On May 30th, 2018 the 5th EU Anti Money Laundering Directive has come into force . It has obliged its member states to make legislative changes at national level by January 2020 in order to comply with the new regulations.
In this context, Germany has proposed a revision of its Banking Act and developed regulations for the safekeeping of crypto currencies/assets. If the regulation is implemented as currently proposed, these changes will affect many existing stakeholders in the market. And they are strict. Currently the BAFIN is still discussing with Financial Industry institution the details. But one after the other…
Who’s affected by the change of law?
The change in the law affects all companies that take care of crypto assets as a service for third parties. The companies that are primarily affected are those that already store crypto assets for their customers in a collective inventory without the customers themselves having any knowledge of the corresponding private keys.
These are primarily crypto-exchanges. Today, they usually store most of their customers’ assets in so-called cold wallets. This means that the corresponding crypto assets were encrypted with a public key whose private key was generated completely offline. As a result, the assets are relatively well protected, since potential attackers have difficulty accessing the corresponding data through the internet.
However, case law will show which other stakeholders will also be affected. Depending on the interpretation of the relevant legal changes, other companies could also fall under this regulation. One example of this are the so-called crypto backed stablecoins, which try to keep the value of the issued stablecoin more or less stable by keeping the corresponding crypto currencies as an underlying value. Structured products and other investment instruments based on crypto currencies could also be affected. In addition, it must be checked to what extent crypto currencies collected by ICO/STO projects and hold in collective wallets will fall under this regulation.
Furthermore, this new regulation does not only concern companies, which have their head office in Germany. All companies that actively offer their services to German customers will have to comply with the new law – regardless of where the legal domicile of the company is.
What’s the crypto custody license?
The crypto custody license is a so-called exclusive license. This means that the company in question may not provide any other licensed services in addition to the custody of crypto assets (such as the trading of crypto currencies). In a first draft, not even the custody of conventional financial assets could have been handled through the same legal entity – at least this restriction has been lifted in the latest update.
Crypto assets are defined as all digital representations of a value that is not issued or guaranteed by any central bank or public authority and is not considered to be currency or money. As already mentioned in the teaser, the new regulation will apply from 1 January 2020. However, for companies that already offer crypto custody services today, a transitional period until 30 November 2020 will apply.
How does the change in the law affect instruments such as security tokens and the like?
According to today’s interpretation, digital representations of securities will not fall under the provisions of the crypto custody licence. This means, for example, that a separate license will apply for the safekeeping of so-called security tokens, which in most cases represent a digital representation of securities as defined by German law.
It is also still unclear how the change in the law will affect business cases still in their infancy, such as the increasing networking of machines within the framework of Industry 4.0. If, for example, a machine has its own wallet and can thus make decisions independently within the framework of defined parameters and trigger and pay orders, an external custodian of the cryptographic keys involved may also be necessary under certain circumstances.
Would you like to know whether you will also be affected by this new regulation and what possibilities exist for you? Then contact us today for a non-binding initial consultation.
