On Tuesday, BaFin issued an advisory letter regarding the regulatory classification of tokens that are distributed to investors through initial coin offerings (ICOs).

 

On February 20, 2018, Germany’s Federal Financial Supervisory Authority (BaFin) published a note on how it will approach token regulation.

The regulator explains that it considers tokens on an individual basis, checking them for compliance against the Markets in Financial Instruments Directive II (MiFID II), the German Securities Prospectus Act, and the German Federal Ministry of Justice and Consumer Protection’s Investment Law (VermAnlG), among other standards.

“The legal classification of tokens requires a precise case-by-case examination.” –BaFin

In November 2017, BaFin issued a consumer warning on the risks of ICOs. Now, BaFin encourages those conducting an ICO or promoting tokens to determine whether their products or services would fall under existing regulation. “In case of doubt, they should contact the responsible specialist departments of BaFin at an early stage,” the regulator wrote. Importantly, BaFin noted, “The mere designation of a token, for example as a ‘utility token,’ is in itself irrelevant to the outcome of the legal analysis.”

At least under MiFID II, the securities designation would require several elements. These include:

  • Transferability;
  • Tradability on financial or capital markets;
  • Embodiment of rights in the token (i.e. either shareholder rights, contractual obligations, or comparable claims); and
  • The token must not fulfill the requirements of a payment instrument.

Earlier this month, German president Frank-Walter Steinmeier said that the financial sector has a responsibility to prevent cryptocurrency speculation. The German and French finance ministers and central bank governors later proposed discussion of the opportunities and risks of virtual currency markets during the upcoming G20 meetings.