Germany Regulates Cryptoassets

Morgan Lewis

Morgan Lewis

On 1 January 2020, 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) will enter into force in Germany. The new law introduces a number of regulatory changes that go beyond the regulation of money laundering prevention. In particular, the act will amend the German Banking Act (Kreditwesengesetz) and the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz) with respect to cryptoassets.

1. Qualification of Cryptoassets as Financial Instruments

As of 2020, cryptoassets (Kryptowerte) will be regulated as a new category of “financial instruments“ under the German Banking Act. Cryptoassets are defined by the new law as the “digital representation of a value that is not issued or guaranteed by a Central Bank or a public authority and that does not have the legal status of a currency or money, but that based on agreement or practice is accepted by natural or legal persons as means of payment or exchange or is used for investment purposes and that is transferred, stored and traded electronically.“

The new law expressly exempts e-cash and electronically stored monetary values within the meaning of the German Payment Supervision Act from the definition of cryptoassets, inasmuch as a comprehensive legal framework already exists for these assets. Besides this, however, the new law takes a broad approach and includes various types of tokens such as payment tokens (virtual currencies) and security tokens which according to interpretation by the German Federal Financial Supervisory Authority (BaFin) already qualify as financial instruments in other categories (read our earlier Lawflash, The Regulation of ICOs in Germany.)

2. Introduction of Crypto Custody Business as New Financial Service

The new law introduces a new regulated financial service, called “crypto custody business“ which is the custody, administration, and safeguarding of cryptoassets or private cryptographic keys used to hold, store, or transfer cryptoassets as service for others. The provision of this financial service in Germany will require as of 1 January 2020 a license from the BaFin under the German Banking Act. The BaFin has already created a related webpage and has offered interested parties to discuss the licensing process informally with the BaFin. Companies that are active in the area of crypto custody business before 1 January 2020 may continue their business for an interim period if they notify the BaFin until 1 February 2020 of their intention to apply for a license and file their complete application for the license until 30 June 2020.

Credit institutions and financial service providers which already hold a license under the German Banking Act for other areas of banking business or financial services shall not be able to expand their business to provide crypto custody business because of the related IT-risks of this business, which shall not affect other areas of banking business or financial services. Consequently, credit institutions and financial service providers that consider expanding in this area will have to establish separate entities for the crypto custody business.

3. Conclusion

In the absence of corresponding regulations at the European level, the German legislaturer will play a pioneering role with the introduction of a license requirement for crypto custody business. Foreign companies that offer crypto custody services (e.g., crypto exchanges) will not be able to offer their services in Germany after 1 January 2020 without a license. The required separation of crypto custody services from other financial services, in particular other depositary services, also will hinder banks that wish to offer custody services for all types of financial instruments to their customers. In turn, the new requirements may cause problems for customers who will be forced to enter into several custody agreements depending on the respective assets.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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