Blockchain technology is used in many areas. Nevertheless, there are a lot of unresolved questions about the legal situation surrounding this technology. For example, problem areas can be found in civil law, data protection law and banking law, among others, which will be illuminated in the following.

Blockchain is a decentralised and public network for processing and storing data. Information is stored in a blockchain, whereby the subsequent modification of this information is excluded. Each incoming piece of information becomes a block, which is chronologically attached to a chain of information. In this way, a blockchain enables the management of cryptocurrencies as well as the storage and documentation of business transactions or similar. At the same time, this technology allows for a secure transmission of information that cannot be manipulated.

Blockchains are now used to manage numerous digital assets. As part of the amendments to the EU Money Laundering Directive that came into force on 1 January 2020, it has now been stipulated that the custody of digital assets requires permission from the German Federal Financial Supervisory Authority (BaFin). Blockchain technology enables the management of digital investment products. Since these are so-called crypto assets, the custody, administration and storage of these are part of the financial services requiring a licence according to § 1 para. 1a p. 2 no. 6 German Banking Act (KWG), the corresponding BaFin licence is required.

Acting without the so-called BaFin licence can have legal consequences. For more information, please look at our article Applying for a German Banking Licence. There we go into more detail about the business models of the banking industry and explain the requirements for obtaining a BaFin licence and the possible consequences of unlicensed trading.

The conclusion of a contract, as well as its execution, can be documented in a blockchain. In this context, one speaks of a “smart contract“. Since a smart contract does not contain some essential elements of a contract under German civil law, such as a formal requirement or other, and thus does not fulfil requirements of the applicable law, it is not to be regarded as a contract.

Instead, it is referred to as a programme that supports the participant in the execution and implementation of the contract. This is done through the automated execution of actions, whereby these are linked to certain pre-programmed conditions.

It should be noted, however, that some challenges may arise from a civil law perspective. The immutability of information in a blockchain initially appears to be an advantage of the technology. This aspect rules out manipulation of the given information. However, a contract’s immutability contradicts some current civil law regulations, for example, in cases that lead to the nullity or invalidity of a contract, among other things, such as in the case of avoidance or revocation.

On the one hand, a manual solution is one way to deal with the problem; on the other hand, forward planning before a smart contract comes into being could be helpful. Schlun & Elseven Rechtsanwälte would be happy to support you in implementing the proposed solutions. Please, do not hesitate to contact us via our online form and benefit from our services in connection with Blockchain.

Furthermore, a challenge arises in terms of liability. Blockchains do not have a central authority, so it is necessary to ask who is liable in the event of service disruptions (triggered by a system error or system attacks by hackers).

Another problem arises with data protection. Since blockchain technology is mainly known for its immutability and transparency, one could assume it is incompatible with data protection. In the following, we will examine whether the technology contradicts the data protection regulations applicable under German and European law.

First, the question arises whether the applicability of data protection law can be accepted. It must be stated that the General Data Protection Regulation (GDPR) regulations are applicable if the processing of personal data within the meaning of Art. 4 No. 1 GDPR is given. A blockchain user is identifiable again if additional information is available based on which a pseudonym can be assigned to a natural person. Therefore, data protection law is often applied to this technology.

For the persons affected by a blockchain, the General Data Protection Regulation (GDPR) regulations often pose a considerable challenge. For example, a particular feature of the blockchain is the immutability of the information already provided. However, the right to correction or deletion of data arises from the GDPR (cf. Art. 16 and 17 GDPR).

The controller within the meaning of Art. 4 No. 7 of the GDPR, i.e. the body that decides on the purposes and means of processing personal data, is responsible for implementing the data protection requirements. In a private blockchain, it is easier to find the responsible party and, therefore, also easier to solve the problem described than in a public blockchain.

In the case of the desired deletion of data in a public blockchain, the question arises as to whom the claim should be addressed. This sometimes leads to the impossibility of deleting or correcting the data.

Banking secrecy is a collateral contractual obligation that arises when a contract is concluded between a bank and a customer. The bank is obliged to maintain secrecy about any matters concerning a client and, thus, not disclose any information to third parties. However, there are often exceptions to this, such as in the case of an inheritance.

Concerning blockchain technology, there could be a breach of banking secrecy, for example, in the case of a payment transaction made in a blockchain that is visible to every participant. However, it should be noted that any transactions in a blockchain can be pseudonymised. However, assigning a pseudonym to a natural person is also possible.

So far, cryptocurrencies – such as Bitcoin – are not considered legal tender in Germany.

Therefore, this raises the question for investors and traders in this area as to which tax aspects need to be considered. Since the Federal Ministry of Finance classifies cryptocurrencies as “other economic assets”, the one-year speculation period must be observed by private investors. Accordingly, the decisive factor is the holding period.

If the period between the acquisition and the sale of the coins is less than one year, a tax liability arises. The difference between the costs of the purchase and the sale (so-called capital gain) is then taxable.

It should be noted, however, that an annual exemption limit applies, which is €600 (cf. § 23 para. 3 sentence 5 EStG). Accordingly, if an investor has sold his units before the expiry of the one-year speculation period and has realised a capital gain that exceeds the exemption limit, this gain is taxable at that person’s personal tax rate. Taxable transactions include:

• Use of this for a payment transaction,
• Sale of the digital currency,
• Exchange into a legal tender, such as the euro,
• Exchange into another digital currency.

In contrast, companies and persons engaged in business do not have a one-year speculation period. Since the shares belong to the business assets (cf. § 15 EStG), they must be taxed accordingly.

All profits generated from crypto transactions must be reported to the tax office as part of the annual tax return. As you are subject to the obligation to cooperate under § 90 German Fiscal Code (AO), the tax office may ask you to provide evidence confirming the information you have provided in your tax return.

Therefore, we advise you to keep all information/data related to your cryptocurrencies carefully. For example, the date of purchase and sale of your shares, the price, the number, and the like. Our tax practice group will happily answer any outstanding legal questions and advise you in detail.

Our lawyers also deal with tax issues relating to mining, lending and staking. Don’t hesitate to contact us today via our online form.

Suppose you provide the tax authorities or another authority with incomplete or incorrect data on tax-relevant facts but fail to inform the authority of relevant facts or fail to use tax stamps or marks in breach of your duty. In that case, you are liable to prosecution for tax evasion (cf. § 370 AO). In addition to a custodial sentence or a fine, which is higher in the event of a particularly serious case under § 370 (3) AO, repayment of the evaded taxes is also required. These are subject to interest according to § 235 (1) AO.

Punishment for tax evasion can be prevented by a voluntary declaration (cf. § 371, paragraph 1, sentence 1 AO). At Schlun & Elseven Rechtsanwälte, our lawyers will be happy to advise you in this regard and will support you in implementing your plan.

Due to increasing digitalisation and the use of Bitcoin & other cryptocurrencies, the question arises as to how to deal with the deceased’s digital assets in the event of death. Problems occur here, particularly regarding access by heirs and from a tax law perspective.

From a legal point of view, a credit balance in cryptocurrencies constitutes digital assets. Consequently, upon the death of its owner, it belongs to the owner’s digital estate. The cryptographic key (the “private key”) is inherited. This grants the heirs access to the assets.

It should also be noted that assets are subject to inheritance tax in the event of an inheritance (cf. §§ 1 para. 1 no. 1, 3 para. 1 Inheritance Tax and Gift Tax Act (ErbStG)). For the tax calculation, it is decisive whether the digital currencies are held as private or business assets (§ 12 ErbStG).

We are happy to advise you personally to examine your legal options for preserving your estate or explain the options open to you for effective estate planning. Please also feel free to contact our lawyers for German inheritance law.

The cryptocurrency market is still being determined due to the many unanswered questions. It still needs to be fully regulated in many parts. Although cryptocurrency trading enjoys great popularity, it harbours several risks and dangers. For example, fraudsters and hackers are becoming increasingly active in this area, so extreme caution is advised.

Currently, there are increasing cases connected with fake stock exchanges. People who buy and manage cryptocurrencies on a seemingly reputable platform find out that it is a phoney exchange at the latest when they want to withdraw their funds. In most cases, the trading platforms can no longer be reached in such cases, and the victims’ deposited money has disappeared.

We recommend victims contact the police and file a criminal complaint. Our criminal law practice group will support you in this endeavour and advise you.

The most common manifestations of cybercrime and crimes related to cryptocurrencies include the following:

• Identity fraud,
• Hacker attacks,
• Infection of the computer with viruses,
• Money laundering (§ 261 StGB),
• Fraud as well as computer fraud (§§ 263 and 263a StGB),
• Spying on data (§ 202a StGB),
• Theft (§ 242 StGB),
• Tax evasion.

If you have become a victim of one of these offences, please do not hesitate to contact our law firm. Our lawyers for criminal law will advise you and represent you and your interests in and out of court.