All over the news in Germany last weekend was a reply by the German Ministry of Finance to an inquiry in parliament. The Ministry announces that Bitcoins are officially recognized. Some weeks ago already the German Federal Financial Supervisory Authority (BaFin) amended a guidance to the definition of “financial instruments“ in the German Banking Code and stated that Bitcoins are financial instruments. Through this official recognition and definition of Bitcoins Germany has become the first country in the world that sets clear-cut rules for Bitcoins.

However, there are some drawbacks: Bitcoin companies must meet strict standards as they are now in principle regarded as financial service companies which must be licensed and will be supervised by BaFin. Inter alia the following conditions must be met:

Initial capital of 730.000 Euros

Management must be professionally qualified

A detailed business plan must be submitted

Capital adequacy standards must be met

AML mechanisms must be implemented

Reports must be submitted to BaFin regularly

With regard to the first criterion and including all other necessary expenses start-up costs should be somewhere near 1 million Euros. Yearly operating costs would also be fairly high.

On the other hand, however, Germany‘s clear-cut rules should facilitate access of Bitcoin companies to venture capital as VC companies now deal with a manageable regulatory environment. Especially Berlin is full of innovative start-ups and also has huge pools of venture capital.

In addition, cooperation with banks should be more easily conceivable as banks can now place Bitcoin companies in the regulatory framework and know what standards they must fulfill.

Other digital currencies (e.g. Ripples, Litecoins etc.) are also classified as financial instruments.

Operating without the necessary license is punishable as a criminal offense. Having a license permits doing business in other countries of the European Economic Area (the EU plus Norway, Iceland and Liechtenstein) through the European financial passport scheme although it is not quite clear how this will work as long as other European countries have not classified Bitcoins.

BaFin may grant exemptions from some of the above mentioned rules. It appears overly zealous to apply rules which are tailored to the “traditional“ finance industry with a daily turnover in the trillions to a budding industry with a total global market capitalization of about one billion. This would probably need to be addressed on a political level though. The Merkel government has recently indicated that it is willing to support start-up companies in areas of technological innovation.

In addition, “financial instruments“ is an extremely broad term which comprises shares as well as credit default swaps and therefore may justify further adaptations based on the specific features inherent to a particular financial instrument.

Through this move the global discussion has become more complicated. Germany straightforwardly says Bitcoins are financial instruments, in the United States FinCEN says they are a “virtual currency“, the Commodity Futures Trading Commission says they are a “commodity”, and a judge in Texas has no doubts they are simply “money“, and in Thailand the central bank says they don‘t know what it is and therefore it‘s illegal. Time for regulators to come together and reach consensus.

Despite these open questions Germany has taken a huge and bold step. It will be very exciting to see how other financial centres like London, Switzerland, Singapore and the US now position themselves.