Name
Global FinTech Guide
Country _ Name
Germany
SectionTitle
ICO / token sale
Body
Companies and projects have increasingly relied on the sale of digital assets, or tokens, as a means of fundraising. These tokens generally do not grant the holders an ownership interest in the issuing company or project, but may provide governance rights, access rights or other utility. This has been conducted through public sales known as initial coin offerings (ICOs), proliferation through token generation events (TGEs) or private sales, among other mechanisms.  While showing characteristics of traditional methods of fundraising, there are a range of unanswered questions related to the legal classifications of such products. As ICOs and TGEs will usually be distributed online and internationally, there is usually no single legal framework applying to such transaction, and the legal framework of each market in which the tokens may be offered or sold needs to be considered.

Introduction

Attitude of the country towards ICOs/token sales

ICOs are seen as an opportunity to raise money by more and more companies, mainly Start Ups. With the increasing media resonance of Bitcoin (BTC) and other cryptocurrencies such as Ether (ETH) or Ripple (XRP), Initial Coin Offerings have also become increasingly popular among investors.

Legal affairs

Presence of any explicit regulation on ICOs and the issuance of token/coins

ICOs themselves are not directly regulated. But the banking supervision laws as well as anti-money laundering provisions must be taken into consideration to conduct an ICO. The relevant legal provisions depend on how the ICO is structured and which legal nature the token has. For example, the token can be deemed a financial instrument, a security, a capital investment or neither of those things with the result that different regulatory provisions must be heeded.

A license is only required when a banking, financial or payment service is provided when carrying out the ICO. The ICO itself, meaning the issuance of tokens for money, is not dependent on a license.

License costs for a banking or a financial service depend on the specific business model and result from fixed and time spent costs. Fixed costs are typically in the range of EUR 4,700.00 and additional time spent costs depend on the complexity of respective business model. The costs of a license for a payment service range up to EUR 13,523.00 depending on which and how many kinds of payment services the license is supposed to cover plus time spent costs.

Presence of any explicit restrictions on ICOs or the issuance, distribution and/or transfer of token/coins

There are no explicit restrictions on ICOs. Nevertheless, a multitude of supervisory and regulatory questions arise when setting up an ICO. Since the applicable regulation as well as financial and investor protection rules depend on the specific design of the coins or tokens issued in the context of an ICO, a company should adapt its business model or the functioning of the coins or tokens to the respective relevant laws. 

Obligations and requirements to issue token/coins

The ICO itself, meaning the issuance of tokens for money, does not require a license.

Classification of token/coins in the jurisdiction

In general, the following classification of coins are made in Germany:

  • Crypto assets:Crypto assets are digital representations of a value that is not issued or guaranteed by any central bank or public body and does not have the legal status of currency or money but is accepted by natural or legal persons as a means of exchange or payment or for investment purposes by virtue of an agreement or actual practice and can be transmitted, stored, and traded electronically. E-Money and monetary values according to the German payment regulation do not form part of crypto assets. Crypto
assets are financial instruments.
  • Currency Token: Currency tokens are tokens that fulfil the economic functions of a (money) currency in that they can be used as a store of value and means of exchange as well as a unit of account. Unlike security and utility tokens, they do not establish any claims against their issuer. The best-known representative of this type is the Bitcoin currency based on Nakamoto's white paper. There are also many other such currencies – e.g. Ether, Bitcoin Cash or Ripple. Currency tokens are crypto assets and as such financial instruments..
  • Security Token: Security tokens or investment tokens are tokens that grant their holders - like other securities - rights to future payments and sometimes also co-management and voting rights. According to the prevailing view, tokens structured as security tokens are therefore to be regarded as "transferable securities" within the meaning of Art. 4 (1) No. 44 MiFID II, which means that they are subject to the prospectus requirement under the EU Prospectus Regulation as well as other regulation tailored to securities trading. Security tokens are financial instruments..
  • Utility Token: Utility tokens basically embody rights to certain services or opportunities to participate in networks or platforms to be created in the future. Here, it depends on the concrete design whether the token corresponds to a kind of voucher or whether it is rather an entrepreneurial investment with corresponding opportunities and risks. If the individual case assessment shows that the investment component of the token is of particular importance, the utility token is to be classified as a security that is a financial instrument.

    • Presence of a duty to publish a prospectus bevor offering token/coins to investors

    Depending on the respective regulatory framework, companies issuing coins or tokens may be obliged to publish a prospectus and comprehensively present further information, for example on the financial risks associated with an investment. Such obligations may arise, for example, in accordance with the German Securities Prospectus Act or the German Investment Act.

    Presence of AML/KYC requirements that are needed to be fulfilled regarding (i) the initial issuance of token/coins and (ii) any following transfer of token/coins to third parties

    Persons, obliged to fulfil the German AML/KYC requirements, must fulfil them in the following cases:

    1. Establishment of a business relationship (i.e. a contract between the issuer and the buyer).
    2. Transactions carried out outside a business relationship, exceeding certain thresholds.
    3. In the case of facts that point to money laundering or terrorist financing.
    4. In case of doubt as to the accuracy of information collected and concerning the identity of the contracting party, the identity of a person acting on behalf of the contracting party or the identity of the beneficial owner.

    The AML/KYC requirements are:

    1. Identification of the contracting party and, if applicable, of the person acting on its behalf and verification that the person acting on behalf of the contracting party is authorised to do so.
    2. Clarifying whether the contracting party is acting on behalf of a beneficial owner and, if so, identifying the beneficial owner; this includes, in cases where the contracting party is not a natural person, the duty to find out the ownership and control structure of the contracting party by reasonable means.
    3. Obtaining and assessing information about the purpose and the intended nature of the business relationship, insofar as this information is not already clear from the business relationship in the individual case.
    4. Determining, using appropriate, risk-oriented
    procedures, whether the contracting party or beneficial owner is a politically exposed person, a family member, or a known close person.
  • Continuous monitoring of the business relationship, including transactions carried out during it.

    • Additional comments regarding (i) the legal situation for ICOs/token/coins and (ii) any following transfer of token/coins to third parties

    The German Electronic Securities Act which was enacted in 2021 and which currently only applies to debt securities to bearer may drive the development of a general legal framework for the tokenisation of any kind of asset.

    Economic conditions

    Market size for ICOs/token sales and existence of any previous regulated ICO/token sales in the jurisdiction

    We don’t have exact numbers regarding the exact volume of all ICOs combined, but (regulated) ICOs take place almost every day nowadays. 

    Additional comments regarding the economic situation for ICOs/token sales or what companies must be aware of in this business area

    Now, that ICOs are conducted frequently, it will become easier for issuers to conduct them. However, they must be aware of an oversaturation of the investment market, which may look for other investment opportunities.

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