Bitcoin is a popular investment in Malaysia

What are Bitcoin & Co. - and: are they actually legal?

Virtual currencies are far from beingInsider tip more for “digital natives”, but a trend among investors. Initially, cryptocurrencies were considered an experimental field for means of payment outside of the established banking system.

In the meantime, the spectrum has become more colorful: Virtual currencies and virtual tokens are used to finance ambitious IT projects and entire companies via crowdfunding (“crowdfunding”). Today there is a real gold rush feeling - this makes investors blind to the risks of such investments and providers overlook the regulatory traps.

Cryptocurrencies: Technology and Economic Importance

Cryptocurrencies such as Bitcoin, Ether or Ripple are often generated by the users themselves through complex computing processes using complex encryption algorithms. The currency units generated are the reward for participating in a distributed database to confirm transactions with the “coins” and to keep a tamper-proof owner register (“Distributed Ledger”).

So-called blockchain technology is used here. Because of the laboriousness of these computational processes, the production is often referred to as "mining". This makes the artificially scarce currency units a popular investment property with potential for value growth. In China, there are supposedly huge computer farms whose sole purpose is mining.

Due to the lively trade in crypto currencies, it is possible to quantify the market value of a unit - similar to the price of a security - reasonably reliably. Even family offices have included BitCoin & Co. in their investment universe. Instead of “IPOs”, there are now “ICOs” in which digital coins or “tokens” are crowdfunded to the public during an initial issue.

What is a cryptocurrency from a legal point of view?

Anyone who is not a “digital native” probably has many unanswered questions when it comes to virtual currencies. For example, what are virtual currencies legally and are they allowed?

First of all: cryptocurrencies such as Bitcoin & Co. are neither a thing nor a right under civil law, but nothing more than an encrypted data set that is forgery-proof and electronically transferable and that is assigned a value by the circles involved. Civil law finds it difficult to categorize these units.

According to which legal Rules of the game these currency units are transferred, and how incorrect transfers could be legally reversed (e.g. erroneous transfer, “theft” by hackers, software errors, identity theft) is therefore unclear.

If the units (“tokens” or “coins”) can be exchanged for a service, they certify a participation in a company or a payment claim, on the other hand they are contractual rights that can be transferred according to the rules of an assignment.


The fact that it could be securities under civil law because of the easy electronic transfer option must be denied, because there is no “document”, i.e. an “embodied statement of thought”. It is also clear that it is not about money. Because virtual currencies are not legal tender.

Typically, they also do not meet the definition of so-called e-money. E-money is characterized by the fact that there is a publisher (issuer) who issues the e-money against payment of a cash amount. With many crypto currencies there is no issuer, but they are created through "mining".

If, on the other hand, there is a “publisher” who sells the Krytpo currency units for money, it depends on whether the units are accepted by third parties as a means of payment. This is lacking, for example, in the case of art currencies in online games that players use to buy virtual equipment or “life points”.

Here, the issuer of the currency units is also the point of acceptance, and the units cannot be transferred to third parties. This is different with cryptocurrencies, however, because they are designed to be transferred to others. The publisher could therefore certainly operate an e-money business that requires a license.

Crowdfunding as an instrument for selling virtual coins

Similar to the currencies in online games, cases are to be assessed in which a virtual currency is sold as part of a crowdfunding project. The amount of money collected is used to finance a project (e.g. the production of software). With the electronic currency units acquired in return, the investor can pay for services that the software manufacturer offers after the software has been completed.

Here, too, there is no e-money, but an advance payment for services. The transferability of the tokens / tokens should not change this, nor should the fact that some buyers view the units as an object of speculation. But that has not yet been finally clarified.

Cryptocurrencies: Prohibited Attack on the State's Monopoly of Money?

The creation of virtual currencies could be seen as a prohibited attack on the state's monopoly of money. But this is by no means the case. The issuance of a virtual currency is not prohibited from this point of view.

Thus, the possession and holding of cryptocurrencies as well as their private purchase and sale, also for investment purposes, is legal and does not require a permit. “Mining” is also allowed, as is acceptance as a means of payment.

So cryptocurrencies are basically allowed. However, many questions regarding the legal treatment of electronic “coins” are still largely unanswered.

In addition, cryptocurrencies are by no means completely unregulated. In some activities with Bitcoin & Co., the financial market regulators have a say, see for example the already mentioned possible classification as e-money. But there are also other gateways for regulation.

In the next part of this series, you can read what regulators are saying about cryptocurrency.

Author: Manuel Lorenz