Since the emergence of “virtual currencies” or crypto currencies such as Bitcoin, Ethereum or Ripple, law enforcement authorities have faced new challenges in combating money laundering and terrorist financing. As early as 2014, the European Banking Authority (EBA) argued that custodian wallet providers and service providers converting virtual assets into fiat currencies be included in anti-money laundering law. After the 2015 terrorist attacks in Paris the European Council decided to swiftly tackle legislative changes in this area. One result of these efforts was the 5th Anti-Money Laundering Directive of 30 May 2018, which the German legislator now intends to implement. The recently published draft bill of the German Federal Ministry of Finance goes beyond the mere implementation of European law and is a first important milestone for a comprehensive regulation of virtual currencies.
Establishing a licence requirement for crypto custodians
In order to subject custodian wallet providers to the German Anti Money Laundering Law (Geldwäschegesetz, GwG), the draft bill introduces the new investment service of “crypto custodian business” This includes the safekeeping, administration and security of cryptographic assets or private cryptographic keys that are used to hold, store and transfer cryptographic assets,. As a result, crypto custodians would have to identify their customers and report suspicious transactions to the authorities. As financial services institutions, they will also require a license from the German Federal Financial Supervisory Authority (BaFin). This would enable BaFin to comprehensively monitor crypto custodians.
Providing legal certainty for Bitcoins in Germany
For the first time in Germany crypto currencies will be legally recognised as a reference point for custody activities forming a new category of financial instruments. Crypto assets are defined as a digital representation of a value that has not been issued by any central bank or public body and does not have the legal status of a currency or money, but is accepted by natural or legal persons as a means of exchange or payment or serves investment purposes on the basis of an agreement or actual practice, and that can be transmitted, stored and traded electronically. The inclusion of digital representations of value that serve investment purposes goes beyond the definition in the 5th Anti-Money Laundering Directive. As a consequence, the German legislator extends the scope of the definition to so called “security tokens” or “investment tokens”. These classes of tokens may represent participations in companies and may be issued in the form of initial coin offerings (ICOs).
The newly defined term "crypto assets" draws a line under the debate in Germany as to whether, for example, Bitcoins are financial instruments and can lead to a licensing requirement. This applies to online crypto assets trading platforms. For several years the BaFin has stated that Bitcoins must be licensed with reference to the fact that they qualify as units of account thus as financial instruments under the German Banking Act. However, on 25 September 2018, the Higher Regional Court of Berlin has expressed a different opinion (Case: 161 Ss 28/18). The fact that the BaFin is apparently sticking to its legal view has led to considerable legal uncertainty among market participants to this day. However, now that the draft bill now classifies crypto assets as financial instruments, this uncertainty is likely to disappear.
A first regulatory step for virtual currencies
The introduction of this licensing requirement is probably only a first step towards regulating the handling of crypto assets. For example, the draft law does not provide specific conduct obligations for crypto custodians or anyone else providing financial services with crypto assets. This still leaves the questions of how to protect crypto assets from access of third parties or whether and how investors must be informed about the risks of crypto assets open. These obligations which are currently outlined under the German Securities Trading Act are not extended to crypto assets. It would be welcomed, if the German legislator would wait for the discussion on the European level. It was only in January that the EBA proposed to the Commission to examine the need for uniform rules for crypto assets. The regulation of virtual currencies is therefore only just beginning to take off.