EU MiCA (Markets in Crypto Assets in Europe)
Since 2019/2020, when anti-money laundering (AML) regulations were enforced, European countries have emerged as leading players in the crypto industry. Some countries have taken the lead, while others are lagging behind, or even going beyond the Financial Action Task Force (FATF) recommendations, incorporating crypto into their financial services regulatory framework.
This has created a highly fragmented and inconsistent regulatory landscape, with only some common AML and CFT elements shared among different countries. To address these issues, the Markets in Crypto Assets Regulation (MiCA) has been proposed, aiming to create a secure environment for the development of crypto assets, their issues and services, while limiting risk for the market and consumers.
Last month, a landmark agreement was reached on the MiCA regulation, which is set to come into force in 2024. The agreement could potentially open the door to crypto securities issuers and service providers to integrate with the established financial world.
In the past, however and despite all efforts to harmonise the regulations among EU member states, implementation has been far from consistent. It is thus essential to examine each member state’s regulations individually to gain a better understanding.
How is Crypto Currently Regulated in Germany?
In Germany, the exchange of crypto assets usually requires permission from German financial regulator BaFin, as such activity is typically considered proprietary trading, brokerage or operation of a MTF.
Similarly, a licence from BaFin is necessary for custody of crypto assets for third parties, as well as managing third party rights that come with crypto assets. Other services, such as digital storage of private keys or custody of physical data carriers, on which private keys are stored, are also regulated by BaFin.
Companies offering storage space only, such as webhosting or cloud-services, do not need a BaFin license as long as they do not explicitly offer storage of private keys. With regards to borrowing/lending and yield/staking, there are structures that do not require a licence but guidance from the regulator is
currently lacking.
The German Electronic Securties Act (eWpG)
In summer 2022, the German legislator extended the scope of the eWpG, which initially only covered debt securities, with the issuance of the Crypto-Fund Units Regulation (Kryptofondsanteilsverordnung; KryptoFAV). This regulation allows for the paperless issue of both centrally custodied and de-centrally registered crypto fund units.
The eWpG has introduced two types of electronic securities: centrally registered securities (Zentralregisterwertpapiere) and crypto securities (Kryptowertpapiere). Centrally registered securities are entered on a central register, while crypto securities are registered on a crypto securities register. In addition, distributed ledger technology (DLT) – commonly known as “blockchain” – enables the registration and transfer of electronic securities on decentralized registers. However, the rules on crypto securities registers are technology-neutral and can accommodate other forms of decentralized registry.
Illustration: Bitbond
AML Requirements
Financial institutions located in Germany must adhere to Anti-Money Laundering (AML) obligations outlined in section 2 (1) of the GwG (Gesetz über das Aufspüren von Gewinnen aus schädlichen Verhalten, or the Law on the Detection of Proceeds from Criminal Activity).
However, limited AML requirements may be applicable in other cases, such as those involving crypto assets or Non-Fungible Tokens (NFTs) that qualify as art, depending on their value. MiCA will incorporate many of the restrictions already in place.
Crypto Asset Business and License Requirements
Obtaining the necessary licensing for a project can be a lengthy process, with an estimated duration anywhere between 6 and 18 months, depending on the type of license, associated IT and HR costs, and the necessary compliance requirements.
For instance, firms must have a physical presence in Germany (unless the EU passporting applies), provide BaFin with evidence of initial capital and management reliability, and adhere to EU consumer protection laws.
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