The financial committee of the German parliament suggested to repeal the law requiring financial institutions to separate their banking business from their crypto custody services.

In August, we reported that the German government had introduced legal changes based on the fifth EU Anti-Money Laundering Directive (AMLD5). 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 was to ensure that risks of the cryptocurrency business do not spill over to the traditional financial services sector.

Mid November, the financial committee of the German parliament had suggested to repeal this clause. The proposed changes by the financial committee would allow banks and other financial institutions to provide crypto custody services within the same legal entity. This is a reaction to massive protests by crypto service providers, who did not support the legal distinction between crypto custodians and traditional custodian banks.  

It might still make business sense to separate banking from crypto custody

Even if the German government will amend the proposed law and repeal the clause requiring a separation of crypto and banking business, there are good reasons why financial institutions providing crypto services may still opt to split their operations into two entities:

Besides canceling the separation clause, the financial committee also suggested reducing the equity requirements of crypto custody providers. That is only if they do not provide any other services beyond custody, explains Dr. Sven Hildebrandt, CEO of Distributed Ledger Consulting GmbH.

Custody providers will still have to show initial capital of at least 125,000 Euro, but the additional capital requirements according to the Capital Requirements Regulation (EU) No. 575/2013 should not apply to crypto custodians.

CRR is an EU law that aims to decrease the likelihood that banks go insolvent and requires custodian banks to increase their capital collateral with increasing assets under custody. As per the suggestion of the financial committee, this should only be the case for custodian banks, but not for custodians exclusively providing crypto custody services.

Apart from lower capital requirements, the financial committee also recommends lower reporting requirements, which further reduces the compliance costs of crypto custody providers. However, those custodians not separating their traditional banking business from their crypto custody services will be subject to the full range of capital and reporting requirements.

Deadline delayed to November

The law announced in August also stated that from next year onward, cryptocurrency-related businesses such as digital exchanges, custodians, and wallet providers would need a Bafin-issued license. Initially, businesses needed to hand in their applications by June 2020 but had to signal their intention to apply for a license already by February 2020.

The financial committee now suggested prolonging this deadline. Businesses now need to signal their intention to apply for a license by 31st March 2020 and hand in an application by 30th November 2020.

Tied agents who are already providing crypto custody services today are exempted from the licensing requirements until 30th November 2020. They may either apply for a license or terminate their custody services by latest 30th November 2020.

However, other financial service providers who also provide crypto custody services either have to get a license by themselves, signal the intention to get a license, or find a separate crypto custody provider before the 01st of January 2020. They do not have the option to wait until 30th November and observe the market.

All of this is particularly exciting considering that the German government also announced to provide draft legislation on digital bonds by the end of this year. We might see the development of a fully integrated legal framework for a token economy in Germany over the course of the next year.

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