German digital assets custody regulation picks up speed

9 Jan, 2020

By January 1, 2020, the new regulation for digital assets custody came into force in Germany. As of today, the Federal Financial Supervisory Authority (BaFin) provides a form for the declaration of intent according to § 64y para. 1 or 2 KWG about digital asset safekeeping. As expected, the requirements indicate a setup that should roughly correspond to a KWG 32 FDL license.

The law already passed by the Federal Government to implement the amending EU directive to the 4th Anti-Money Laundering Directive in Germany introduces a new legal regulation which will make many market participants in the digital asset world “financial institutions” subject to supervision from January 1.

The BaFin qualifies virtual currencies/cryptocurrencies as units of account and thus as financial instruments. Companies and persons who arrange the purchase of tokens via online trading platforms, sell or buy tokens on a commercial basis or provide main brokerage services in tokens, among other things, generally require prior approval from BaFin.

 

German digital assets custody regulation

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, either wallet providers who hold the private keys for third parties or exchanges offer these services; as soon as they hold the key for third parties for at least one logical second. This does not affect, for example, the private hardware wallet at home.

This means that, among other things, that all exchanges (no matter where they are based, which is a common misconception here -> the new law does NOT only apply to entities based in Germany), but also all wallet operators that actively address the German market from January 1st must have a license – otherwise the Federal Financial Supervisory Authority (BaFin) may stop their business. To conduct business without permission is a criminal offense.

To continue to address the German market and comply with the new regulations,

  • all parties that want to file such an application for authorization must indicate this by March 31, 2020; which we assume will be many, as the German market is relatively large;
  • thereafter, the parties have to submit their complete application for approval by November 30, 2020 at the latest.

 

What are the consequences?

If a company does not comply with both of the above points or cannot prove that it has entered the German market, it cannot benefit from the “provisional” granting of such a license. In other words: If a company wants to actively develop the lucrative German market, it can only do so if it has the license in its hand. Meanwhile, its competitors may still operate under a provisional license and can occupy important market shares. It is important to note that failure to comply with the German crypto custody regulations is a criminal offense!

 

To learn more about the new regulations, please read the article Germany: New regulations for Digital Asset Custodians. New regulatory provisions also came into force in France and Liechtenstein earlier this year.

Not sure whether and to what extent the new German legislation affects your company? You are interested in obtaining a license or rely on a license-as-a-service model? Please don´t hesitate to contact us at any time. We are happy to help you!

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