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Next to crypto exchanges and Bitcoin ATMs, crypto payment service providers were one of the business models of the Blockchain community from the very get-go. The user of these services can transfer Bitcoin to the service provider which will in return transfer the equivalent in e.g. Dollar or Euro to a bank account of the customer’s choice after deducting a service fee. These services therefore enable the payment of debts with Bitcoin that are owed in fiat currency. Some crypto payment providers offer the reverse service. In these cases, the customer transfers fiat currency to the service provider which will then (after the deduction of a service fee) transfer the equivalent amount of crypto currency to a wallet address of the customer’s choice. Another existing variation is a service where a payment is made in one cryptocurrency and the service provider transfers the equivalent amount in another (most of the times in Bitcoin) to a crypto wallet determined by the customer. The most frequent form of crypto payment service however is crypto to fiat payment which will therefore be the subject of this blog. How are these services regulated under German law and what do the operators of these services have to consider when offering their services in Germany?
Crypto Payment Services are Subject to Two Different Regulatory Regimes
In fact, crypto payment services constitute a hybrid under German financial regulation. The basic idea of these services is the execution of customer payments to the respective recipient. If this service would not involve crypto currencies but only fiat currencies, it would be considered a mere money remittance servicein the sense of the second payment services directive and therefore be treated as a classical payment service. The operation of such a business requires a BaFin authorization in accordance to the German Payment Services Act (ZAG) if the business operates commercially or at least requires a professional business set-up in Germany and no legal exemption from this obligation is applicable. Crypto payment service providers on the other hand not only offer the aforementioned service but also an exchange service. As shown, the customer transfers e.g. Bitcoin to the crypto payment service provider who then forwards the payment to the recipient’s bank account in fiat currency and thereby effectively exchanges crypto currency into fiat currency. This exchange is, depending on the individual circumstances, either qualifies as a financial commission business or proprietary trading. Both alternatives require the service provider to be BaFin authorized in accordance with section 32 of the German Banking Act (KWG).
Do Crypto Payment Service Providers Really Need Two BaFin Licenses?
Naturally, also crypto payment service providers have the possibility to outsource the parts of their business that require authorization to a partner that is already authorized for these activities. If the service provider wants to be independent from these kinds of partners, the question arises if the different activities requiring individual authorization can be authorized by one single license with regards to either the German Payment Services Supervision Act (ZAG) or the German Banking Act (KWG). In the context of a single authorization, section 10 para. 1 2nd sentence of the German Payment Services Act (ZAG) might be interesting. This provision allows authorized payment institutions to also provide closely associated ancillary services such as foreign exchange transactions without a generally mandatory KWG license. Licensed payment institutions are therefore authorized to perform foreign exchange transactions in order to execute payment processes in the currency which their client requested even though these transactions are considered proprietary trading and would therefore normally require a separate BaFin authorization. BaFin considers Bitcoin and comparable crypto currencies as units of account. According to section 1 para. 11 no. 7 German Banking Act (KWG), units of account and foreign exchange are both financial instruments. The explanatory memorandum of the German legislator that accompanied the introduction of units of account into the KWG emphasizes that units of account must be comparable to foreign exchange. It could be argued that because of the comparability of foreign exchange and units of account the payment institutions should also be allowed to trade units of account in the same manner as foreign exchange as long as the trading is an ancillary service to a payment service. BaFin has proven to be rather conservative when it comes to these kinds of privileges, even more so when cryptocurrencies are involved. It therefore seems unlikely that BaFin would simply accept the aforementioned argument. It might however be an interesting option for crypto payment providers and should therefore be further discussed.
Attorney Lutz Auffenberg, LL.M. (London)