With its crypto license, Germany is a close second to Switzerland’s Crypto Valley as a leader in blockchain and crypto. Berlin implemented the EU’s Anti-Money Laundering (AML) rule on January 1, 2020.
The German regulator took the opportunity while introducing the new AML guidelines along with its crypto license to regulate all forms of blockchain-based assets as well, including digital securities and cryptocurrencies like Bitcoin or Ethereum.
As of January 1, 2020, companies require a so-called “crypto license” if they want to provide services around digital assets. To obtain such a licence, companies need to apply with BaFin, i.e. the German financial supervisory authority. Within the EU, Germany is one of the first countries to adopt such a regulation. A harmonization across EU member states is yet to come.
Focus on crypto custody
At its core, the German regulation is aimed at the custody of digital securities and cryptocurrencies. Clear regulation of custody has two main advantages: First, companies finally have legal certainty, enabling them to plan ahead and invest. Second, the risk of money laundering through the use of cryptocurrencies is reduced.
Even though the regulation has only been in place for a few weeks, a large number of companies are intensively analyzing the blockchain and cryptocurrency space, following its legitimization. Rumor has it that over 40 financial institutions have expressed an interest in acquiring a crypto license. Presumably, interest will growing during this year and dozens more will follow.
The question of who these companies are arises. Established blockchain startups, unsurprisingly, are highly interested in the new crypto license. However, acquiring a license may be a big task for smaller, less-established startups. As a result, a few startups have announced plans to incorporate elsewhere. This is predominantly driven by the fact that application and the resulting regulation would lead to costs that smaller startups cannot cope with. The interest of established banks and exchanges does not seem to have peaked yet – with some exceptions of course. The established players can afford to jump on the “blockchain train” at a later stage.
Implications for non-German players
The regulation does not spare foreign companies that want to operate in the German market either. For example, an Asian blockchain-based company trying to get into the German market would also require a license. And the 100+ crypto exchanges in existence, which are usually incorporated in Asia or the US, might want to start operating in Germany – a country with over 1 million Bitcoin owners. Interest among these foreigner players is significant.
The regulation, however, requires foreign companies to establish a subsidiary in Germany with BaFin-approved management, which poses one of the main challenges of the new regulation. Regardless of whether the company is a well-established financial institution in the blockchain space or a recently incorporated crypto exchange, the rules apply all the same. Noncompliance with the regulation bars the firm from actively conducting business with German clients.
Since this regulation is focused on custody, it is becoming clearer that custody of digital assets in Germany requires a local subsidiary. In contrast to previous practical experience in Europe, it is not permitted to rely on a workaround, where business is conducted via other EU member states. Opening a subsidiary in Luxembourg or Liechtenstein, for example, would not be sufficient.
The silver lining is that companies that had already offered services in 2019 in this newly regulated space are permitted to keep operating (“grandfathering”). For companies that have decided to start acting in the blockchain space in 2020, the time to apply is now.
On an international scale, blockchain technologies and cryptocurrencies are developing at an ever increasing pace. For this reason, the new regulation should be appreciated and the regulators commended for not only keeping up with technological advancements, but also for establishing the necessary framework for the industry to flourish.
About the authors
Prof. Dr. Philipp Sandner is head of the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance & Management. In 2018, he was ranked as one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belongs to the “Top 40 under 40” – a ranking by the German business magazine Capital. The expertise of Prof. Sandner, in particular, includes blockchain technology, crypto assets, distributed ledger technology (DLT), euro-on-Ledger, initial coin offerings (ICOs), security token offerings (STOs), digital transformation and entrepreneurship. You can contact him via email, via LinkedIn or follow him on Twitter (@philippsandner).
Dr. Johannes Blassl works as a lawyer in Frankfurt am Main in the area of banking and capital markets. He advises companies and banks among other issues on the use of blockchain technology in the financial sector. In addition, Dr. Blassl is a lecturer for international securities trading and compliance at the EBS Law School in Wiesbaden and for capital markets law at the University of Applied Sciences Mainz. You can contact him via email or via LinkedIn.
This piece reflects the authors’ personal opinions and does not necessarily represent the views of Blocks99 as an independent media portal.