Analysis | Entities need to obtain BaFin license. Does the new law pave the way for Germany to become a "cryptocurrency paradise"?

A new German law requires that every entity (such as a Bitcoin exchange or Bitcoin custodian) who holds the private key of another person's cryptocurrency must obtain a license from January 1, 2020. The most common misconception here is: No, it doesn't matter where your company's headquarters is. What matters is whether your service addresses the German market.

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"The law implementing the Fourth Amendment to the European Union's Money Laundering Directive (Federal Law Gazette I, December 19, 2019, p. 2602) includes the cryptocurrency deposit business as a new financial service under the Credit Law (KWG). When the law As of January 1, 2020, companies that want to provide these services need to obtain a license from the German Federal Financial Supervisory Authority (BaFin). However, the law provides that companies that have already undergone a current authorized transaction before entering into force , Transitional provisions should be made. "

Let me show at the beginning of this article that, although there are still many outstanding issues, I would be a general supporter of this regulation if implemented properly. I believe that this new law may pave the way for Germany to become a "crypto paradise" in Europe, as large financial institutions and investors in particular prefer regulatory entities. But frankly, this will depend to a large extent on how the regulators ultimately deal with emerging issues. Even if the intention was very good at the beginning, if not implemented properly, it could have a negative effect on the German ecosystem. But in my heart, I don't think this will happen as the cooperation between regulators and the industry seems to be getting closer. By cooperating with each other instead of opposing, then good regulatory decisions should be feasible.

Taking all factors into consideration, I think the main challenges facing the new regulations are the following four points:

1.Lack of clear definition

There is currently no clear definition of what it means to “actively respond” to the German market, which will depend on the specific situation. One possible explanation is that anyone who runs a website with German lettering or provides German marketing materials may think that they are actively responding to the German market. But if someone-for whatever reason-has more and more German customers without any "official" marketing, you can also conclude that you must be actively responding in some way German market, otherwise you would not get so many new customers from Germany.

2. Lack of "Passport"

France is also collating its own regulations, and it would be great if Germany and France could agree on the potential "passports" for their respective permits. This means that if you obtain a license in Germany, you can also operate in France without applying for a new license (to be precise, registration). Although we are convinced that this will happen soon, it would be great if this agreement was reached from the beginning.

3.Lack of clarity

For an outsider unfamiliar with German laws and regulations, enforcement methods and timetables may seem strange (though in fact they are very smart). In short, if you declare to the official that you plan to apply for a license by March 31, 2020, and then submit your application by November 30, 2020 (yes, it seems to require you to return in time), since 2020 Starting January 1, you will be considered a supplier with a temporary and traceable license. This also means that if you say that you want to apply for a license before March 31, 2020, and then do not submit an application before November 30, 2020, you will be considered as of January 1, 2020 Is illegal.

At the same time, it also means that if you run your own business as usual, you will most likely be considered illegal starting January 1, 2020. This is not a misdemeanor, but a felony. Nonetheless, some market participants seem to really rely on a strategy called "reverse tendering" (which means basically the customer is free to choose any supplier he or she wants) rather than applying for such a license .

Given the huge political impact of this new rule, I'm sure this is not a good idea. As we have seen in the past, I think the German Federal Financial Supervisory Authority (BaFin) will perform very strict supervision in this case, otherwise the new law will be meaningless and will harm the German economy. From a German perspective, It makes little sense.

4. Lack of communication with international stakeholders

Significant improvements need to be made in communication, especially in the international community, as this is an international issue. So far, I have neither seen a direct translation of the law nor any English advice provided by the regulator. Although this is good for those of us who work in consulting firms and provide advisory services to exchanges and custodians, the lack of clear communication from regulators is generally problematic.

A strange "non-German" structure is missing

I sometimes laugh at an interesting "cultural" event. As we all know, the Germans have a set of forms and rules for almost everything. This is true, and this is where we are (including all the pros and cons). So it's weird that it's not the case in this example; therefore, we need to work with regulators to develop appropriate rules and regulations.

For example, "multi-party computation" (MPC) is not mentioned in the new law; the issue of multi-signature is still an open state, including many different other issues, some of which are very specific. This lack of clarity makes a typical German quite uncomfortable, because we are not used to it at all. What we have is, at best, a step-by-step method that involves educated guessing and a lot of communication.

Positioning of managed service entities

Another interesting fact is the way the custodian (technology provider) deals with these issues. According to a study conducted by the Digital Assets Custody website (the Digital Assets Custody, as far as I know, the largest website on the digital asset custodian comparison site), it seems that most professional infrastructure providers for digital asset hosting Escape from regulation like a plague, claiming that they will only act as technology providers and not as custodians who need regulation.

Although I understand this evasion, it seems short-sighted because of the challenges inherent in regulation. On the one hand, I believe that regulation will eventually expand. The first step will focus on exchanges, but then they will focus on escrow services.

In my opinion, not only exchanges, but depending on each entity's respective technology stack and business model, the custodian may eventually be considered a regulated entity. Therefore, it is basically a matter of time before regulators knock on the door. As seen in history, it's usually a good idea to go ahead.

Solutions to the custody dilemma

Interestingly, although relevant participants should remain vigilant about German regulation before then, the new law on custody has to some extent alarmed the industry. This goes back to the view of the German Federal Financial Supervisory Authority (BaFin), which treats Bitcoin as a so-called "bookkeeping unit", making it a financial instrument; therefore, everyone who deals with these financial instruments Should already have the proper licenses. This means that if you want to operate a Bitcoin trading platform, you need (depending on the business model) a license for a multilateral trading platform. The Berlin Court of Appeal expressed different views in one case, causing some confusion.

By introducing the newly created term "Krytowerte" (directly translated as "cryptocurrency value"), it is now clear that Bitcoin is indeed considered a financial instrument, and every entity that deals with Bitcoin must deal with any other financial instrument. Companies are regulated in the same way.

Since the respective licenses depend on the specifics of the business model, it is difficult to give some of the "general information" required. A custodian license is likely to require two "suitable" managing directors, starting capital of 125,000 euros (approximately US $ 136,000), plus approximately 250,000-350,000 euros (approximately US $ 272,000-380,000) in establishment costs and 350,000 euros (Approximately $ 380,000). (These are rough estimates, and various costs can vary greatly depending on your business model.)

All in all, the new law makes it more difficult to run a digital asset business. But on the other hand, it also brings a degree of clarity and security to those who work with vendors in the digital asset space.

Will everyone be satisfied with this new direction? Probably not, but this is just the beginning.