Cryptocurrency conceptA major problem to the analysis of the crypto asset and the related blockchain industry has been and still is the lack of clear guidelines and legal definitions. This blog considers how German law approaches crypto assets and how those type of assets are dealt with in an insolvency.

Apparently, the change from paper-based securities to electronic registries of securities maintained by central clearing depositories since the 1970s has led to a substantial shift from direct to indirect holding of objects, with significant implications for the underlying property law. Interestingly, the meaning of “ownership” differs fundamentally across major jurisdictions and with regard to how property law treats immaterial digital objects like crypto assets. Various legal systems are currently struggling with the property status of crypto assets. The qualification of a crypto asset as property (i.e., as an object of property rights, including the right of ownership) constitutes a fundamental legal, rather than “regulatory”, consideration. Legal systems take divergent approaches to the concept of property. Three broad approaches can be named in the world’s major legal systems:

  • Common law jurisdictions use categories of things that they can be owned and transferred like other types of personal property;
  • Most civil jurisdictions treat certain rights as non-physical objects, although a few stipulate that only physical objects qualify as “objects” that can be owned; and
  • Some civil jurisdictions, which includes German and Japanese law, have the most fundamental problems, as the recognition of any non-physical object, as an object of property rights needs to circumvent this dogmatic axiom.

Consequently, the handling of crypto assets require a reexamination of the concepts of ownership. Crypto assets have principally no physical manifestation they exist exclusively as digital book entries in a virtual, shared and distributed ledger. “Moving” crypto asset units requires an authorization in the form of a cryptographically signed message by the initiator. The signature, produced by a private key, represents the user’s permission for the Distributed Ledger Technology (DLT) system to request a ledger entry reflecting the change in possession. A valid signature provides the cryptographic assurance to the DLT system and its participants that the transaction initiator has the authorization to enact a corresponding ledger entry. If accepted, the ledger is updated such that a particular crypto asset is associated with the (typically pseudonymous) public key of a particular user. In this context, the private key can be compared to a password that unlocks the user account, whereas the associated public key (and the derived address) resemble a user account number.

However, a valid signature does not automatically provide proof that the owner of the corresponding private key has produced the signature. Instead, it provides a guarantee that a holder of the private key has initiated the transaction. Therefore, the use of a private key underpins the presumption that a transaction was authorized. In the context of crypto assets, the notion of custody thus no longer refers to the direct holding of assets, but to the secure storage of cryptographic keys. Despite this functional equivalence, it is far from straightforward that (exclusive) knowledge of a private key is equivalent for all purposes to legal ownership of the certain crypto assets.

German Property Law

Under German civil law, it is not possible to classify crypto assets as objects (Sachen) within the meaning of section 90 of German Civil Code (Bürgerliches Gesetzbuch – BGB), based on the lack of physicality. Consequently, crypto assets are also not regarded as property in the sense of sections 903 et subq. of the BGB, which define the property rights of the owner of objects. Likewise, it is not possible to transfer ownership of a crypto asset by means of agreement and transfer of ownership, in accordance with section 929 of the BGB.

However, the transfer of crypto assets is possible in other ways. For example, the digital assets (e.g. coins and tokens) can be transferred by a mere real act (Realakt). Consequently, any rights or claims associated with the crypto assets are to be transferred by assignment, in accordance with sections 413, 398 of the BGB. Thereby, it must be ensured that the digital asset and the associated right are not transferred separately, but uniformly.


Further, from a German law regulatory perspective, the question arises whether crypto assets are deemed financial instruments in the field of securities supervision.

On 29 November 2019, the second chamber of the German parliament (Bundesrat) approved the “Act on the Implementation of the Amendment Directive to the Fourth EU Money Laundering Directive” (Gesetz zur Umsetzung der Änderungs­richt­linie zur Vierten EU-Geldwäscherichtlinie) which entered into force on 1 January 2020. The law introduced the new regulated financial service “crypto custody business” (Krypto­verwahr­geschäft). “Crypto custody business” is defined as:

  • Custody (Verwahrung);
  • Administration (Verwaltung); and
  • Safeguarding (Sicherung) (i) of crypto assets or (ii) of private cryptographic keys used to hold, store or transfer crypto assets as service for others”

Within the law, crypto assets (Kryptowerte) are defined as digital representations of assets which are neither issued nor guaranteed by any central bank or public entity and which do not have the statutory status of a currency or money, but which, based on agreements or actual practice, are accepted by natural or legal persons as means of exchange or payment or serve investment purposes and which can be transferred, stored or traded electronically. Electronic money within the meaning of the German Payment Services Supervisory Act (Zahlungsdiensteaufsichtsgesetz – ZAG) does not qualify as such as a crypto asset. The concept of crypto assets thus includes a wide array of crypto tokens and is not restricted to virtual currencies, such as payment tokens, within the meaning of the amended AML Directive. Safekeeping of crypto assets includes, in particular, the storage of crypto assets in a collective inventory where the customers have no knowledge of the cryptographic keys used.

Administration of crypto assets includes, in a broad sense, the exercise of rights resulting from a crypto asset, such as collection activities or notification services. Safeguarding of crypto assets includes the service of digital storage of private crypto­graphic keys, but also the storage of physical data storage devices (e.g., USB sticks) on which such private keys are saved.
Service providers such as custodian wallet providers will therefore require a license for crypto custody business pursuant to section 32 of the German Banking Act (Kreditwesengesetz – KWG). Banks and investment firms are permitted to conduct crypto custody business in addition to their other regulated services. Service providers who solely conduct crypto custody business are exempt from some of the regulatory requirements set forth by the KWG. It should be noted, however, that one of the requirements for obtaining the requisite license under the KWG is a seat in Germany. Given that the new regulated activity of crypto custody business is based on autonomous legislation by the German legislators and not on harmonized European law, service providers seated in other EU/EEA member states will, for the time being, not be able to rely on a notification to provide crypto custody services in Germany. Accordingly, the German Federal Financial Supervisory Authority (Bundesaufsichtsamt für Finanzdienstleistungsaufsicht -BaFin) has released new guidelines in this regard (see here).

In addition, in its advisory letter (see here), BaFin states its position on the regulatory classification of tokens in the field of securities supervision. Therein, BaFin defines an initial coin offering (ICO) as a method of raising capital using “tokens”. Accordingly, an ICO can also be referred to as an initial token offering or a token sale. In an ICO, a company or an individual issues tokens and sells them in exchange for traditional currencies, such as, for instance, euros, or, more frequently, for virtual currencies like bitcoins or ether. The properties and purpose of tokens can vary from one ICO to another, whereby tokens facilitate the use or purchase of services or products that the issuer develops with the proceeds from the ICO and others confer on the buyer voting rights or shares in the issuer’s future revenues. Some tokens have no particular additional value. Other tokens, once issued, are traded and can be exchanged for traditional or virtual currencies on specialized trading platforms for cryptocurrencies. ICOs are carried out online, i.e. via the internet or social media. Tokens are usually generated and distributed using distributed ledger or blockchain technology. ICOs are used to raise capital for a variety of projects, including business using DLT.

BaFin outlines in the guideline that it determines on a case-by-case basis whether a token constitutes a financial instrument within the meaning of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) or the Markets in Financial Instruments Directive (MiFID II), a security within the meaning of the German Securities Prospectus Act (Wertpapierprospektgesetz – WpPG) or a capital investment within the meaning of the German Capital Investment Act (Vermögensanlagengesetz – VermAnlG). Consequently, market participants providing services related to tokens, dealing with tokens or publicly offering tokens should observe whether the tokens constitute a regulated instrument, for instance, a financial instrument within the meaning of section 2 (4) of the WpHG, or a security within the meaning of section 2 (1) of the WpPG, so that they can fully comply with any legal requirements. The duty to comply with the legal provisions is particularly relevant with regard to possible authorization requirements pursuant to the KWG, the German Investment Code (Kapitalanlagegesetzbuch – KAGB), the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG) or the ZAG.

According to BaFin, it should be noted that, depending on its specific design, a token may be deemed a financial instrument within the meaning of section 2 (4) of the WpHG or Section C of Annex I to MiFID II. Depending on its features in the individual case, a token may be classified as a security (section 2 (4) no. 1 in conjunction with section 2 (1) of the WpHG, or Article 4(1)(44) of MiFID II), as a unit in a collective investment undertaking (section 2 (4) no. 2 of the WpHG in conjunction with section 1 (1) of the KAGB, or point (3) of Section C of Annex I to MiFID II) or as a capital investment (section 2 (4) no. 7 of the WpHG In addition, a token can serve as the underlying asset for a derivative contract (section 2 (3) of the WpHG, or point (4) and points (9) to (10) of Section C of Annex I to MiFID II). In cases where a token is the underlying asset for a derivative contract, the derivative contract is also to be classified as a financial instrument.

To be deemed a security within the meaning of section 2 (1) of the WpHG or Article 4(1)(44) of MiFID II, a token has to meet the following criteria in particular:

  • Transferability
  • Negotiability on the financial market or capital market – trading platforms for cryptocurrencies can, in principle, be deemed financial or capital markets within the meaning of the definition of a security
  • The embodiment of rights in the token, i.e. either shareholder rights or creditor claims or claims comparable to shareholder rights or creditor claims, which must be embodied in the token
  • The token must not meet the criteria for an instrument of payment (as set out in section 2 (1) of the WpHG or Article 4(1)(44) of MiFID II)

Most importantly, BaFin states that, pursuant to section 2 (1) of the WpHG and Article 4(1)(44) of MiFID II, it is not mandatory for a token to be a certificated security in order to qualify as a transferable security. Rather, it is sufficient if the holder of the token can be documented, for example by means of distributed ledger or blockchain technology, or through comparable technologies.

Furthermore, BaFin is of the opinion that the classification of a financial instrument as a security within the meaning of section 2 (1) of the WpHG is generally also decisive in determining whether the WpPG and other applicable capital market laws and EU regulations (for instance MAR) which refer to the concept of a “transferable security” are applicable. If applicable regulatory requirements are not complied with, this can result in the respective projects or business being prohibited by BaFin. In addition, such violations may, under certain circumstances, constitute administrative offences, which are punishable by the imposition of fines. If there are indications that criminal offences have been committed, the matter is passed on to the competent law enforcement authorities for the purpose of prosecution.

Regulatory Consequences

Because BaFin has stated that crypto assets qualify as financial instruments, any banking business or any financial services relating to financial instruments will require a license if such a banking business or financial services is conducted or provided in relation to crypto assets. For example, the operation of a multilateral trading system (MTF) that brings together multiple third party buying and selling interests in financial instruments according to non-discretionary rules, qualifies as a licensable investment service. Depending on their specific set-up, it is likely that some operating crypto asset trading platforms may qualify as MTFs. In addition, the purchase and sale of financial instruments as an agent for others qualifies as a licensable banking business or as a financial service. Thus, if such activity is conducted with respect to crypto assets, the service provider will have to obtain a license as a bank or as an investment firm. Trading that is conducted with a view to purchasing and selling crypto assets to customers does not qualify as proprietary trading and may, therefore, be subject to licensing requirements.

In addition, an authorization requirement pursuant to section 10 (1) of the ZAG may arise for providing payment services. If the third party, at the request of the acquirer, transfers the real equivalent value of the token via its own account to the recipient, the third party is deemed to be conducting money remittance business (section 1 (1) sentence 2 first alternative of no. 6 of the ZAG). If the third party acts at the request of the recipient of the payment, it may, under certain circumstances, meet the criteria for acquisition business within the meaning of section 1 (1) sentence 2 second alternative of no. 5 of the ZAG. A combination of the two is also conceivable if the payment services provider acts on behalf of both parties to the exchange deal, which can often be the case with internet platforms. As always, when assessing whether or not an authorization requirement exists, the specific contractual arrangements between the contracting parties are decisive.

Insolvency Law

The assessment of the application of the German insolvency law rules cannot be made without the legal classification of crypto assets. As outlined above, ownership of crypto assets presupposes the quality of the crypto assets as objects within the meaning of section 90 of the BGB, which is not given as described. Further, crypto assets cannot be transferred on a physical data carrier, as such crypto assets are only stored digitally, to the extent that this is done for the classification of computer programs under the law of obligations. On a wallet file, which is saved on an external data carrier, only the private keys are stored, not the virtual assets.

Crypto assets also do not constitute a claim against another party. There exists no indispensable opposing party in a disturbed ledger. There is also no central instance to which the crypto asset owner can address any issues, nor can a claim arise against other members of the crypto asset ledger, as there is a lack of the necessary will to legally bind all the DTL parties. The members of the peer-to-peer network can be regarded as non-binding association of persons who wish to use, e.g. the crypto currency for their means of payment. Qualification of the participants as a partnership under legal aspects is in principle not possible for precisely these reasons. As a result, crypto assets have to be classified as intangible assets.

The classification of crypto assets in accordance with sections 35 to 55 of the German Insolvency Code (Insolvenzordnung – InsO) is important for the insolvency proceedings. Notably, crypto assets are part of the insolvency estate, in accordance with section 35 (1) of the InsO, because their value can be determined. Further, crypto assets are also not unseizable objects (unpfändbare Gegenstände) pursuant to section 36 (1) sentence 1 of the InsO. In addition, currency tokens do not normally represent claims, according to sections 41 to 46 of the InsO. Such currency tokens cannot be withdrawn from the insolvency assets by segregation or separation because they do not derive any rights. In contrast, the situation is different with utility and security tokens. Utility and security tokens can represent claims and a segregation according to sections 47 et seq. of the InsO (Aussonderung) is possible. A separation according to sections 50 to 52 of the InsO is also possible. For example, a lien may exist, in the sense of section 50 of the InsO (Absonderung), on claims pursuant to sections 1279 to 1290 of the BGB or a separation pursuant to section 51 No. 1 of the InsO. Separation in accordance with section 49 of the InsO is not possible because crypto assets are not regarded immovable objects.

The main challenge for the insolvency administrator is to find out about the possession of crypto assets and the respective location.