Germany’s Cryptocurrency Regulations

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German cryptocurrency regulations stipulate that German native citizens and legal entities can buy/sell/hold ‘cryptoassets’ – so long as it is done through a BaFin-licenced exchange, custodian or Bitcoin ATM.

An economic powerhouse, Germany is a heavily developed EU member state with the 4th largest economy in the world as measured by GDP. Germany was one of the first countries in the world to offer legal certainty to financial institutions allowing them to custody crypto assets.

German Cryptocurrency Regulations Key Takeaways;

  • Bitcoins are ‘units of account’ – not classed as legal tender
  • BaFin (Federal Financial Supervisory Authority) is Germany’s regulator for cryptocurrency
  • German Banking Act (KWG) amendments allows custody of cryptocurrency

German Cryptocurrency Regulations for Custodians

The German ‘Act Implementing the Amending Directive on the Fourth EU Anti-Money Laundering Directive‘ made Germany one of the first countries in the world to enable financial institutions (FIs) to custody crypto assets as a new type of ‘financial service’ by incorporating it into the German Banking Act (Kreditwesengesetz – KWG).

As of the 1st of January 2020, entities wishing to offer this service need to apply for authorization from BaFin (the Federal Financial Supervisory Authority). This also applies to cross-border operators.

Cryptocurrency custodians are set out as performing the roles of;

  • custody;
  • admin
  • securing

(a) of Cryptocurrencies (i.e. crypto assets) or of the keys that are used to hold/store/transfer crypto assets as service for third parties.

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In addition, the legislation defines Bitcoin and other cryptocurrencies as ‘crypto-assets’ that are a new form of financial instruments (Sect. 1 para. 11 cl. 1 no. 10 KWG). Thus, any business that facilitates the trade of them must be a BaFin licenced entity.

‘Cryptoassets’ are defined in the Act Implementing the Amending Directive on the Fourth EU Anti-Money Laundering Directive as “digital value representations;

  • which are not supplied/guaranteed by any central bank/public authority as well as not meeting the stature of currency/money (i.e. legal tender),
  • however, due to agreement/normal practise, are (a) accepted by natural/legal individuals as means of exchange/payment or (b) serve investment intention &
  • which are able to be transferred/stored/traded digitally”.

This new regulation quickens the mass adoption of cryptoassets, with some of the most respected traditional financial players in Germany, such as Bankhaus von der Heydt, becoming involved in the space. However, if custodians are offering the custody of cryptocurrencies that are deemed as financial securities by BaFin, then these businesses should also apply for a banking business licence.

Banks and FIs in Germany suffer from a negative interest rate policy (NIRP) environment, leading to a number of high-net-wealth individuals storing their wealth in cash and precious metals stashed in safety deposit boxes. After BaFin allowed banks to custody Bitcoin and other cryptocurrencies on behalf of their clients, another alternative are now available to customers wishing to avoid NIRP.

German Cryptocurrency Regulations for Exchanges

Under the German Banking Act (KWG) regulation amendments – Virtual Asset Service Providers (VASPs) in Germany that are targeting natural citizens or legal entities, should also apply for a licence with BaFin.

Non-compliance with the KWG is a felony offence in Germany.

German Cryptocurrency Regulations for Bitcoin ATMs

Recently, BaFin made regulations surrounding operating a Bitcoin ATM more strict – operators must now seek licence from BaFin to operate. spot9 is the first regulated Bitcoin ATM operator in Germany.

These kinds of licencing requirements and regulations for cryptocurrencies allow investors in Germany to be protected from scams and fraudulent activities whilst ensuring that they have market access.

German Regulations on AML & CFT of Cryptocurrencies

Being a European Union member state, Germany closely implements the EU’s various Anti-Money Laundering directives (i.e. 4, 5 & 6 AMLD).

As a member of the global AML (Anti-Money Laundering) CFT (Combatting the Financing of Terrorism) watchdog, the FATF (Financial Action Task Force), Germany additionally follows stringent Risk-Based Approach (RBA) policies such as Enhanced Due Diligence (EDD) and Know Your Customer (KYC) requirements.

As the German Banking Act (KWG) has defined cryptocurrency custodians and exchanges as financial institutions (FIs) due to them offering ‘financial services’, they are subject to the normal AML and CFT regulations in Germany as other obliged entities. In addition to custodians and exchanges, brokers dealers (i.e. OTC trading), insurance providers and wallet providers must also follow AML/CFT regulations due to the change in the German Banking Act.

Germany’s main AML regulation is the ‘Money Laundering Act‘ (Geldwäschegesetz – GwG).

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Basic AML regulations for FIs (including cryptocurrency-related business) in Germany are;

  • Appointing an MLRO (money laundering reporting officer) for the purposes of detecting/preventing financial crimes
  • Collecting and checking relevant customer details
  • Detection of domestic and foreign Politically Exposed Persons (PEPs) and associated risks
  • Record keeping of customer id, info and transactions to ensure proper Enhanced Due Diligence (EDD)
  • Submitting Suspicious Activity Reports (SARs) such as money laundering or terrorism financing, etc activities to Germany’s Financial Intelligence Unit (Zentralstelle für Finanztransaktionsuntersuchungen)
  • Training of employees for AML regulations and how to comply

What is BaFin?

BaFin (Federal Financial Supervisory Authority) is Germany’s financial market regulator. Responsible for protecting investors and maintaining a transparent German financial system.

Formed in 2002 – from the passing of the ‘Financial Services and integration Act ‘(Gesetz über die integrierte Finanzaufsicht (FinDAG)) legislation by the – BaFin is an independent federal institution with ~2,700 FIs, 800 financial services institutions & 700+ insurance ventures under its supervision. BaFin falls under the supervision of the Federal Ministry of Finance of Germany.

The German Minister of Finance has taken a dim view of stablecoins in the past, calling them a “wolf in sheep’s clothing”. ‘Private’ stablecoins have been a contentious issue to central bankers as they view the asset as having a potentially destabilizing factor to state fiscal policies.

Stablecoins are cryptographic assets typically pegged 1:1 of another underlying asset such as USD, EUR or Gold.

Blockchain Financial Securities and Tokenization

In December of 2020, Germany passed a law that enabled financial securities to be held on the blockchain. This means that issuers/holders are now able to document their securities on a blockchain-based register – whereas previously securities transactions must have been recorded in physical form. However, this is so-far only applicable to bonds, and not publically traded stocks/shares.

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Blockchain technology is proving its ability to cut costs, improve speed and the increase the transparency of the wider financial sector, amongst other industries.

Regulatory initiatives that seek to spur blockchain securities’ acceptance will additionally open up more acceptance of tokenization’ such as with NFTs (non-fungible tokens). RIDDLE&CODE – a Coinfirm partner – is a German FinTech exemplary of innovation in the jurisdiction, pursuing both custodian and tokenization solutions, amongst others.

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