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Regulatory Consulting Services for Digital Asset Custodians

We not only offer you regulatory consulting services but also guide you through the entire process. Since Germany was the first country to introduce a “gold standard” for the regulation of digital assets, we want to help others achieve their goals. That is also why we are engaged in the Finance Working Group 2 of INATBA, the International Association for Trusted Blockchain Applications, sponsored by the European Commission.

Get in touch with us if you are interested in our regulatory consulting services.

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Digital Asset Exchanges and custody providers require a license from the German supervisory authority BaFin as of 1 January 2020

Please read the information carefully, as not complying with these new rules is a felony since 1 January 2020.

The regulation applies to any exchange or custodian that is

  • actively involved in/addressing the German market
  • and — even if only for a short time — is in possession of its customer’s crypto assets.

For example, you actively address the German market if you operate a German-language website. This applies regardless of where the company is based. So even if your company is domiciled in Hong Kong, you still have to comply with the rules.

The law implementing the amendment to the 4AMLD in Germany introduces a new statutory provision that makes many market participants in the cryptographic world “financial institutions”. As such they are subject to financial supervision since 1 January 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)” are classified as a financial service within the scope of the German Banking Act. Usually, either wallet providers who hold the private keys for third parties or exchanges offer such services; at least if they hold the key for third parties for at least one logical second. So this does not affect the private hardware wallet at home.

This means that all exchanges, but also all wallet providers that actively address the German market, must have a license. Otherwise, the Federal Financial Supervisory Authority (BaFin) threatens to suspend the business. To conduct business without permission is even a criminal offense.

Using a licensed sub-custodian might be a remedy as setting up an own regulated entity appears cumbersome and costly. To be on the safe side, we highly recommend that the companies concerned obtain detailed information and, if necessary, seek appropriate regulatory consulting.

 

Transitional Period

However, there is a transitional period that allows the providers to continue operating the business for the time being. In the actual decision recommendation from 13 November 2019, this transitional period has been extended.

To comply with the rules and still be able to address the German market, the following measures are necessary:

  1. All parties that want to file such a permission request must indicate that by 31 March 2020.
  2. After that, the parties have to file their complete permission request no later than 30 November 2020.

Contractually tied agents who already hold cryptographic values for third parties before the law came into force are exempt from the licensing obligation until 30 November 2020. It is, therefore, open to them to also use the transitional period to apply for a license. Alternatively, they can stop storing crypto until the end of November 2020.

Such a transitional period would also be desirable for other financial service providers who hold digital assets for their customers. These service providers (e.g. asset managers) must either acquire the license themselves or announce an application for a license by 1 January 2020 or find a crypto custodian before 30 November 2020 to take over this task for them. They are denied the opportunity to observe the market; this would be helpful in order to take account of these developments when selecting a suitable custodian.

 

Important to note

Only those companies which can prove that they already addressed the German market can apply for a license.

If a company does not comply with the two points mentioned above, it cannot benefit from the “provisional” granting of such a license as other companies do. This also applies if it cannot prove that it has already entered the German market. 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 receiving approval. Meanwhile, competitors may still operate with preliminary permission and occupy important market shares.

 

Immediate actions

We, therefore, recommend all market participants to whom the new law could apply:

  1. securing the (still possible) market cultivation by announcing the submission of an application for permission.
  2. if necessary before: creating the basis for the notification of a license application.
  3. applying for a permit.

We support interested parties within the scope of our regulatory consulting and coordinate the corresponding steps. We are also happy to assist in the selection of a suitable regulatory legal advisor; because in this area, in particular, it is important to work with the right partners immediately.

 

Here you find the Decision Recommendation of the Financial Committee (only in German). Also, the Draft Law of the Federal Government on the implementation of the amending directive to the Fourth EU Money Laundering Directive is only available in German.

Learn more about how Crypto Custodians grapple with Germany’s New Rules and how German custody regulation picks up speed.

If you are looking for a custodian, check out our digital asset Custodian Comparison.

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