German legislation on cryptocurrencies

Judy Rubio

The demand of time, backed by the EU Directive

The EU money laundering legislation Directive has far-reaching plans. Germany was among the first to start the process of regulating the movement of cryptocurrencies. From now on, storing and trading digital assets in the future will require a license from BaFin, Germany's Federal financial supervision authority.

This condition applies to all companies using blockchain.

A dry legal text with a large explosive force

The new Federal law prescribes a number of fundamental points:

  1. From now on, holders of digital currency are protected from loss of funds at the state level. Crypto asset storage is introduced as a BaFin licensed and approved financial service.
  2. Companies storing and trading digital assets should have only cryptographic business, not provide other financial services.
  3. The implementation of high security requirements for companies offering encryption.
  4. Possibility of exchange from abroad.
  5. Every manufacturer or owner of a mining machine that has a wallet of crypto assets will also have to comply with regulatory requirements for storing cryptography.

The path of the German lawmaker also has significant obstacles at the EU level. EU-registered financial service providers can do business in other countries without the need for additional country-specific approval. Since the storage of crypto assets is not a financial service in the meaning of European regulation, when entering the German market, financial institutions established in the EU will have to apply for a license.

Concerned companies must inform BaFin of their intention at the beginning of the first quarter of 2020 and submit a full application by June 30, 2020.

Risks and new opportunities for participants of the German crypto market

The approach of the German legislator to the comprehensive regulation of the crypto assets sector is an important step in the further development of the industry. Stolen bitcoins, deceived customers, manipulation of the exchange rate, money laundering are a thing of the past.

The successful development of the cryptocurrency market now requires the participation of reputable players.

Start-ups

For startups that need a license, the challenges of regulatory innovation are the biggest. Fulfilling the conditions of the new law is fraught with difficult obstacles for beginners. As a result, a significant part of startups will abandon their activities or leave the country. Young active business can move to countries such as Liechtenstein, Malta, Switzerland, where the rules are less stringent.

Whether regulatory barriers will be too high even for high-end startups is a matter of time. But the undoubted advantage of innovation is that non-professional startups and questionable suppliers will leave the market.

Fintech companies

For an already created and established fintech-leaders, the implementation of the new requirements can be a real obstacle. On the one hand, these companies have their technical know-how for the core business. On the other hand, they already cooperate with banks. However, even in these cases, it may be necessary to create a subsidiary and apply for the appropriate encryption license.

However, fintech companies should understand that the licensing process provides an opportunity to significantly improve its position in the market.

We can assume that by the end of 2020 there will be a "shake-up". This means that many companies (in particular, crypto exchanges) will be forced to cease their activities. They will not be able to meet regulatory requirements.

On the other hand, those who obtain a license will actually benefit from the associated consumer confidence and, as a result, improve their economic situation.

Banks

For banks, the latest developments involve opportunities and risks at the same time. Large companies are unlikely to abandon the offer of financial services in favor of switching to crypto assets for strategic reasons. Most likely, most of them will create subsidiaries with the application for a license. However, some traditional banks will face significant challenges in implementing the technology into the existing business structure.

Banks often do not understand blockchain technology with its specific details. This is a kind of internal "crypto-ban", which is fraught with the danger of being drawn into the financing of terrorism and money laundering.

Any German financial institution with technological tools in the field of cryptography can create a legally independent subsidiary and obtain a BaFin license.

Joint venture

The combination of startups and established financial institutions seems to be a very interesting construction in a legal sense. This format could be used for a potential joint venture on mutually beneficial terms. However, such cooperation is dangerous for both the beginner and the traditional financial institution, if it requires exclusivity.

As a result, either the growth of the startup will be limited, or an established partner from the financial industry will be subjected to unwanted "blocking".

Banks can share their experience and reputation, which should be useful given the relatively short transition period. Startups, on the other hand, can help their partners with technological expertise.

The principle requirement to separate the secure storage of crypto assets from other banking operations will be automatically fulfilled in the joint venture.

Blockchain on a legal basis

Progressive regulation of the crypto market in Germany provides consumer confidence, recognition and wider use of Blockchain technologies. Unprofessional startups and questionable providers are being pushed out. Well-established projects will find solutions and continue to grow, either alone or in collaboration with others.

The scope of the new legal framework requires comprehensive study and discussion. In this context, regulation of the circulation of crypto assets by the European community would be desirable. But if Europe as a whole turns out to be sluggish, what should the German legislator do? Wait and see? Fortunately, he takes action!