Germany has adopted a new regulatory regime for crypto assets in connection with the implementation of the Fifth Anti-Money Laundering Directive (AMLD5). On 29 November 2019, the second chamber of the German parliament (Bundesrat) approved the “Act on the Implementation of the Amendment Directive to the Fourth EU Money Laundering Directive” (Gesetz zur Umsetzung der Änderungsrichtlinie zur Vierten EU-Geldwäscherichtlinie) which will enter into force on 1 January 2020.
The German AMLD5 implementation act (link to the adopted version; cf. also our earlier publication in the blog) provides for changes of various regulatory acts and regulations including important amendments of the German Banking Act (Kreditwesengesetz – KWG) relating to crypto assets.
“Crypto assets” as a new category of “financial instruments”
The reform introduces the new category of “crypto assets” (Kryptowerte) in the German definition of “financial instruments” set out in the KWG. “Crypto assets” are defined as “digital representations of value
- that are neither issued nor guaranteed by a central bank or a public authority and that do not have the legal status of currency or money,
- but that, based on agreement or actual practice, are (i) accepted by natural or legal persons as means of exchange or payment or (ii) serve investment purposes and
- that can be transferred, stored and traded electronically”.
E-money and monetary values within the meaning of the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) are expressly excluded from the scope of such defined “crypto assets”.
The new definition includes various types of crypto tokens including payment tokens (virtual currencies), but also security tokens. However, the exact scope regarding other tokens (in particular, with respect to utility tokens) is unclear and already subject to discussion in legal literature.
It should be noted that the new category is introduced as a general “catch-all clause”. In accordance with the administrative practice of the German regulator (BaFin) in the past, crypto tokens such as Bitcoins may already qualify as other (existing) categories of “financial instruments” within the German meaning.
The amended definition of “financial instruments” is relevant for the relating regulated activities triggering a licensing requirement. In particular, the operator of a virtual currency exchange platform (VCEP) targeting the German market requires a German license.
New financial service of “crypto custody business”
Further, the reform introduces the new regulated financial service “crypto custody business” (Kryptoverwahrgeschäft). “Crypto custody business” is defined as
- “custody (Verwahrung);
- administration (Verwaltung) and
- safeguarding (Sicherung)
(i) of crypto assets or (ii) of private cryptographic keys used to hold, store or transfer crypto assets as service for others”.
Service providers such as custodian wallet providers (CWP) will therefore require a license for crypto custody business pursuant to Sec. 32 KWG. It should be noted that crypto assets may also qualify as one of the existing categories of “financial instruments” within the German meaning. Pursuant to the explanatory statement of the bill, if crypto assets qualify as securities (Wertpapiere), a license for custody business (Depotgeschäft) as type of banking business may thus be required instead of the new license.
It is permissible for banks and investment firms to also conduct crypto custody business in addition to their other regulated services. However, service providers who solely conduct crypto custody business are exempt from some of the requirements set forth by the KWG.
Service providers who conduct crypto custody business on 1 January 2020 will be deemed to have been provisionally authorised
- if they inform BaFin in writing of their intention to obtain a license pursuant to Sec. 32 KWG by 31 March 2020 and
- submit a complete application for such authorisation by 30 November 2020.
Further, BaFin has published a related webpage and has communicated that parties interested in such authorisation may already informally contact the German regulator.