Crypto assets and crypto securities in the form of digital tokens

A particularly hot topic, closely related to the phenomenon of virtual currencies, is so-called ICOs (“Initial Coin Offerings”) and other issues of digital assets. Unlike virtual currencies, however, the focus here is not on the payment function, but rather on the “securitization” of rights to a company, product, or idea.

These transactions are therefore primarily about selling quasi-participation rights in a company or its products or services, by issuing digital tokens to interested parties. In this case, too, the challenge is to identify whether such ICOs are subject to licensing or prospectus requirements, what issuance requirements apply, and what risks must be investigated. This is always the case if a token is not solely a so-called utility token, which, in and of itself, is not (yet) regarded as a financial instrument or investment, although drawing the line is often difficult.

The need for a comprehensive legal review significantly increased yet again after the Federal Financial Services Regulatory Authority (BaFin) published a detailed report on this issue, emphasizing that in its view ICOs generally raise regulatory concerns. This is because, as with Bitcoin & Co., digital tokens may qualify as units of account within the meaning of the German Banking Act (KWG). If so, not only must the an issuer of digital tokens comply with prospectus requirements, but commercial trading of such tokens may also require that the issuer or a third party obtain a license if such trading is offered as a service (e.g., in secondary market trading).

Another frequently asked question is how various transaction and deposit options are treated for tax purposes. We will gladly help you with this issue, as well. Note that it makes sense to obtain legal advice at the earliest stage possible. This will ensure that banking regulatory concerns can be coordinated with the Federal Financial Services Regulatory Authority in due time, if necessary, and comprehensive information on corporate and contractual structuring options can be provided to the client.

It therefore makes sense to obtain expert advice and a reliable assessment in advance, in order to avoid liability exposure and determine whether it may also be possible to structure the ICO in such a way that a license from the Federal Financial Services Regulatory Authority is not required.

We will be happy to answer these and any other frequently asked questions about capital market law.

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