On January 1, 2020, Germany joined a small but growing number of countries with a specific regulatory regime for crypto assets. ‘Goldplating’ the European requirements under the Fifth Anti-Money Laundering Directive (AMLD5), the German legislator reformed the national regulatory rules for crypto-related activities: 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) (i) affects existing licensing requirements under the German Banking Act (Kreditwesengesetz – KWG) by defining a new category of financial instruments and (ii) additionally introduces a new licensing requirement for custody services.
Crypto assets as a new category of financial instruments
The reform aims to cover all crypto tokens relevant for the financial markets. For this purpose, the new category of ‘crypto assets’ was inserted in the definition of financial instruments within the meaning of the KWG.
Crypto assets are defined as:
- digital representations of value
- not issued or guaranteed by a central bank or a public authority
- do not possess the legal status of currency or money
- based on agreement or actual practice, are
- accepted as means of exchange or payment or
- serve investment purposes
- can be transferred, stored and traded electronically
E-money and certain monetary values within the meaning of the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) are expressly excluded from the scope. The new definition includes a broad range of payment tokens / virtual currencies and security / investment tokens. With respect to utility tokens, the explanatory memorandum only states that “mere electronic vouchers for the obtaining of goods and services” are not covered as long as these are not used for investment purposes. Already in dispute in legal literature is whether at least certain utility tokens may, nevertheless, be covered by the new definition.
The new category is introduced as a ‘catch-all clause’. In accordance with the administrative practice of the German regulator (BaFin) in the past, crypto tokens such as Bitcoin may already qualify as other (existing) categories of financial instruments within the meaning of the KWG.
The amended definition of financial instruments is relevant for the related types of banking business and financial services. The reform confirms, in particular, that trading activities targeting the German market, such as the operation of a virtual currency exchange platform (VCEP), require a German licence.
Crypto custody business as a new financial service
Further, the reform introduced the new regulated financial service of ‘Crypto Custody Business’ requiring a licence under the KWG.
Crypto Custody Business is defined as: the custody (Verwahrung), administration (Verwaltung) and safeguarding (Sicherung) of crypto assets or of private cryptographic keys used to hold, store or transfer crypto assets as service for others.
Providing any of the three activities custody, administration and safeguarding will trigger the licensing requirement for Crypto Custody Business. The explanatory memorandum provides further guidance on the three variants:
- Custody means the safekeeping of crypto assets for clients; such service includes the holding of crypto assets for clients without the client knowing the cryptographic keys.
- Administration is the ongoing management of rights arising from the crypto asset.
- Safeguarding means both the digital storage of the cryptographic keys of third parties and the physical storage of a data carrier for such keys. The mere provision of data storage space, however, does not qualify as Crypto Custody Business.
Given that crypto assets may also qualify as other types of financial instruments, custodial services in relation to certain tokens may be connected with other regulated activities as well. Pursuant to the explanatory statement, such other licensing requirements take precedence over the general licensing requirement for Crypto Custody Business. In particular, to the extent that a security token qualifies as a security within the civil law meaning, a banking licence for custody business will be required instead of the financial services licence for Crypto Custody Business.
Custodian wallet providers (CWP) that solely conduct Crypto Custody Business are exempt from some of the requirements set forth in the KWG (e.g., from certain reporting obligations, from the provisions on remuneration or from own funds and liquidity requirements).
Following the reform of the regulatory regime for crypto assets, the German legislator also intends to reform the related civil law regime. As part of a larger ‘blockchain strategy’, the German Federal Government has announced it will comprehensively revise German securities law in this context. However, such revision of the civil law rules regarding crypto assets (classification of tokens under private law, property rights, transfer and legal protection, etc.) has been delayed. If certain crypto assets qualify as securities within the civil law meaning based on future reform, the regulatory treatment will also be affected: the safekeeping of the relevant token will then require a licence for the banking business of custody business as described.