The Federal Financial Supervisory Authority (BaFin) in Germany is currently clarifying how the new German cryptocurrency custody law will apply to companies that have their jurisdiction outside of Germany but still serve the German market. There is still widespread uncertainty, especially among non-German companies, with regard to obtaining the BaFin license for crypto custodians.
In a guideline published in January, the regulatory authority announced that companies that already custodying digital assets for Germans will not be penalized for not having a license. Instead, they will be grandfathered in the same protection that German-based crypto custody companies already have under the new law.
Declare the intention to apply for the BaFin license by the end of March
This means that these companies must announce their intention to apply for a license by March 31. And they must actually apply for the license until November 30, 2020, at the latest. Those crypto companies that have not kept any crypto for German customers before January 1, but want to expand into the German market, will not be able to start their business until they receive the said license.
Carola Rathke, a partner at Eversheds Sutherland Germany, said: „Nobody has the ability to apply right away, which is why we have these grandfatherly mechanisms.“ The law firm is working directly with BaFin on how the law should be enforced.
Recommendation to submit the application well before the deadline
Despite the deadline of November 30, Rathke emphasizes that crypto companies should apply long before November. By the deadline, only complete applications that do not leave any questions of the supervisory authority unanswered will be considered.
Last but not least, the processing time required by BaFin for granting the license for crypto-custodians must also be taken into account.
Germany drafted the law in response to the European Union’s Fifth Anti-Money Laundering Directive (AMLD5), which requires crypto firms to demonstrate compliance with enhanced know-your-customer (KYC) and anti-money-laundering (AML) procedures. While firms familiar with German financial regulation are already drafting applications, the industry is at the mercy of whatever guidance BaFin releases over the next several months. At the beginning of 2020, BaFin published an application form that is non-binding, meaning firms are not required to use the form.
Problematic for companies newly entering the German market
Companies that are not yet familiar with dealing with the German regulatory authority could face problems as a result of this process.
Sven Hildebrandt, head of the Distributed Ledger Consulting Group, is not enthusiastic about the new legislation. „This is exactly the way it works. A law is passed quickly. Then it turns out to be not very clever. And as soon as the law comes into force, an administrative practice will be established.“
Hildebrandt estimates that guidance will start to appear as the result of specific applications in the next 3 — 5 weeks. Hildebrandt’s DLC Group has been advising crypto firms on how to navigate the complexities of the German regulatory system. It is now trying to get approval from BaFin to serve as the compliance arm of companies that can’t afford to apply for the license themselves.
„Nevertheless, there are parts of crypto-custody that aren’t addressed by law — such as custody for multi-party computation,“ Hildebrandt stated.
Certain parts of the law will also need clarity over time. For instance, companies that apply must have a German subsidiary with „fit and proper“ directors. However, what makes such a manager suitable for the job in the crypto world is not defined. It is likely that in addition to a manager with experience in banking, the regulator will also require a manager with technical blockchain experience, Rathke said.
Source: CoinDesk and Crypto Valley Journal