On January 1, 2020, a German law will come into force that makes digital asset custodians subject to financial supervision. Companies that want to provide this business then need a license from the German Federal Financial Supervisory Authority (BaFin). Any crypto custodian addresses to German customers, must notify BaFin of its intention to obtain a license before April 1st and submit an application before November 1, 2020.
A clause will allow current crypto custodians to continue serving customers in Germany without being penalized. However, this only applies if they declare their intention to make an application before April 1, 2020. At the moment, the companies concerned are still waiting for BaFin to issue final regulations concerning the new law.
“As long as the legislation is not in place, BaFin is not going to think about how to cope or how to deal with the legislation,” said BaFin press officer Norbert Pieper. The supervisory authority declined to make a further statement to Coindesk; the German Federal Ministry of Finance did not respond to the request for comments by the editorial deadline.
Pieper added: “There is no date foreseeable [yet] by which we’ll be able to communicate the results of our assessment. We will certainly communicate that on our website.”
In addition, crypto custodians are waiting to see if the law can be passported to other EU states.
Crypto custodians deal with the new rules in Germany in different ways
While the final terms have not yet been determined, the new license requirement may not cause the same kind of exodus of crypto companies that New York saw after the BitLicense requirement, said Miha Grčar, Bitstamp’s business development director.
Bitstamp, one of the largest European crypto exchanges based in London, plans to continue operations in Germany. Whether Bitstamp would apply for a license, Grčar left open. Crypto firms could also use a white-labeled custody service to operate in Germany.
Because the law is an “updated version of the existing banking regulation”, banks are likely to benefit most from it, Grčar added. Companies that receive the license will be German financial institutions, but they will not be classified as banks.
The law also means that German regulators now see crypto as a “legitimate” industry, he said.
Ulli Spankowski, chief digital officer and managing director of the crypto custody subsidiary of German stock exchange Boerse Stuttgart, called Blocknox, sees the license as a step forward for “the professionalism of the industry.” The subsidiary has already advised BaFin that it plans to apply.
“There are other countries that won’t go for a full-fledged license”, he said. “If you want to get traditional, established players from the banking side, you need to give them this environment to feel safe.”
The Swiss company Crypto Storage AG, a subsidiary of Crypto Finance AG, is opening a branch in Germany to offer crypto-custody to banks and then also to start-ups in the financial technology sector.
“Large banking houses will do custody business in the future”, Stijn Vander Straeten, CEO of Crypto Storage AG, said. “They are moving slowly, though. We’ll build it up now for a premium.”
An alternative: White-labeled crypto custody solution
DLC group is taking advantage of the new regulatory framework by offering consulting services for firms interested in applying, and its own white-labeled crypto custody service.
Sven Hildebrandt, head of Distributed Ledger Consulting Group, is concerned some exchanges won’t understand the nuances of the new law.
“The law is only in German and no English translation of the law is out there”, he said. “What’s going to happen to exchanges? [Operating without a license] is actually a felony and not a misdemeanor so that’s jail time.”
Hildebrandt predicts that the cost of licensing will be similar to other German financial services licenses, where companies need two CEOs, an established German entity and 125,000 Euro in start-up capital. He also estimates the installation costs at between 250,000 and 350,000 Euro and the annually recurring costs at 350,000 Euro.
Looking for more information about the new blockchain and cryptocurrency regulation in Germany?
Read: Germany: New regulations for Digital Asset Custodians