„Amending directive to the fourth EU Money Laundering Directive in Germany requires Digital Asset Exchanges and Custody providers to obtain a license from the German regulator BaFin as early as January 1st, 2020.“

Summary regarding the new Anti-Money Laundering Act in Germany, which contains vital rules for Digital Asset Exchanges/Custodians (you can find the complete law here – so far only in German). Please read the information carefully, as not complying with this new rules is a felony since January 1st, 2020.

 

  • Regulation applies to any Exchange or Custodian actively involved in the German market (e.g. operates a German-language website), regardless of where the entity is based (i. e. if you are domiciled in Hong Kong, you still have to comply with the rules), which at any time is in possession of the customer’s crypto assets
  • Using a licensed sub-custodian might be a remedy as setting up an own regulated entity appears cumbersome and cost-intensive

 

With the law on the implementation of the amending directive to the Fourth EU Anit-Money Laundering Directive in Germany a new statutory provision is being introduced which will make many market participants in the cryptographic world „financial institutions“ subject to supervision as of January 1, 2020. For example, „the safekeeping, administration and security of cryptographic values or private cryptographic keys used to hold, store or transfer cryptographic values for others (cryptographic safekeeping business)“ is classified as a financial service within the scope of the German Banking Act. As a rule, such services are offered either by wallet providers who hold the keys for third parties (i.e. the private hardware wallet at home is not affected) or by exchanges, provided you hold the key for third parties for at least one logical second.

This means that, among other things, all stock exchanges, but also all wallet operators that actively address the German market from January 1st, must have a license – otherwise there is a threat of the business being stopped by the Federal Financial Supervisory Authority (BaFin). To conduct business without permission is even a criminal offense.

After the recent meeting on November 13th, the Finance Committee’s decision recommendation provides clarity on some issues that have been discussed since the publication of the speakers‘ and government drafts. The Finance Committee is in favor of deleting the much-discussed „separation requirement“ that cryptosafekeeping and other regulated banking or financial services could not be offered from the same legal entity. With the announcement of the Federal Government to make electronic securities possible, the question had arisen whether their safekeeping under a roof with other Digital Assets such as Bitcoin would be possible. With the proposed adjustments, the separation of the custody of securities (custody business) from the cryptographic custody business would no longer be legally mandatory. Nevertheless, depending on the business model, there may still be reasons for separating various regulated services: As has often been called for in recent months, the Finance Committee recommends that service providers offering only crypto custody services be granted extensive relief from the CRR’s capital adequacy requirements. This does not apply to the required initial capital of EUR 125,000, but to the additional capital resources which, according to the CRR, would increase with the value of the assets held in safe custody and the associated risks.

Despite the proposed adjustments, the separation of the custody of securities into custody business and other crypto-values can be advantageous not only for reasons of liability but also economically. Although the organizational effort involved in outsourcing to another legal entity will increase, the exemption of the crypto custody business from the CRR requirements will reduce the overall amount of capital tied up. The adjustment recommendations of the Finance Committee are supplemented by exemptions from separate institution reporting obligations and the regulations on institution remuneration.

However, there is a transitional period which makes it possible for providers to continue operating the business for the time being. In the actual decision recommendation from November 13th, this transitional period has been extended.

In order to comply with the rules and still be able to address the German market, the following actions must be taken:

  1. All parties that want to file such an permission request – which we assume will be many, give the relatively large German market – must indicate that by March 31st, 2020.
  2. After that, the parties have to file there complete permission request no later than November 30th, 2020.

 

Contractually tied agents who already hold cryptographic values for third parties before the Act comes into force are exempt from the licensing requirement until 30 November 2020. It is therefore open to them to also use the transitional period to apply for a license or to stop storing crypto by the end of November.

Such a transitional phase would also be desirable for other financial service providers (e.g. asset managers) who store digital assets for their customers. These service providers must either acquire the license themselves or announce an application for a license or find a crypto custodian before 01.01.2020 to take over this task for them. They are denied the opportunity to observe the market over the coming months and to take developments into account when selecting a suitable custodian.

It is important to note here, that only those companies that have demonstrably already addressed the German market will be given the opportunity to apply for a permit at all.

If a company fails to comply with both of the above points or cannot prove that it has addressed the German market, it cannot – like the other companies – benefit from the „provisional“ granting of such a license. This means that if a crypto exchange or a custodian provider wants to actively open up the lucrative German market for itself, it can only do so after holding the permission in its hands – while its competitors may still operate under temporary permission and occupy important market shares.

DLC Distributed Ledger Consulting GmbH therefore recommends all market participants to whom the new law might apply:

  1. securing the (still possible) market cultivation by notification of the submission of an application for permission.
  2. if necessary before: creation of the basic basis for the notification of a permit application.
  3. submitting an application for a permit.

 

DLC Distributed Ledger Consulting will be happy to assist interested parties and coordinate the relevant steps. Thanks to our good network, we are also particularly helpful in the selection of a suitable legal advisor – since it is particularly important in this special field to work together with the right partners immediately.

Do you have more questions? Feel free to contact us: