The German approach towards Bitcoin, Ethereum & Co. is set.
Crypto-asset business in Germany will have to fulfil licence requirements in the future.
At the end of November, the German Parliament passed a legislation transposing the Fifth EU Money Laundering Directive into national law. In addition to pure AML regulations, the law introduces a comprehensive regulation of the cryptocurrency business. Compared to the other EU Member States, Germany is a pioneer by going beyond the EU rules and establishing inclusive regulatory treatment of Bitcoin, Ether and other virtual currencies.
Following the changes in the German Banking Act (“KWG”), the crypto-assets will be categorized as a financial instrument (Sect. 1 para. 11 cl. 1 no. 10 KWG). This is in line with the practice of the German Financial Supervisory Authority (“BaFin”). Therefore, all transactions with coins or tokens are subject to licensing. Additionally, the custody of crypto-assets is included as a new class of investment service (Sect. 1 para. 1a cl. 2 no. 6 KWG). The crypto-custody business is the counterpart to the classic custody business, which only refers to securities.
The application of the competing legal provisions remains unclear. The arguments of the legislator point out that coins which have been classified as units of account until now, e.g. Bitcoin, will continue to be treated in the same manner. The qualification as units of account will thus override the classification as crypto-assets. But what about the units of accounts that are not subject to custodian business because of the lack of security status (while they would be subject to crypto-custodian business in case they were crypto-assets)? It is still questionable whether the new rules can settle the regulatory competition between the terms financial instrument, security, crypto-asset and units of account.
The initially envisaged segregation between crypto services and banking business was not adopted by the German Parliament following the recommendation by the Finance Committee. Therefore, the credit institutions and financial service providers will now be allowed to combine safe keeping and/or trade of crypto-assets with traditional banking and financial services as long as the required licence is obtained. Furthermore, a lighter regulatory regime under the German Banking Act will apply to an authorized financial service provider which would like to focus on crypto-custody only.
The law is due to enter into force on 1 January 2020.
In order to benefit from the transitional provisions, the crypto companies must notify BaFin by 31 March 2020 that they intend to submit a licence application, and the complete application must be submitted by 30 November 2020. Therefore, immediate actions are required to take advantage of the transitional regime and ensure business continuity.
The regulatory regime of crypto business in Germany will become a fact in 2020, despite the uncertainties. It remains to be seen whether the German approach will be the leading one for harmonizing the regulation on European level or it will just be another step in fragmenting the international regulatory landscape even further.