investment Act if the holder of the tokens receives distributions, which are based on the performance of the issuing company and paid out according to specific rules. The features of the actual tokens are hence crucial for the legal classification of an ICO under German law.
Companies wishing to implement an ICO in Germany cannot circumvent German supervision laws by establishing the registered office of the company offering the tokens in Switzerland, for example. Because BaFin, in its established administrative practice, assumes that a domestic nexus of an issue applies and, thus, German supervisory laws are applicable even to issuers based in foreign countries if they purposefully address the German market and German investors. This may be the case if the website relating to the ICO is also made available in German or if it is actively advertised on German internet forums.