At the end of March 2018 the German Federal Financial Supervisory Authority (BaFin) published an advisory letter on the classification of tokens as financial instruments. The advisory letter has been published in response to the rising number of queries the BaFin’s Securities Supervision / Asset Management Directorate has received as regards whether the tokens, coins or cryptocurrencies underlying initial coin offerings (ICOs) are deemed to be financial instruments in the field of securites supervision. The advisory letter follows the BaFin’s warning regarding the risks of ICOs published in November last year and the European Securities and Markets Authority’s statements during the same period.

The key message of the BaFin’s advisory letter is that the German regulator assesses on a case-by-case basis whether a token constitutes a financial instrument within the meaning of the German Securities Trading Act or MiFID II, a security within the meaning of the German Securities Prospectus Act or a capital investment within the meaning of the German Capital Investment Act. The advisory letter does not cover the German Safe Custody Act.

Because of a large number of different token structures on the market, the BaFin feels that a general statement regarding their legal nature would be too sweeping. The BaFin adds that supervisory classification is not possible without assessing all individual circumstances and features.

The BaFin states in the advisory letter that the decisive factor is which rights are associated with the respective token. A typological designation is not, according to the BaFin, a determining factor although it may provide an initial indication of the token type. However, such a typological designation cannot replace a comprehensive, binding supervisory classification which is based on the supervisory legislative act applicable in each case. For each token, the requirements specified in each supervisory legislative act needs to be assessed to detrmine whether the respective legislative act is applicable to the token.

The advisory letter states that because of the broad consequences of violating legal requirements, affected market participants would be well advised to read the advisory letter and seek legal advice where appropriate.

At the beginning of April 2018 the UK Financial Conduct Authority issued a statement on the requirement for firms offering cryptocurrency derivatives.