Cryptocurrency as a means of payment


Cryptocurrency: anonymous and fast transfers – but almost impossible to control

For users, cryptocurrencies offer a range of benefits. They enable peer-to-peer transactions without the need for a third party, such as a bank or payment provider. Payments are completed in a matter of minutes, transaction costs are negligible or non-existent, and thanks to the use of cryptography all transactions are completely anonymous and almost entirely immune to counterfeiting.

However, inherent within these benefits are also a number of pitfalls. Since cryptocurrencies are not issued by a central authority, they are highly volatile. Their value is dictated purely by supply and demand, which means it could theoretically drop to zero at any time. In addition, it is difficult to determine realistic rates of exchange. This is due in part to the fact that cryptocurrencies are bought and sold through many different cryptocurrency exchanges. Furthermore, cryptocurrencies can be exchanged directly between two parties, who negotiate a rate independently.

The anonymity of cryptocurrency transactions makes them extremely vulnerable to money laundering. This problem is only partially addressed in the draft version of the EU’s 5th Anti-Money Laundering Directive, which classifies cryptocurrency exchanges and crypto wallet providers as “obliged entities” with respect to money laundering. The Directive does not provide a means of regulating transactions between private individuals.

Currently, cryptocurrencies are used online for a wide range of criminal activities, including drugs and human trafficking, and all payments are untraceable.

Economic importance of cryptocurrencies

While cryptocurrencies are not yet a serious alternative to legal tender, they are steadily gaining in importance.

Take Bitcoin, for example: on 1 November 2017, there were over 16.5 million bitcoins in circulation, the USD exchange trade volume was USD 298,387,947.67 and the USD market price was USD 6,665 – and has been rising steadily since 2009. At present, there are almost 10,000 offline retailers around the world who accept bitcoins as a payment method. These are joined by a less quantifiable number of online vendors as well as private peer-to-peer transactions.

Commercial trading of cryptocurrencies requires authorisation under German law

If a cryptocurrency such as Bitcoin has no associated rights, the German Federal Financial Supervisory Authority (BaFin) classifies it as a unit of account (Rechnungseinheit) and therefore as a financial instrument within the meaning of the German Banking Act (Kreditwesengesetz). As a result, commercial brokers wishing to trade such a cryptocurrency require a license under the German Banking Act.

If there are rights associated with a cryptocurrency, such as profit-sharing or voting rights, the German Securities Trading Act (Wertpapierhandelsgesetz) and German Financial Assets Investment Act (Vermögensanlagegesetz) may also be applicable. In this case, trading of the cryptocurrency may be subject to further obligations, including the publication of a prospectus when issuing the cryptocurrency.

Overall, the legal classification of cryptocurrencies is complex because this area has not been addressed specifically in legislation so far, and the German Federal Financial Supervisory Authority has yet to establish reliable administrative practices. Before embarking on any commercial activities involving cryptocurrencies it is therefore advisable to clarify the precise legal requirements in consultation with the relevant authorities.

The agreed use of a cryptocurrency as a means of payment between private individuals is not restricted by law, provided the respective transaction is legal per se.