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The BaFin License to be Required for Crypto Custodians in Germany

The BaFin License to be Required for Crypto Custodians in Germany

The 5th EU Anti-Money Laundering Directive (the “Directive”), the very same that has brought blockchain assets under the scope of the European AML/CFT framework, compels the EU Member States to make changes to their local legislation to be compliant with the Directive`s provisions by January 10, 2020.

In line with that, Bundesregierung (The Cabinet of Germany) has approved the Draft Law on the Implementation of the Directive, Amending the 4th EU Money Laundering Directive (the “Draft Law”).

Virtual Currencies (re)Defined 

The Draft Law proposes changes to the German Banking Act (Kreditwesengesetz, KWG) that will define cryptoasset (Kryptowert) as adigital representation of value that is not issued or guaranteed by any central bank or public authority and that does not have a legal status of currency or money but is accepted by natural or legal persons under agreements or practice as means of exchange or payment, or serves for investment purposes and which can be transferred, stored and traded electronically.

Unlike the Directive, the Draft Law does not limit the use of cryptoassets to simply medium of exchange but also considers other functions normally associated with money that a cryptoasset can potentially perform: means of payment and store of value.

New Regulated Activity: Cryptoasset Custody 

Under the Draft Law, custody, safeguarding and protection of cryptographic keys, used to hold, store and transfer virtual currencies on behalf of the customers, becomes a financial service, making it a regulated activity, authorized by the Federal Financial Supervisory Authority (“BaFin”).

The Draft Law proposes to addend the §32 Permit section of the KWG with a paragraph that will prohibit businesses to perform any other regulated activity, that is subject to authorization under the KWG if a company already provides cryptoasset custody services. 

Basically, this means that a traditional financial or credit institution would not be able to engage in cryptoassets` custody, but rather forced to either outsource custody services, or utilize a holding corporate structure with separate permits.

As stated in a supplementary note to the Draft Law, this is mostly because of cybersecurity risks accompanying blockchain technology, which might have potentially jeopardized other business activities, should a financial institution have carried them out. 

In case a company currently provides custody serviced in regards to cryptoassets, it would have to notify BaFin in writing by February 1, 2020, and submit a full authorization application by no later than June 30, 2020.

Catch Them All

The reasoning behind the Draft Law is that as of now, the German AML framework does not capture crypto-custody services, as well as trading cryptoassets that are not financial instruments.

According to the note, other blockchain businesses like, for example, blockchain exchanges (both crypto-crypto and crypto-fiat), are already regulated activities, as depending on their design, blockchain assets may be considered financial instruments, such as investments, debt securities, units in collective investment funds, foreign currencies or units of account. In this case, exchange services fall under the already existing list of financial services, which is right now not the case for custodians. 

Conclusion 

By adopting the Draft Law with a broad definition of cryptoassets and a permit requirement for custody providers, Germany would ensure that all cryptocurrency-centered businesses are obliged entities under the local AML legislation, compliant with the Directive.

However, we find it very interesting to see Germany go beyond requirements of the AMLD5, making the provision of custody services by already authorized businesses impossible. Regardless, we will continue to monitor any potential changes to blockchain regulation to come in 2020 and notify you of the most interesting updates.

 

Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.

Some of the regulatory provisions that have not entered into legal force are referenced above and are subject to change.

Nik Kliapets, Legal Counsel at Legal Nodes

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