New German Rules On Crypto Assets – Finance and Banking

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On November 29, 2019, the German legislator adopted new rules on
crypto assets. The new rules have been adopted as part of the
implementation of Directive (EU) 2018/843 of 30 May 2018
(5th AML Directive). Under the 5th AML Directive,
the domestic law of EU member states has to provide that custodian
wallet providers are subject to anti-money laundering requirements.
In this context, “custodian wallet providers” are defined
as entities that provide services to safeguard private
cryptographic keys on behalf of their customers, to hold, store and
transfer virtual currencies. Rather than amending the German
Anti-Money Laundering Act (Geldwäschegesetz
(GWG)), the German legislator has decided to take
a much broader approach. The new law contains, amongst others,
changes to the German Banking Act (Kreditwesengesetz
(KWG), which provide that:

  1. crypto assets qualify as financial

  2. trading with crypto assets and the
    custody of crypto assets as a service for others require a license
    from the German Federal Financial Supervisory Authority
    (Bundesanstalt für Finanzdienstleistungsaufsicht
    (BaFin)) as a bank or as an investment firm;

  3. entities that provide no other
    financial services than custody are exempted from certain rules
    that apply to other investment firms.

Crypto assets qualify as financial instruments

Whether or not crypto assets qualify as financial instruments
has a significant impact on the applicable regulatory framework. If
crypto assets qualify as financial instruments, entities trading
with such assets or providing custody services with respect to them
may require a license as a bank or an investment firm. Banks and
investment firms must also comply with regulatory requirements such
as capital requirements and anti-money laundering requirements.

The qualification of crypto assets as financial instruments was
disputed in the past. The BaFin took the view that utility tokens
did not qualify as financial instruments. However, according to the
BaFin, investment tokens qualify as securities, which fall under
the definition of financial instruments pursuant to the German
Banking Act. The BaFin also took the view
that currency tokens qualify as “units of account”
(Rechnungseinheiten), which also falls under the
definition of financial instruments pursuant to the German Banking
Act. A
decision by the district court (Kammergericht) of Berlin
dated October 19, 2018, opposed this view and held that payment
tokens did not qualify as financial instruments; however, this
decision had no impact on BaFin’s administrative

The new law defines crypto assets as “the digital
representations of a value that has not been issued or guaranteed
by any central bank or public authority and that does not have the
legal status of currency or money, but which is accepted as a means
of exchange or payment or for investment purposes by any person or
entity on the basis of an agreement or according to market
practice, and which can be transmitted, stored and traded

This definition is rather broad and can include utility tokens,
investment tokens, payment tokens, as well as hybrids

Licensing requirements for the custody of crypto assets

The new rules also include a licensing requirement for the
safeguarding, the administration and the securing of crypto assets
as a service for others. According to the legislative reasoning,
“safeguarding” means that the service provider saves
crypto assets of the customers in a collective account to which the
customers have no key. The “administration” of crypto
assets means the exercising of rights arising from the crypto
assets (such as voting rights). The “securing” of crypto
assets includes the securing of the private key of the customers as
well as the securing of physical media on which such keys are
recorded. This does not apply to the mere offering of storage
capacity (such as webhosts or cloud storages), provided that such
storage space is not explicitly offered for the securing of private

Thus, custodian wallet providers will be subject to license
requirements if they offer their services in Germany. According to
German banking law, the offering of services “in Germany”
does not require a physical establishment in Germany. Any activity
by which an entity incorporated or resident outside Germany
solicits business from persons in Germany is regarded as the
offering of services in Germany. Only if the German customer
contacts the service provider without having been solicited to do
so, the service provider will not be deemed to conduct the custody
business in Germany (so-called “reverse solicitation”).
If services are provided on the Internet, there is often only a
thin line between soliciting customers in Germany and reverse

Requirements for a license for the crypto asset business

Entities that require a license only for the crypto asset
business, but not for any other type of banking business or
financial service, will have to comply, inter alia, with the
following requirements:

  • an initial capital of

  • the management must have sufficient
    experience and be reliable;

  • the firm must have a proper business
    organization (this includes the rules applicable to outsourcing and
    risk management as well as IT security which apply to banks and
    other investment firms);

  • certain notification requirements
    (i.e. if the capital falls below certain thresholds or if managing
    directors resign or are appointed. 

Entities that provide no licensable services other than the
custody of crypto assets are exempted from a number of regulatory
requirements that generally apply to investment firms. This mainly
applies to certain requirements related to capital buffers and liquidity
and regulatory capital requirements under the Banking Act and the CRR.

Further licensing requirements

Since the legislator has now clarified that crypto assets
qualify as financial instruments, any banking business or financial
service relating to financial instruments will require a license if
such a banking business or financial service is conducted or
provided in relation to crypto assets. 

For example, the operation of a multilateral trading system
(MTF) that brings together multiple third-party
buying and selling interests in financial instruments according to
non-discretionary rules, qualifies as a licensable investment
Depending on their specific set-up, it is likely that some crypto
asset trading platforms may qualify as MTFs. 

In addition, the purchase and sale of financial instruments as
an agent for others qualifies as a licensable banking business or
financial service. Thus, if such activity is conducted with respect
to crypto assets, the service provider will have to obtain a
license as a bank or investment firm.

Pure proprietary trading, which is not provided as a service for
others, does not qualify as a licensable business. However, it
should be noted that own account trading that is conducted with a
view to purchasing and selling crypto assets to customers does not
qualify as proprietary trading and may therefore be subject to
licensing requirements.

Changes in comparison with the draft rules

A draft version of the new rulesprovided that entities that
hold a license for the custody of crypto assets may not provide any
other licensable business. This would have meant that, for example,
an entity that holds a license for the operation of an MTF would
have been excluded from offering the custody of crypto assets. This
was mainly based on IT security considerations. The legislator was
concerned that custodians of crypto assets would often be a target
of hackers and that in case of a successful hack, not only the
custody business but also other businesses of the same entity may
be affected. However, this strict
separation rule was abandoned in parliament.

Transition periods

The new law will enter into force on January 1, 2020, subject to
certain transition periods. Entities which require a license for
the custody of crypto assets, or which require a license due to the
extension of the definition of “financial instruments”,
may notify the BaFin on or before March 31, 2020, of their
intention to obtain a license. In such case, the license will be
deemed to be awarded on a preliminary basis, provided that they
will submit a complete application for a license no later than
November 30, 2020. 

Firms that provide custody services with respect to
crypto assets or other services related to crypto assets are
advised to consider the implications of the new rules, in
particular whether they need to obtain a license. Please note the
deadline of March 31, 2020, for indicating the intention to obtain
such a license to the BaFin. Please also note the deadline of
November 30, 2020, for the submission of a complete application for
a license. Although about one year from now, it should be noted
that the preparation of a complete application may require a
considerable amount of time and effort. 


1Art. 3 para. 19 of Directive
2015/849 as amended by the 5th AML Directive.

2Furthermore, investment tokens
may qualify as can be as “transferrable securities” and
therefore also as financial instruments pursuant to Directive
2014/65/EU (MiFID II), depending on their

3Traditionally, “units of
account” have been interpreted as payment instruments such as
the special drawing rights under the International Monetary Fund

4The definition also explicitly
excludes e-money and payment instruments that entitle its holder to
the acquisition of a limited range of goods or services only or
certain payment services that are offered by the provider of
electronic communication services.

5Section 2 para. 7b of the Banking

6Sections 10c to 10i of the
Banking Act

7Section 11 of the Banking

8Articles 411 to 455 of the

9Section 1 para. 1 sentence 1 no.
1b) of the Banking Act, which implements no. 8 of Annex I, Section
A of Directive 2014/65/EU (MiFID II).

10Section 32 para. 1g) of the
Banking Act in the version of the government draft
(Regierungsentwurf), BT-Drucks. 19/13827.

11BR-Brucks. 352/19, p.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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