At the beginning of 2020, Germany has announced its involvement among the growing number of countries in handling the crypto assets regulations (Cryptocurrency Regulation in Germany). The German legislator has reformed the national regulatory norms for crypto-related tradings, which begins with ‘Gold plating’ European market requirements under the Fifth Anti-Money Laundering Directive (AMLD5). The ‘Act on the Implementation of the Amendment Directive to the Fourth EU Money Laundering Directive’ focus on the two principles;
- i) affects the current licensing requirements under the German Banking Act (KWG), while introducing a new category of financial instruments,
- ii) launch new licensing requirements for custody services under BaFin authorization.
Cryptocurrency Regulation in Germany
A renowned German financial watchdog BaFin has published a record of detailed newly enacted laws for 2020 cryptocurrencies trading. The rules are presented as the authority’s interpretation of a revised German legislature.
In these recently launched instructions, the body clarifies the numerous aspects of crypto regulations previously left unnoticed, which has missed the cryptocurrencies units. As a result, the business dealing with crypto trading was denied to befallen to the category of financial service providers.
BaFin has generated a wider concept of a crypto asset and its functionality relating to the tokens used for payment, exchange, and even security token. However, according to the German Securities Deposit Act, security tokens were not accountable as securities, even if they are tradable or transferrable. Security tokens are kept to be regulated by EU Prospectus Regulations.
BaFin has clearly stated the generic rules applied to maximum large and small scale businesses, and its requirement to pass the body’s authorization. According to the body, if anyone wants to perform a business activity to cater to Germany’s financial service, that requires the right set on a professional basis that needs to be done commercially.
Crypto Assets attains a new category in Financial Instruments.
Recently, Crypto assets took a relevant position in the list of financial instruments following the KWG. The reformers work diligently, presenting crypto tokens as a gateway in the financial market. Now in the new definitions, crypto assets are known to function as;
- Digital Representation of Value;
- Limits to be issued or guaranteed by public authorities and Central bank
- The legal status of money or currency can’t be possessed.
- Based on the agreement, it can either serve investment purposes or be taken as a payment or exchange.
- It can be stored, transferred, and electronically traded.
Under the German Payment Services Supervision Act (ZAG), the E-money services and other monetary values lose the scope to grow. In contrast, introducing a broader range of payment tokens, including virtual currencies and security investment tokens, is on the new roll. In the case of utility tokens, the explanatory memorandum describes the “mere electronic vouchers for obtaining goods and services” are rejected as they are not involved in any investment purpose.
Although BaFin has already given a clean chit to crypto tokens such as Bitcoin and litecoin to qualify all categories of financial instruments within the KWG regulation ‘catch-all clause’.
BaFin’s definition of financial instruments welcome all banking, business, and financial services. However, it has declared that any trading activity that engages the German Market, like operating a virtual currency exchange platform (VCEP), strictly requires running under the German Licence.
Declaration of New Financial Service- Crypto Custody Businesses.
Another important aspect is introducing a ‘Crypto Custody Business’ as a regulated financial service under the KWG licensing. As per the new definition, the Crypto Custody Business involves; the custody, administration, and safeguarding of the crypto assets. On the other hand, it has launched systematic private cryptographic keys to store and transfer crypto assets as a regulatory service among consumers.
The enactment has triggered the requirement of license in running Crypto Custody Business providing the mentioned activities; it also offers detailed guidance on these vital variants;
- Custody- Clients’ crypto assets are kept safe, with the help of cryptographic keys to hold the assets without the client’s presence.
- Administration- It will be ongoing management of rights that are needed for the purpose.
- Safeguarding- It needs the proper protection of the digital storage of third parties’ cryptographic keys and the physical storage of such keys’ data carrier. Only some sort of provision made for data storage space was totally disqualified in Crypto Custody Business.
Crypto assets are eligible to qualify under the other types of financial instruments required to be performed parallel to other regulated activities. However, these licensing requirements may have preceded the general licensing requirements for CCB. In the case of a security token, a banking license will be required instead of a financial services license as it comes under the civil law security for Crypto Custody Business. Lastly, CWP (Custodian wallet providers) are spared from some regulations of KWG that help is solely conducting Crypto Custody Businesses.
Conclusion-
According to the German Federal Government, the German securities law will be revised with the reformed ‘blockchain strategy.’ However, few revisions of civil law for crypto assets are still under review, affecting the regulatory treatment based on the qualification of crypto assets as securities. Also, the safekeeping of tokens will require a license for the particular purposes of the banking business of the crypto custody business.
Also Read:- Blockchain & Cryptocurrency Regulation in the USA