The German government has introduced legal changes that require crypto-related businesses to apply for a Bafin license by 2020. The law goes beyond the EU’s requirements and could give the industry greater credibility.
The German government has decided to introduce new anti-money laundering regulations in 2020. Starting next year, cryptocurrency-related businesses such as digital exchanges, custodians and wallet providers will need a Bafin-issued license.
Businesses need to hand in their application by June 2020, but have to signal their intention to apply for a license already by February 2020.
German wording differs from the EU’s requirements
The legal changes are based on the fifth EU Anti-Money Laundering Directive (AMLD5), which all member states need to introduce into national law by the 10th of January.
However, the German wording differs significantly from the AMLD5. It defines crypto custody services as the holding, managing, or safekeeping of “crypto-assets.”
Thus, the German act goes beyond the EU’s requirements by establishing the term “crypto-assets” instead of adopting the Directive’s definition of virtual currencies. “Crypto-assets” also include tokens that serve investment purposes, not only payment tokens.
Moreover, according to the new law, licensed banks and financial service providers cannot offer crypto services but have to outsource such services to a separate entity. The purpose of this rule is to ensure that risks of the cryptocurrency business to not spill over to the traditional financial services sector.
Critics argue the increased scrutiny might hurt crypto-businesses
Industry representatives have mixed feelings about the legal changes. Some argue additional regulations will harm Germany’s crypto ecosystem.
Thomas Schaeffler, member of parliament and a Bafin board member, argues the government’s requirements will force digital exchanges to leave the country. He says, “The government is not consistent” and points to a paper the government had published earlier this year declaring the importance of digital technologies such as blockchain.
The government had also announced a blockchain strategy for summer 2019, which it has not yet presented. That poses the question of why these legal changes have been introduced without agreeing on the strategy first?
Legal certainty will foster the industry’s long-term growth and attract institutional investors
Others view the changes as a positive development. The law creates legal certainty, which has so far been missing.
In the past, there have been various cases where the Bafin has closed down digital exchanges in Germany, but German courts then ruled the shutdown was unjustified. The new law clarifies these cases.
Christian Schmies, Partner at the law firm Hengeler Mueller, welcomes the legal changes and is in favor of the additional requirements that go beyond the EU standard. He says the lack of regulations has so far hindered the development of a blockchain market in Germany.
“The technology has not yet been accepted by institutional investors because a reliable legal framework is missing,” he said in an interview with the German newspaper F.A.Z. Schmies is in favor of the new law but criticizes the lack of a clear definition of crypto custodians’ responsibilities.
The new law eliminates some of the legal limbo revolving around digital exchanges and crypto-asset custody. It’s a first step. The question is, how it will fit in a potentially broader blockchain strategy the government is working on. Another question is how other European countries will interpret and implement the AMLD5 directive.
Nevertheless, Germany is moving ahead and gives the crypto space more regulatory burdens, but also more legal recognition and credibility. That may come with some more work and hassle in the short-term, but also with opportunities to drive crypto adoption and attract institutional investors in the long term. Image: ©Shutterstock