New German ICOs and regulatory clarity on their treatment?

Initial Coin Offerings (ICOs) are now mushrooming in Germany as well like in Switzerland, Russia or elsewhere. Besides the recent Savedroid ICO,  the local Frankfurt news section of the Frankfurter Allgemeine Zeitung recently  mentioned at least three more transactions that are in the process of being launched. The acronym “ICO” is no longer known only in the blockchain community but has become mainstream.

Like its many European counterparts, the German regulator BaFin is very skeptical regarding blockchain-based coin (“token”) sales and has issued a number of warnings to consumers.

More recently, on 20 February 2018, the BaFin published a guidance note that explains the circumstances under which tokens sold via ICOs are “financial instruments”. This note is not addressed to consumers but rather to companies raising funds via ICOs and any intermediaries involved in the transaction.

If the tokens are financial instruments this has the consequence that trading platforms, investment advisers, brokers, portfolio managers or custodians who trade in, advise on, intermediate, manage or store tokens become subject to the Markets in Financial Instruments Directive (MiFID). As a consequence they will need a license and will be supervised by the BaFin.

In the past, BaFin had only stated that virtual currencies such like BitCoin, Ether or Ripple are so-called calculation units (Rechnungseinheiten). However, BaFin had so far not published any views on tokens sold via ICO, particularly whether they could trigger a prospectus requirement. On that topic, the BaFin’s guidance note offers new insights:

According to BaFin, an analysis in the individual case is necessary, but tokens could be:

  1. securities (triggering also a prospectus requirement for a public offer of tokens).
      Two important rules:

    • The fact that the token is uncertificated and is tradable only via the blockchain does not rule out that it is a security if it is tradable via a trading platform.
    • Per se, describing a token as a “utility token” alone does not exclude that the token is a security if in fact, it represents(i) a corporate participation right (ii) a contractual claim or (iii) some right comparable to a participation right or contractual claim.


  2. a share/unit in an (Alternative) Investment Fund (AIF), triggering registration requirements for the fund and a license requirement for the fund manager under the German Capital Investment Code. A token can be a share or unit in an AIF if the purpose of the token is to collect funds (fiat currency or virtual currency) in order to reinvest them in ventures to generate a return for the token holders.

  3. an alternative investment (Vermögensanlage) (again triggering a prospectus requirement for a token sale). This applies in particular where the token is not a security (e.g. it is not tradeable), but still represents a share in the results of an undertaking or creates some kind of trust structure.

  4. a calculatory unit (Rechnungseinheit) (that is the BaFin’s known position on virtual currencies which it applies where the token can be used to make payments.)

According to BaFin and depending on the circumstances, persons dealing in tokens could also be deemed to operate a payment service, a multilateral trading facility or even insurance.
In many respects, the guidance from BaFin raises more questions than it answers by referring to the need to analyze each individual case.

However, BaFin can also be expected to scan the white papers and to intervene when it deems an ICO to amount to a public offering of securities or alternative investments.

As the CEO of SaveDroid stated in a recent presentation of his own ICO experience:

Go get yourself a specialized lawyer before you launch an ICO. There are many pitfalls.

The pitfalls multiply when the company starts marketing the transaction across the border and accepts investors from abroad. In some markets token sales are prohibited by law, in others, regulators may take a different view as to whether a prospectus or a license is required.

Manuel Lorenz
Manuel Lorenz is a lawyer in Baker McKenzie's Frankfurt office. He advises banks, securities firms and fund issuers on regulatory matters such as licensing and compliance as well as structuring and registration of products.