Crypto Tokens, Legislative Intent & Prerogative of Interpretation – The current Dilemma for Supervisory Authorities

Crypto tokens are – in most jurisdictions – far from being “fully regulated”. This does not only pose a challenge for investors or market players, but also for supervisory authorities, which depend on a somewhat clear-cut legal framework. On the one hand, the authorities risk a state of legal uncertainty by abstaining from official statements and decisions, on the other they may act “ultra vires”, not merely interpreting (existing) but creating new law, thus infringing upon legislative competences. A recent German case exemplifies this dilemma, which, even though it concerns a modern phenomenon, has it roots in fundamental legal theory.


Quick Read

  • In a recent decision, the Kammergericht (Court of Appeal) in Berlin strongly criticized the German Federal Financial Supervisory Authority (BaFin) for actively shaping the law, thus acting outside its executive competence.
  • Even though the decision is not binding for the BaFin, it is an example of the regulatory dilemma when it comes to crypto tokens: By trying to cope with legal uncertainty and “outdated” law, authorities risk making their own law, violating  legislative competences.
  • Authorities will have to keep in mind the fundamental legal issues while dealing with the current situation, in particular respecting the boundaries of a teleological interpretation and the legislative intent (which may be, however, hard to determine).


Crypto tokens, i.e. the digital representations of assets/utilities relying on distributed ledger (in particular blockchain) technology, are – from a regulatory standpoint – rather hard to grasp. In particular, the variety of claims that may be represented by tokens makes it hard to decide on the application of clear-cut rules. This state of legal uncertainty heavily affects national supervisory authorities, who may only act within the boundaries of the (national) law which is not always “up to date”, i.e. does not provide a sufficient or appropriate basis for the treatment of crypto tokens and associated transactions.

This post does not dive deeply into this issue, but – only using the fact that there are still many uncertainties and grey areas as a starting point – simply illustrates the dilemma that supervisory authorities may end up in due to the current uncertainty and lack of legal framework.

Quite recently, the Court of Appeal in Berlin decided on the case of a defendant accused of operating an internet platform without the necessary permission pursuant to the German Banking Act (KWG).[1] The platform – put simply – enabled users to trade in Bitcoins. Not all particularities of the case shall be outlined. The main issue was that the German Federal Financial Supervisory Authority (BaFin) treats Bitcoins as “financial instruments” (in particular “units of account”) according to the KWG, which triggers a range of legal requirements. This BaFin view is well known and goes back to the year 2011. The BaFin published various information documents, stating, for example:

In accordance with BaFin’s legally binding decision on units of account within the meaning of section 1 (11) sentence 1 of the KWG, Bitcoins are financial instruments.[2]

The Court of Appeal, however, takes the view that Bitcoins are, in fact, not covered by the legal termfinancial instruments”, in particular “units of account”. The Court takes a detailed look at the wording and the system of the KWG, as well as legislative documentation and comes to the conclusion that it was the legislative intent only to cover such instruments that allow a comparability of goods and services within different countries by using a common and comprehensible unit. Bitcoins, however, lack – in the Court’s opinion – such a comparability, as they do not rely on a general/ public issuer. The economic acceptance of Bitcoins as a means of payment does, in contrast, not suffice.

The Court also elaborates:

At the time of the introduction of the law to implement the Second E-Money Directive, Bitcoins were already in circulation, and other crypto currencies were also emerging. Nevertheless, the legislator has refrained from expressly regulating these in the KWG or ZAG and from placing them under the supervision of BaFin.

Beyond this, the Court states that the BaFin – by its broad interpretation of the KWG provisions – fails to recognize that it is not the task of federal authorities to intervene with (criminal) laws by actively shaping the law, i.e. by presuming to have legislative powers. This is a particularly strong statement by a court (at least for German standards). The Court also refers to fundamental constitutional principles such as legal certainty and clarity and the democratic parliamentary decision-making process.

This case shows the current dilemma of supervisory authorities when it comes to crypto tokens: While trying to cope with legal uncertainty and to give fundamental guidelines to investors and market participants, they risk stepping into legal no man’s land. While this could – in a positive sense – be praised as pioneer work it may also (and justifiably) be criticized as a breach of the statutory competence framework. The latter in particular, where rather clear and narrow legislator intentions can be seen but are “stretched” beyond what was originally (or verifiably) intended.

The decision touches on various issues of legal doctrine and theory, in particular the issue of interpretation and the canons of construction. Put very simply, those canons give guidance for the interpretation and, thereby, application of the law. The delimitation between lawful interpretation and “unlawful law-making” is, however, not always clear and usually open to discussion.[3]  In particular, it is quite controversial whether the law can be smarter than the legislator and can be interpreted dynamically in order to meet the challenges of an everchanging world. The legal scholar and politician Gustav Radbruch († 1949) expressed his view:

The will of the lawmaker is not a method of interpretation but rather the goal of interpretation and the result of interpretation […] something which was never present as the conscious will of the author of the law. The interpreter must understand the law better than did the person who created it; the law can be wiser than its author – it really must be wiser than its author.[4]

The idea behind a dynamic interpretation is that only in such a way the legislative intent can effectively be asserted in modern society, i.e. that it prevents obsolescence. However, developing the law by means of (dynamic or teleological) interpretation is in most (democratic) jurisdictions the fundamental role of the judiciary. And even the courts are strictly bound by the boundaries of interpretation, so as not to assume a legislative role. These issues go to the very roots of the legal system and are only addressed superficially in this post.

It is, however, interesting and worth mentioning that the current issue when it comes to crypto tokens, legal uncertainty and the interpretation of the (codified) law has its roots in traditional disputes.

The authorities will have to keep in mind that, even though it is tempting to try and provide some legal certainty, “useful” or “functional” cannot replace “lawful”. It is, however, always difficult to determine where something is – implicitly – covered by legal provisions and where it is not. This is a fundamental issue of legal (teleological) interpretation.

David graduated from Bucerius Law School and studied at Oxford University. He is currently a PhD Student at Bucerius Law School, an Associate at Schnittker Möllmann Partners, focusing on PE and VC Funds with an emphasis on tax aspects and a member of TeamCrypto@SMP.


[1] KG Berlin, 25. September 2018, Document No. (4) 161 Ss 28/18 (35/18).

[2] BaFin Publication on Virtual Currency (English version).

[3] See, for example, D’Amato, The Injustice of Dynamic Statutory Interpretation,

[4] Radbruch, Rechtsphilosophie, Heidelberg 2003, p. 107; referenced by Bunikowski, Historical and Philosophical Foundations of European Legal Culture, 2016, p. 126.


One thought on “Crypto Tokens, Legislative Intent & Prerogative of Interpretation – The current Dilemma for Supervisory Authorities

  1. In current age of the Internet, legislation cannot keep up with technological advances. Hence, authorities should act in a prudent way to protect consumer interests. The “ordinary” legislative process can be sometimes slow and does not react in quick fashion. Therefore, it is for other authorities to step in and regulate. The decision of the Court of Appeal is unfortunate, but an expected one. Crypto currencies pose many challenges for regulators and consumers alike. Authorities should act fast to protect consumers. Bashar H. Malkawi


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