BaFin put ICO tokens under a case-by-case securities test

Germany’s Federal Financial Supervisory Authority, BaFin, published an English-language account on March 28, 2018 explaining how it would classify tokens or cryptocurrencies offered through initial coin offerings. The central conclusion was deliberately narrower than either a blanket approval or a blanket designation of ICO tokens as securities: BaFin would examine each token individually under existing German and European financial law.

BaFin said the rights attached to a token and its actual economic characteristics would control the analysis. Calling an instrument a “utility token,” “coin” or “cryptocurrency” could provide an initial indication of its intended function, but the issuer’s terminology could not replace a binding supervisory assessment.

That position mattered because classification could bring an offering, trading venue or service provider within prospectus, market-conduct and authorization requirements. It also rejected a common premise of the 2017–2018 token-sale boom—that a blockchain-based instrument necessarily occupied a regulatory category outside conventional finance.

A test built around the token’s features

BaFin’s advisory record identified several possible classifications. Depending on its design, a token could be a financial instrument under Germany’s Securities Trading Act or the European Union’s Markets in Financial Instruments Directive II; a security under Germany’s Securities Prospectus Act; or a capital investment under the Capital Investment Act. Tokens could also fall within rules for investment-fund units or derivatives when their features met the relevant legal tests.

For treatment as a transferable security, the regulator focused on whether the token was transferable, was capable of being traded on a financial or capital market, embodied membership rights or contractual property rights comparable to shares or debt instruments, and was not merely a payment instrument. BaFin considered organized cryptocurrency trading platforms capable of constituting financial markets for this analysis. Actual admission to trading was not necessarily required if negotiability existed in principle.

The regulator also said a paper certificate was unnecessary. Recording the holder and associated rights through blockchain or distributed-ledger technology could satisfy the documentation function relevant to the assessment.

Why the guidance mattered in March 2018

BaFin attributed the publication to a rising number of questions received by its Securities Supervision and Asset Management Directorate. Market participants wanted to know whether tokens sold in ICOs were regulated instruments and which obligations followed from that status.

The answer placed responsibility on issuers and intermediaries to assess applicable law before proceeding. If a token qualified as a regulated instrument, requirements under securities-trading, prospectus, market-abuse or investment-management law could apply. Token dealing, placement, investment advice, portfolio management or operation of certain trading facilities could also require authorization, depending on the activity and instrument.

This approach was consistent with the European Securities and Markets Authority’s November 13, 2017 warning that firms involved in ICOs had to determine whether their activities were regulated. ESMA had identified the Prospectus Directive, MiFID, the Alternative Investment Fund Managers Directive and anti-money-laundering rules as potentially relevant when an ICO’s structure brought it inside their scope.

What the record did not decide

The March 28 publication did not create a bespoke German ICO statute, classify every token as a security or decide the status of any named offering. BaFin expressly treated token designs as too varied for a universal conclusion. The advisory also did not establish that compliance with one securities rule resolved every possible banking, payments, insurance or investment-fund question.

No market-price reaction is asserted here. Cryptocurrency trading was fragmented across continuous global venues, and the cited regulatory records do not establish that BaFin’s publication caused a measurable move in bitcoin, ether or any ICO token.

Later confirmation

Later in 2018, BaFin’s annual report described a significant increase in companies raising capital through ICOs despite falling token prices and confirmed that the supervisor had published its classification advisory during March 2018. That later institutional summary corroborates the contemporaneous record; it does not change the guidance’s case-specific status on March 28, 2018.