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BaFin on Bitcoins – A Blueprint for Europe?

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Op-ed - BaFin on Bitcoins – A Blueprint for Europe?

In an oft overlooked statement German Federal Financial Supervisory Authority (BaFin) in December 2011 commented on Bitcoins. Although this statement directly concerns only Bitcoin businesses domiciled in Germany, one should be aware that BaFin is one of the most influential regulatory bodies in the EU. BaFin‘s statement could therefore be a blueprint for regulation in other European countries or EU regulation. Even if a particular Bitcoin business is not domiciled in Germany, it may be advisable for them to understand the BaFin statement and heed its possible consequences.

The statement was contained in a guidance to the German Payment Services Supervision Act, one of the codes which transfers the EU Payment Services Directive (PSD) into German law. Bitcoin is analyzed with regard to its possible quality as e-money. Regarding this question BaFin comes to the same conclusion as the ECB in its analysis of virtual currencies of October 2012, namely that bitcoins do not constitute e-money. BaFin henceforth refers to bitcoins as “units of value” (not “units of account” as posted on some forums; “unit of account” is a technical term in finance law while “unit of value” does not carry any specific legal meaning).

While the ECB goes on to say plainly that, by not being e-money, bitcoins “clearly fall outside the scope of the Payment Services Directive”, BaFin’s wording is much more subtle and cautionary. It states that the “creation” of bitcoins and their “use as medium of payment” do not need a permit (license). However, regulation applicable to banks and financial services could be applicable to Bitcoin transactions under two conditions: (1) the bitcoins themselves become an “object of trade” and (2) the “structure of the transaction” justifies doing so. If these two criteria are met, bitcoins become “units of account” and therefore “by implication” financial instruments.

I think, based on the very careful wording of the statement, that BaFin is well aware that it is all but impossible to fully gauge the meaning of these two conditions. An “object of trade” is not a technical term in finance law but comprises everything that is being traded, be it pork bellies, real estate or climate derivatives. I personally would assume that, for example, exchanging fiat currencies into Bitcoin and vice versa may make bitcoins an “object of trade”.

As for the “structure of the transaction” one must probably look for the similarities between Bitcoin-based transactions and traditional banking and financial services transactions. Therefore it can only be assessed on a case-by-case basis whether a specific Bitcoin business model may come within the scope of banking or financial services regulation.

The ECB's analysis of October 2012 that the PSD is not applicable does not over-rule this earlier statement of BaFin of December 2011 that laws based on the PSD or other laws pertaining to banks or financial services may be applicable. As long as there is no comprehensive EU regulation every country in the EU is free to regulate Bitcoin the way it deems fit. Even if the EU would begin to formulate Bitcoin-specific regulation it would probably take years before such regulation is enacted.

I'm afraid that this analysis of BaFin's statement cannot be conclusive and may therefore be slightly frustrating for Bitcoin businesses applying various business models and looking for clear guidance. For the time being though, regulatory matters in the Bitcoin space will remain in a state of flux. However, as one VC investor noted at this year‘s London Bitcoin Conference, this obscure regulatory environment also presents opportunities for those keen and nimble enough to cope with it.PS: Maybe‘s collaboration with Fidor Bank in Germany will shed some more light on BaFin‘s thinking.