Crypto Custody Business and Grandfathering – Who Can actually Profit from the Transitional Rule?

(For German version click here)

 

With the year 2020, the new financial service of crypto custody business will be introduced in Germany. Custodians of crypto assets from then on can offer their services only if they acquired a BaFin authorization beforehand. Since the German legislator took his time with the new law and the exact requirements for a successful authorization application have only recently become clear, a transitional arrangement for operators of crypto custody service providers will be in effect. This means that crypto custody service providers can continue offering their services without BaFin authorization if they comply with certain requirements and time limits. But what exactly are the requirements to trigger this so-called grandfathering rule?

Important: Grandfathering Requires Existing Business Operations

The wording of the transitional regulation which will be incorporated on the 1st of January 2020 into the German Banking Act (KWG) states that businesses that will be subject to authorization because of the newly introduced financial service of crypto custody service business can continue their operations without BaFin authorization if they notify BaFin about their intention to apply for authorization in writing until the 31st of March 2020 and subsequently apply for authorization until the 30th of November 2020. Then, the authorization to conduct crypto custodian business is considered to be provisionally granted. Therefore, businesses intending to offer crypto custody services for the first time on or after the 1st of January 2020 cannot profit from this grandfathering regulation according to the wording of the law. These businesses will not become subject to authorization because of the introduction of the crypto custody service as a new financial service into the German Banking Act (KWG) but rather because of the start of their business. Businesses planning to profit from the grandfathering rule should therefore fulfil the requirements as a crypto custody service provider before the end of the year. This means that these businesses should try to offer the custody of crypto assets such as e.g. Bitcoin, Litecoin or ERC-20 tokens that do not classify as securities to the German market and (in a best-case scenario) start operations prior to the new year. Additionally, the scope of the offered service has to be conducted commercially or at least in a commercial extent. It would therefore not be sufficient to simply store some crypto assets of friends or family on a free-of-charge basis.

BaFin Asks for Intention Notification – No Effect for Grandfathering

On the 4th of December 2019, BaFin publicly asked businesses intending to apply for authorization for the new crypto custody services to non-bindingly and informally report their intentions and a short summary of their business model to the authority. BaFin thereby intends to get a proper overview of the market and to gather information required in order to develop their supervisory standards for the application process and the ongoing supervision of crypto custodians. At the same time, BaFin states that this non-binding report of intention does not have any effect with regards to the above-mentioned grandfathering rule, since the legal basis for the acceptance of that rule will only become effective next year and any intention notification that is made prior therefore cannot have any effect. In its public statement BaFin ensures that the non-binding report of intention that it asked for is completely voluntary and will have no effect on a later application process. Businesses that comply with the BaFin request will however receive further information regarding the application process as soon as the authority substantiates its administrative practice regarding the crypto custody business. Such information certainly will not have a negative effect on the applications procedures of the companies.

 

Attorney Lutz Auffenberg, LL.M. (London)

 

I.  https://fin-law.de

E. info@fin-law.de

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