Implementation of AMLD5 in Germany could impose licencing requirement on providers of crypto custody services – potentially boosting trust or stifling developing market

An early stage draft of the law implementing the 5th AMLD in Germany drafted by the German Federal Ministry of Finance (BMF) introduces a licence requirement for “the custody, management and safekeeping of crypto-values or private cryptographic keys used to hold, store and transmit crypto-values for others". The offering of such “crypto custody business” would, should this draft become law, trigger the requirement to obtain a financial service licence under the German Banking Act (KWG) from the German regulator BaFin. This would apply to anyone offering such services in the German market.

Casting a wider net

The current draft law seems not only to capture cryptocurrencies (as are addressed in the 5th AMLD) but to cast a wider net to also include other crypto-values which are defined as:

“digital representations of an asset 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 which is accepted by natural or legal persons 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 (excluding, inter alia, e-money)”.

Support for earlier BaFin’s approach?

It is noteworthy that this draft is still subject to discussion and might change. It can, however, also be read as a reaction of the legislator to a ruling of the high court of Berlin (Kammergericht Berlin) in late 2018.

In this ruling, the Kammergericht Berlin dismissed BaFin’s regulatory qualification of cryptocurrencies as financial instruments. However, as this was a ruling in criminal court, the ruling did not change BaFin’s qualification per se but was limited to the specific case at hand.

It seems plausible that the legislator wants to back BaFin’s assessment with this current draft law.

Blockchain for dematerialised securities

Furthermore, there are further legislative efforts in Germany on the way which might allow for dematerialised securities to be issued in registers (such as DLT). Thus, the proposed introduction of a new licence requirement seems – also taking into account the often fraudulent ICOs of the more recent past - in principle sensible.

Clarity for regulated entities

Furthermore, such a licence requirement would make it clear that regulated financial institutions are generally able to develop crypto products and to offer services in connection with crypto-assets, even in public blockchains.

What’s happening next?

As the current draft is not based on EU law, it remains to be seen what such a new licence requirement would mean to the further development of blockchain technology in the financial space for the German market.

On the one hand (in the medium to long run), it seems plausible that a higher level of protection via regulation should have a positive effect on customer and investor trust, perhaps providing a major stepping stone for the further maturing of this industry, helping established institutions to further venture into this space.

On the other hand (at least in the short run), this change could pose a high burden for many of the young DLT start-ups in the developing German blockchain scene, posing the risk for custody ventures to avoid the German market.