Until recently, Germany’s Federal Financial Supervisory Authority (BaFin) classified bitcoin as a financial instrument, but a subsequent court ruling disclaimed this categorization and decided that the cryptocurrency does not meet this definition under the terms of the German Banking Act (KWG).

Bitcoin Unrecognizable to German Legal Framework

The Berlin Court of Appeal in September dismissed a criminal proceeding against the operator of a local bitcoin trading platform. The German enforcement had arrested the administrator for facilitating the trades of financial instruments like bitcoin without obtaining a BaFin permit. While the Berlin-Tiergarten had sentenced the accused for providing financial services, the Berlin Regional Court reversed the judgment, stating that BaFin misinterpreted the legal status of bitcoin. According to Mondaq, The 4th Criminal Division of Berlin Court of Appeal favored the regional court’s ruling, confirming that the German regulators extended the scope of criminal law to bitcoin without synchronizing it with the banking acts.

Citing Section 1(11) of the KWG, the appeal court stated that neither the central bank nor any public authority issues bitcoin. The digital currency lacks general recognition and a stable value that could allow its use to compare goods or services. Therefore, it cannot gain the status of units of account – or financial instruments — contrary to what was enforced by the BaFin in May 2018.

The judgment also shed light on the matters related to the sale and purchase of bitcoin in Germany. The court, reading Section 1(32), ruled that bitcoin trading is not subjected to permits or licenses, and consequently – per Section 1(54) – was not a criminal offense. Due to these facts alone, BaFin couldn’t extend the scope of criminal penalties on the accused.

The appeal court also criticized the financial regulator for crossing the boundaries of federal authorities, stating that it was not their responsibility “to exercise a modifying influence (in particular) on criminal laws.”

Regulatory Inconsistencies Deepen

The court ruling has deepened the inconsistencies in the ways each European country interprets bitcoin law. The European Union has passed a motion in 2016 that enabled taxation of cryptocurrency holdings, investments, and profits. The provision, however, didn’t settle any definition for cryptocurrencies as a whole. Individual countries in the Eurozone awarded bitcoin a legal status in their jurisdictions, but the digital currency never attained a particular Europe-wide regulatory framework for itself.

Jörg von Minckwitz, President of Bitwala, a blockchain banking service based out of Germany, believes each European country should get on the same page before writing the first bitcoin bill.

“In the past years, Bitwala has repeatedly spoken out in favor of legal clarity and a regulatory level playing field in the EU,” he said in a statement provided to CCN. “As digitization affects society across borders, this can only be done in unison. Currently, every EU country seems to have their interpretation, which results in regulatory arbitrage to the detriment of German consumers and innovators.”

BaFin, after the court ruling, cannot penalize people holding or trading cryptocurrencies unless it joins hands with lawmakers to create new legal provisions to modify the KWG. As for now, bitcoin and similar digital assets will be subjected to European regulations.