With its decision of 29.09.2018, the 4th Criminal Senate of the Berlin Court of Appeals found that the Federal Financial Supervisory Authority (BaFin) has disregarded the principle of the separation of powers embedded in Article 20 paragraph 2 sentence 2 of the German Constitution and the principle "Nullum crimen, nulla poena sine lege" ("no crime, no punishment without law") stipulated in Article 103 paragraph 2 of the German Constitution. The astonishingly clearly formulated decision of the Court of Appeals questions the assessment of crypto currencies and their legal classification by the Federal Financial Supervisory Authority (BaFin).
Classification of crypto currencies as financial instruments
In 2013, BaFin defined the crypto currency Bitcoin (BTC) as being a so-called unit of account (Rechnungseinheit) and thus assigned it to a subclass of financial instruments - with far-reaching consequences. This classification subsequently formed the most important instrument for controlling the market of and with crypto currencies in Germany. Commercial services relating to crypto currencies (such as investment advice and brokerage, exchange activities, trading/brokerage) require prior official approval due to this classification. Meeting the (not only financial) requirements for the granting of such approval is, depending on the specific business model, difficult to practically unattainable.
As a result, with the exception of a few rare offerings, such services are not yet available in Germany. Only the initial issuance of a token classified as a crypto currency does not require a license, as long as it is not combined with one of the services mentioned above or classified (amongst other) as deposit business.
Actions taken without the approval required by BaFin can result in a prohibition order and may also lead to criminal law consequences of up to five years of imprisonment.
This background gives the decision of the Court of Appeals its special significance, especially since the case went through three appeal stages (Local Court Berlin-Tiergarten, Regional Court Berlin, Court of Appeals).
What happened?
An internet platform trading Bitcoin (www.bitcoin-24.com) launched in 2012 became extremely popular in March 2013, following the "hype" around Bitcoin triggered by extensive media reports at the time. Large numbers of users registered on the platform and deposited funds by transferring them to the platform operator's bank account. The amounts would then be available for users to trade with Bitcoin.
After the account balance of the platform operator, Birmingham-based BTC24 Ltd., had increased tenfold within a few weeks, its account held in Poland was blocked by the Polish authorities on suspicion of money laundering. Commerzbank closed another account in Germany. Following the recommendation of a lawyer, the operator finally shut down its internet portal.
The Berlin managing director of BTC24 Ltd. was fined by the Local Court Berlin-Tiergarten in the spring of 2016 for negligent conduct of illicit banking transactions and financial services respectively. On his appeal, the decision was reversed and the managing director was acquitted by the Berlin Regional Court at the end of 2017. The decision of the Court of Appeals now confirms the acquittal in the third instance.
Findings of the Court of Appeals
The 4th Criminal Senate of the Berlin Court of Appeals unequivocally states that BaFin - insofar as it takes the view that Bitcoin is a complementary currency and thus a unit of account - fails to recognise that it is not the task of the federal authorities to intervene (in particular) in criminal law by shaping the law.
The principle of certainty (Bestimmtheitsgebot) laid down in Article 103 paragraph 2 of the German Constitution contains the obligation that essential questions of criminal liability or impunity must be determined by going through the democratic-parliamentary decision-making process. In this context, the conditions for criminal liability must also be described in such concrete terms that the scope and the scope of the offences can be identified and can be understood by interpretation. Taking into account the principle of certainty, the main task of the legislative power is to draft the wording of criminal statutes in such a way, that the addressee of the statute could, as a rule, already predict on the basis of the wording of the statutory provision whether conduct would be punishable or not.
The authority granted to BaFin, in the interests of general supervision of maladministration and preventive averting of danger, to issue incriminating administrative acts (e.g. closure or cease and desist orders) does not, however, lead to any competence whatsoever to extend the scope of application of criminal law statutes by expanding the requirements (here: making banking transactions or financial services subject to approval).
With this ruling, the Court of Appeals has rejected the appeal of the public prosecutor's office and confirmed in the last instance that the managing director of BTC24 Ltd. did not act in a manner relevant to criminal law because, contrary to the opinion of BaFin, Bitcoin is not a financial instrument.
The principle of the separation of powers stipulated in Article 20 paragraph 2 sentence 2 of the Constitution states that only the legislative power may determine the prerequisites for criminal liability. Accordingly, the principle of separation of powers also prohibits an executive power to decide on the criminal nature of an act. However it is also not the job of the courts (judiciary) to close potentially existing loopholes in order to protect consumers.
What are the consequences of the decision?
The criminal court ruling has no direct effect on the classification of crypto currencies such as BTC as units of account by BaFin. The criminal judgment is not binding on the administration, whose decisions are reviewed by administrative courts. BaFin has not changed its view on Bitcoin and other crypto currencies despite knowledge of the second-instance judgement of the Berlin Regional Court issued at the end of 2017. Therefore, it is to be expected that BaFin will also be unimpressed by the final instance decision of the Court of Appeals. The judgment of the Court of Appeals is therefore - apart from the restitution of the accused - ultimately only an invitation to have the controversial classification of crypto currencies as financial instruments reviewed by the competent administrative courts.
The decision also provides an opportunity to rethink the sensible regulation of token-based business models. In 2013, Bitcoin's classification as a financial instrument provided an efficient way to control development and set high barriers to entry for the German market. At the European level, however, units of account do not constitute financial instruments. Nonetheless, the special route chosen by Germany has not been able to stop the spread of tokens in Germany. But German consumers and investors cannot fall back on a grown environment of German service providers. They are dependent on foreign providers for the use of services, which probably makes it more difficult to enforce their rights. Germany would therefore do well to not close this market any further, and instead embrace and let it develop in a controlled and sensibly accompanied environment. The global development cannot be halted anyway - we as a society must decide whether we want to actively shape it and create meaningful instruments for this purpose.
In this context, it would also be desirable if a more active intervention against obviously fraudulent activities in the crypto sector finally became visible in Germany. This is urgently necessary for the development of a healthy market, not only in the area of corporate financing (the so-called initial coin offerings), but above all in the much more serious Ponzi schemes, whose focus is increasingly shifting to Europe after the decisive intervention of the US authorities.
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