(For German version click here)
Notice: This blog article refers to the first draft of the German Ministry of Finance dated 20th May 2019. In the meantime, the German government resolved a draft that even goes beyond the first draft, see:
- Crypto Custody Service - New Financial Service Providers as the Future Centers of Power of the Crypto Market?
On 20 May 2019, the German Ministry of Finance published its first draft for the transposition of the provisions of the 5. European AML Directive into national law. Beside the awaited change proposals for the German AML Act in order to transpose the rules from the 5. EU AML Directive into German law, the ministry came up with a real surprise: The German legislator wants to use the opportunity and not only change the provisions of the German AML Act, but additionally amend the German Banking Act by introducing a new financial service. In future, crypto custody shall be regulated as a financial service being subject to a permission requirement from BaFin. In addition to that, the Ministry of Finance plans to define crypto assets legally as financial instruments, probably also for the purpose of putting an end to the discussions about Bitcoins and comparable cryptocurrencies qualifying as units of account and therefore financial instruments in the sense of the German Banking Act, which finally came up after the ruling of the Criminal High Court of Berlin stating that Bitcoins were not to qualify as units of account.
Which Activities Shall Be Qualified as Crypto Custody Services in the Future?
According to the ministries first draft the safekeeping, the management and the protection of cryptocurrencies or private keys that allow the access, the storing or the transfer of cryptocurrencies shall be considered a crypto custody service. This primarily affects providers of wallets that store the cryptocurrencies of their clients by transferring them to wallets of their own. But more interestingly, this regulation will also affect crypto exchanges that have to take the cryptocurrencies of their clients onto their own wallets in order to safely perform trades between their customers. Under current legislation, the mere custody of cryptocurrencies for customers does not require the service provider to hold a BaFin permission, as the custody regulations of the German Banking Act (KWG) are only applicable to securities right now. This would change if the draft became law.
Would Crypto Custodians Need a Permission from BaFin in the Future?
The inclusion of the crypto custody service into the German Banking Act (KWG) would mean that German blockchain businesses need a BaFin permission in order to – temporarily or permanently – store cryptocurrencies of clients in their wallets. According to this draft the requirements to obtain such a permission include a 125.000 euros minimum capital at all times, fit and proper directors as well as all the other general requirements that financial institutions have to meet. As an alternative to obtain a permission itself, the crypto custodian could also cooperate with an already licensed partner. It can be expected that several German FinTech banks will quickly create this option for crypto custodians to partner up with them.
What Exactly Will Be Considered a Crypto Asset?
In addition to that, the Ministry of Finance plans to extend the catalogue of financial instruments in the German Banking Act (KWG) and include crypto assets. The 5th EU AML Directive compels the EU members to define “virtual currencies” in their respective national laws. The Ministry of Finance prefers the term “crypto asset” and plans to define it instead of “virtual currencies” in the German Banking Act (KWG). According to this definition crypto assets are digital representations of values that are not issued or guaranteed by a central bank or any other public authority and does not possess the legal status of currency or money, but is accepted by natural or legal persons as a means of exchange or payment on basis of an agreement or actual practice or which serves investment purposes and which can be stored, traded and transferred electronically. The ministry justifies the use of the term “crypto asset” instead of “virtual currencies” with the argument that it not only includes tokens with payment and exchange functions but also tokens that serve an investment purpose. The term “crypto asset” should therefore not only include currency tokens but also security tokens in the case that the security token in question is not already considered a security and therefore a financial instrument with regards to the German Banking Act (KWG).
Should Blockchain Businesses Start to Prepare for the New Regulation right now?
The Ministries of Finance proposal dated May 2019 is just a first draft. It is somewhat likely that this draft will be changed in the course of the now following discussion. At the same time, businesses providing crypto custody services should prepare for the new supervisory situation. It is unlikely that the German legislator abandons the idea to introduce the financial service of crypto custody. After the implementation of the final draft, providing custody services without BaFin license will no longer be possible.
Attorney Lutz Auffenberg, LL.M. (London)