Crypto Regulations in Germany

Currently, Germany has a special and rapidly growing regulative environment for crypto businesses, supplemented with general laws regulating economic activities. German and EU legislations are enforced by the national Federal Financial Supervisory Authority – BaFin. They are not yet fully harmonized, and it is thus important, on that score, when considering a crypto business, to check which of the regulated items the crypto assets in use fall under, and thus which laws are applicable.

BaFin typically assesses crypto businesses in the context of the following legislation:

• If it is a token that represents a financial instrument, it will be regulated by the German Securities Trading Act and MiFID 2.
• If a token is security-like, it will fall under the German Securities Prospectus Act.
• If the token is a capital investment, then this will be ruled by the German Capital Investment Act.

While crypto regulations are still in the making at both the national and EU levels, in December 2022, Mark Branson, the president of BaFin, hastened to call for global regulation of the crypto industry in an effort to prevent money laundering, protect consumers, and finally preserve international financial stability. That indeed means Germany is embracing crypto-based services as a real and worth-taking-along industry that might coexist with other financial products and services at the international level.

German crypto businesses can boast the following advantages:

• At the 2021 Bloomberg Innovation Index-counting expenditure on research and development, the presence of high-tech organizations, and other relevant metrics, Germany ranked 4th as the most innovative country in the world.
• A clearly defined and stable crypto regulatory framework which can instill trust in crypto businesses internationally.
• Germany has numerous various investment incentives: grants for research and development.
• The German market is huge – over 82 mill. people – and for many German companies this will open doors to the rest of the EU too.
• Germany tries to avoid double taxation and thus has international agreements on avoidance of double taxation with about 90 countries.

Cryptoasset Definition

Within the meaning of section 1  (11) sentence 1 no. 10 of the German Banking Act, cryptoassets also are financial instruments. In other words, Section 1 para 11 sentence 4 of the German Banking Act defined cryptoasset as a digital representation of value which has neither been issued nor guaranteed by any central bank or public body and which isn’t considered legal tender but on the basis of an agreement or actual practice is accepted by natural or legal persons as a means of exchange or payment or for investment purposes, and it can be transferred, stored and traded by electronic means.

Pursuant to section 1(11) sentence 5 of the German Banking Act, the following shall not be deemed cryptoassets: Means of payment in electronic form within the meaning of section 1(2) sentence 3 of the German Payment Services Supervision Act.

Such a monetary asset meeting the conditions of payment systems used in limited networks or with a very limited product range and instruments used for social or tax purposes, or is used only for payment transactions in case of electronic communication services.

Only those e-vouchers, which comprise the products or services of either the issuer or a third party against equal value – intended only to acquire an economic function vis-à-vis the issuer upon redemption, un tradable and also not embedding quasi-investor expectations about performance of the voucher or general business development of issuer or a third party, in value and accounting terms:

Among these, service tokens are electronic tokens within multi-partner schemes where their exchange is not possible and not fitting for means of general exchange and payment, neither intended for such.

Considering the fact that the above categories of financial instruments are partly overlapping, taking into consideration peculiarities in some cases, cryptoassets might fall under another category of financial instrument in the meaning of section 1 para. 11 sentence 1 of the German Banking Act. The tokens are already exchange or payment functions, hence they are already units of account in the meaning of section 1 paragraph 11 sentence 1 no. 7 of the German Banking Act.

On the other hand, there is one cryptoasset which covers a token used for an investment among them. For instance, security tokens and investment tokens can also be qualified as debt securities, investment products, or investment funds according to section 1 para. 11 sentence 1 no. 2, 3, and 5 of the German Banking Act.

Prevention of Money Laundering and Terrorist Financing

Under German law, every crypto company is obliged to apply internal policies and procedures regarding the identification of any transaction connected with money laundering and terrorist financing. The so-called policy should operate to protect not only the crypto company’s reputation and financial strength but also the integrity and stability of the entire financial market. While the German Federal Bank lacks AML/CFT competence, BaFin’s Department for the Prevention of Money Laundering has full responsibility for the enforcement of AML/CFT regulations.

BaFin is tasked with ensuring that all the businesses it supervises adhere to the stipulated rules in the following legislation:

• The Anti-Money Laundering Act
• The Banking Act
• The Insurance Supervision Act
• The Payment Services Supervision Act
• Investment Code

These regulations create an avenue for making the business transaction transparent by using such precautions as risk assessment. According to Section 4 of the Anti-Money Laundering Act, liable companies shall establish a risk management function commensurate to the type and extent of the business. This includes procedures for risk analysis according to section 5 of the AMLA and measures about internal risk according to section 6 of the AMLA. These are the minimum standards necessary for the risk-based approach as relates to money laundering and terrorist financing.

Also, crypto businesses are required to observe the due diligence of customers. More specifically, besides identifying the customer, as well as a person acting on behalf of the customer, and the beneficiaries or beneficial owners, it is relevant to check whether any of them fall under politically exposed persons, relatives of politically exposed persons, or known close associates. Also, clarification of the purpose and type of business relationship must be made every time when it is not wholly obvious.

This should be followed by ongoing monitoring of either the business relationships or the transactions processed. The liable businesses, in this case cryptocurrency companies, shall ensure the documents and information concerned are timely updated in line with laid procedure. This allows tracing back cash flows to allow identification of suspicious transactions of businesses. A liable business should thus investigate such transactions by obtaining more information. Should any facts about criminal transactions be ascertained, there shall be an immediate notification to the Financial Intelligence Unit of the Central Customs Authority.

Regulation of Crypto Exchange Businesses Companies offering services of the exchange of cryptoassets into fiat money and vice versa and into other cryptoassets are treated as financial service institutions subject to AML/CFT legislation, since cryptoassets may be financial instruments according to the meaning of section 1 (11) sentence 1 of the German Banking Act, depending on their specific characteristics. The exchange of cryptoassets which are classifiable as financial instruments falls under the scope of the list of banking and financial services transactions in section 1 (1) sentence 2, (1a) sentence 2 of the German Banking Act.

Regulation of Crypto Custody Businesses

Crypto custody businesses were, for the first time, financial service providers under the German Act Implementing the Amending Directive on the 4th EU Anti-Money Laundering Directive of 12 December 2019. The crypto custody business is defined in Sec. 1 para. 1a sentence 2 no. 6 of the German Banking Act as: “the custody, management, and protection of cryptoassets or private crypto keys used to keep, store or transfer cryptoassets for others.”.

The amendments concern nine laws and five statutory orders. They include, among other issues, the actual implementation of the extended AML/CFT requirements in respect to the extension of the number of business areas subject to AML/CFT regulations, especially within crypto businesses. The paper also considers such issues as public access to the European transparency register and reporting discrepancies, as well as the introduction of the requirement to report suspicious activity in the context of transactions.

German Law on Electronic Securities

In this way, Germany follows the example of most other European countries and moves towards laws dematerializing securities. The German Electronic Securities Act entered into force in June 2021. This law revised the German securities legislation and also the related supervisory legislation. By issuing electronic securities, German legislators implemented one of the main points of the government’s blockchain strategy, as well as the joint whitepaper on electronic securities published by the Federal Ministry of Justice and Consumer Protection and the Federal Ministry of Finance.

Moreover, the German Electronic Securities Act is an omnibus law that has amended the following regulatory frameworks:

• The German Stock Exchange Admission Regulation
• The German Securities Prospectus Act
• The German Safe Custody Act
• The German Bond Act
• The German Banking Act
• The German Pfandbrief Act
• The German Investment Code

Note that these capital market regulations may also apply to your crypto business, depending on the purpose and characteristics of cryptoassets in use. Alongside this, the legislator agreed upon an option to simplify the bringing-in of crypto funds by this ordinance that are certificates of units, which are issued via a crypto securities register. It would be a regulation enacted by the Federal Ministry of Justice and Consumer Protection in concert with the Federal Ministry of Finance. Pending different preliminary legal questions being brought into focus, it would be more likely that the scope of the German Electronic Securities Act would be further extended toward other investment classes.

Under the German Electronic Securities Act, a distinction is made between two kinds of electronic securities registers: the central securities register and decentralised crypto securities registers, normally operated on the basis of distributed ledger technology (DLT). The German Electronic Securities Act classifies electronic securities as property within the meaning of section 90 of the German Civil Code. Thus, in general, it is possible to say that the transfer of e-securities will fall under the German Civil Code.

The German Electronic Securities Act does allow issuance of bearer bonds as crypto securities entered into the Crypto Securities Register. The legislator has not tied himself to a specific technology but tried to leave room for market innovations. At the same time, the regulation of the German Electronic Securities Act is explicitly in line with the efforts of the fintech industry to issue securities via a DLT. These concepts are supposed to make it easy to create secure, decentralised databases that, in turn, are also meant to document securities transactions.

In this process, the technology is supposed to take the place of central securities depositories or custodian banks. This shall apply only to crypto securities and only in cases where the issuer does not strive for the tradability of the financial instrument within a stock exchange. It has to be underlined that in connection with the book-entry securities concept of a central securities depository, this is possible only under the conditions laid down in section 12 paragraph 3 of the German Electronic Securities Act, and is not possible for crypto securities. The requirements of European law are in contrast to each other; therefore, it excludes tradability on a stock exchange at present.

Pursuant to the German Electronic Securities Act, BaFin has been entrusted with responsibility for keeping the Crypto Securities Register, with the aim of ensuring investor protection, transparency, smoothness, and no disturbance to market integrity. In this respect, the legislator classified crypto security registration as a financial service in the sense of the German Banking Act. Maintenance of the register could be automated and algorithm-based.

From a legal standpoint, such an electronic security shall exist once it has been entered into this register. Crypto securities registrars can apply for the respective authorization with effect from June 2021. Once the relevant authorization has been granted, the registrar entity is free to create a crypto securities register that aims at listing crypto securities.

BaFin will publish a public list of the crypto securities on its website in accordance with Section 20 para. 3 of the German Electronic Securities Act. Only those crypto securities will be included in the future crypto security list whose entry or amendment in a crypto securities register has been published in the Federal Gazette by an issuer pursuant to section 20 (1) of the German Electronic Securities Act and regarding which the issuer has informed BaFin of such publication. This list is only published for information purposes without giving rise to any legal effects.

Germany

Capital	Population	Currency	GDP
Berlin	84,270,625	EUR	$48,398

New EU-wide Crypto Regulations

The EU has also worked tirelessly to standardize crypto regulations across the block, which will affect German crypto businesses. The Markets in Crypto-Assets regulations are supposed to take effect between early 2023 and before the end of 2024. They shall provide clarity through harmonization of regulations pertaining to the prevention of the misuse of crypto assets while encouraging the development of crypto innovations.

Key priorities and enhancements also involve the environmental obligations that will commit crypto firms to contribute to the reduction of crypto assets’ high carbon footprint. In a nutshell, major CASPs will be forced to publish information relating to environmental impact, such as the extent of energy use, by displaying it on the company websites and informing national authorities.

The next big EU-wide move is related to supervised experimentation with crypto-technologies for commercial purposes. It will be given legal effect in March 2023 by the so-called Pilot DLT Market Infrastructure Regulation (PDMIR). The latter will provide a legal framework for the trading and settlement of transactions in cryptoassets that are classified as financial instruments under MiFID 2.

CRYPTO REGULATION IN GERMANY

Crypto License in Germany

The commercial offering of crypto-products and crypto-services in Germany, or their offer to such an extent that their operation is subject to the establishment of a commercial enterprise, is contingent upon prior written approval by BaFin, regardless of the business form taken by the operator, which also pertains to civil law business forms (sole proprietorship, partnership, GmbH, or otherwise). In any event, such a business shall be subject to authorization pursuant to section 32(1) of the German Banking Act only if it is conducted in Germany.

First, it is considered to be carried on in Germany if either the central administration or registered office of the company is situated in Germany, even if it intentionally operates only this business with persons who are not residents of Germany. It shall be deemed to be carried out in Germany, in particular, if the enterprise establishes a dependent branch in Germany or has any other permanent establishment in Germany from which it carries on these economic activities, even if it intentionally does so only with persons that are not residents of Germany.

Thirdly, the abovementioned link with Germany is created if the service or product, starting from a country other than Germany, is offered, especially to companies or persons whose registered office or habitual residence is in Germany while communicating remotely for the cross-border provision of services without a network of intermediaries or a physical presence. Although crypto custody businesses could therefore, in principle, engage in cross-border activities under Section 1 paragraph 1a sentence 2 no. 6 of the German Banking Act by simply notifying the German authorities of the process, they are prohibited from doing so under this provision, while all other financial services are permitted.

Since January 2020, every company that plans to offer crypto custody services in Germany needs to apply for permission from BaFin, which reviews the applications under the German Act Implementing the Amending Directive on the 4th EU Anti-Money Laundering Directive (4th AMLD) and the German Banking Act, whereby crypto custody businesses are classified as new financial services. The main requirements for crypto-custodians are the minimum capital of 125,000 EUR, reliable owners, and reliable and qualified managing directors of the company, as well as a viable business plan.

Whoever would like to perform, besides licensed activities, any other business, has to obtain a prior new authorisation, the so-called written permission from BaFin. This shall also apply if the enterprise conducts its business either as a member or participant of an organized market or a multilateral trading system, or directly with electronic access to a trading venue, or with commodity derivatives, emission allowances, or derivatives on emission allowances. In the case of a sale of the financial instruments by it, licensing by BaFin is required for a company licensed under Section 32 paragraph 1 sentence 1 of the German Banking Act, unless this already constitutes the operation of a banking business or a financial service.

In the cases when the business activity includes, additionally, financial instruments according to MiFID 2, the authorization might be based on a Delegated Regulation (EU) 2017/194 instead of section 32 paragraph 1 sentence 1 of the German Banking Act. Please feel free to book an individual consultation with our team for further clarification, as we will be happy to explain in detail what exactly should be applied to your crypto business model.

How to Start a Crypto Business in Germany

The first step in establishing any crypto business in Germany is opening a German company, which is duly incorporated under Company Law. The GmbH, which stands for Company with Limited Liability, remains the most common legal business entity in Germany. You can establish it within three weeks and then start applying for a crypto license while we support you every step of the way.

The main requirements to have a Company with Limited Liability are the initial share capital, a registered office in Germany, qualified directors, and a name of the company which is in compliance with the relevant regulations. All the documentation that accompanies this needs to be certified, translated and authorised, which we also can help you with. The notarised applications are forwarded to the Commercial Register Court, which afterwards registers the new company with the Commercial Registry.

It is also necessary to register with the Federal Central Tax Office, given the crypto companies’ obligation of having to pay most of the taxes. Once the crypto company is set up and fully licensed, you should make sure to follow rules on taxation and reporting that may be quite complicated and irritating, as German corporate tax is among the highest in Europe, though partial exemptions may apply to Corporate Income Tax. For instance, this tax does not apply to company-level capital contributions provided during the formation or increase of the company’s capital.

If you’re determined to go deeper into crypto regulation in one of the most stable and trusted economies, highly qualified and experienced consultants at Regulated United Europe (RUE) will be happy to share theoretical and practical insights with you. We’re well-aware and closely follow the crypto-related legislation not only in Germany but in the whole of Europe and therefore can explain the situation efficiently and confidentially. What’s more, we are happy to help with setting up and licensing a company, financial accounting, and tax optimisation. Book a personalized consultation now and begin your new journey in the crypto industry.