Crypto Assets soon to be regulated as financial instruments under German law

The Law serves to implement the amending directive to the Fourth EU Money Laundering Directive (Directive [EU] 2018/843) (AMLD5) into national law. It will primarily lead to amendment of the German (Anti) Money Laundering Act.

However, the Law also provides for additional rather unexpected changes to the German Banking Act (Kreditwesengesetz – KWG) relating to Crypto Assets, as it:

• introduces a regulation for Crypto Custody Services and defines this service as “the safekeeping, administration and storage of crypto assets or private cryptographic keys used to hold, store and transfer crypto assets for others (Crypto Assets Custody Services)”, and
• defines “Crypto Assets” and classifies them as regulated financial instruments:

“For the purposes of this act, Crypto Assets are digital representations of a value which has not been issued or guaranteed by any central bank or public authority and which does not have the legal status of currency or money but is accepted by any person or entity as a means of exchange or payment or for investment purposes by virtue of an agreement or actual practice and which can be transmitted, stored and traded electronically.”

The Law was published for public consultation (albeit for a very short period).

The German market and experts have already expressed their concerns noting that the Law goes some way beyond the scope of AMLD5 when many consider it unnecessary to introduce such material changes to the German Banking Act in order to achieve the goals of Anti-Money-Laundering and Combat-Finance-of-Terrorism.

In fact, Germany is drafting a new law which would regulate Crypto Assets on a domestic level and which contradicts EU harmonisation goals, as recently expressed by ESMA and EBA. Even though ESMA recognises such proactive and supportive approaches, it strongly prefers an EU-wide approach considering the cross-border nature of Crypto Assets.

The Law would create a novelty within the EU by regulating Crypto Custody Services and Crypto Assets as defined above. More critically, the proposed definition of Crypto Assets is both very wide and captures any electronic tradeable asset within the definition of regulated financial instruments. Even though the current definition of Virtual Currency within the AMLD5 is very broad, the German definition would open Pandora’s box.

The Law follows the position taken by the German Federal Supervisory Authority, BaFin, which qualifies BitCoin and any Crypto Currency since 2014 as financial instrument, even though German Court Rulings have ruled that such a broad interpretation is not supported in law. The Law will introduce new business opportunities to regulated firms and exclude Crypto related services for non-regulated firms in Germany.