Crypto Regulations in Germany

Today, Germany has a unique and rapidly maturing regulatory framework for crypto businesses which is complemented by the general regulations governing economic activities. Germany’s Federal Financial Supervisory Authority (BaFin) is responsible for enforcing national and EU regulations. They aren’t completely harmonised yet, and for this reason, it’s very important to assess every crypto business on a case-by-case basis in order to determine which regulated items cryptoassets in use are classified as and which laws are applicable.

BaFin generally assesses crypto businesses within the framework of the following legislation:

• If a token constitutes a financial instrument – the German Securities Trading Act and the Markets in Financial Instruments Directive (MiFID 2)
• If a token constitutes a security – the German Securities Prospectus Act
• If a token constitutes a capital investment – the German Capital Investment Act

While crypto regulations are still being developed at the national and EU levels, in December 2022, Mark Branson, the president of BaFin, rushed to urge for global regulation of the crypto industry with the aim to prevent money laundering, protect consumers, and ultimately preserve international financial stability. This indicates that Germany is embracing crypto-based services as a legitimate and worthwhile industry that can function alongside other financial products and services at the international level.

German crypto businesses can benefit from the following:

• According to the 2021 Bloomberg Innovation Index which takes into consideration the spending on research and development, the presence of high-tech companies, and other relevant metrics, Germany is the 4th most innovative country in the world
• A clear and stable crypto regulatory framework that builds trust in crypto businesses at the international level
• Germany is known for various investment incentives, including grants for research and development
• The German market is vast (over 82 mill. people) and in many cases, it also opens doors to the rest of the EU
• Germany aims to prevent the double taxation and therefore has international agreements on the avoidance of double taxation with around 90 countries

The Definition of Cryptoassets

According to the meaning of section 1 (11) sentence 1 no. 10 of the German Banking Act, cryptoassets are also financial instruments. In section 1 (11) sentence 4 of the German Banking Act, a cryptoasset is defined as a digital representation of value that has neither been issued nor guaranteed by a 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.

According to section 1 (11) sentence 5 of the German Banking Act, the following items aren’t considered cryptoassets:

• Electronic money within the meaning of section 1 (2) sentence 3 of the German Payment Services Supervision Act
• A monetary asset that fulfils the requirements 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
• Purely electronic vouchers relating to products or services of the issuer or a third party in exchange for the equivalent amount, which are only intended to acquire an economic function in relation to the issuer upon redemption and aren’t tradable and which don’t reflect any quasi-investor expectations, in value or accounting terms, as to the performance of the voucher or the general business development of the issuer or a third party
• Electronic tokens in multi-partner programmes where they can’t be traded and aren’t suitable as general means of exchange and payment or aren’t planned to be used in such a way

Considering that the categories of financial instruments overlap to certain extent, depending on the characteristics, in certain cases cryptoassets may also fall under a different category of financial instrument according to the meaning of section 1 (11) sentence 1 of the German Banking Act. Tokens with an exchange or payment function are already defined as units of account within the meaning of section 1 (11) sentence 1 no. 7 of the German Banking Act. However, the definition of cryptoassets also includes tokens used for investment. For instance, security tokens and investment tokens may also be categorised as debt securities, investment products, or investment funds under section 1 (11) sentence 1 no. 2, 3, and 5 of the German Banking Act.

Prevention of Money Laundering and Terrorist Financing

In Germany, every crypto company is legally required to have internal operational policies for the detection of transactions tied to money laundering and terrorist financing. Such policies should work in a way that not only protects the reputation and financial strength of the crypto company but also guarantees the integrity and stability of the entire financial market. While the German Federal Bank doesn’t have AML/CFT competence, BaFin’s Department for the Prevention of Money Laundering is fully responsible for the enforcement of AML/CFT regulations.

BaFin’s task is to ensure that all the supervised businesses comply with rules stipulated in the following legislation:

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

These regulations allow for ensuring the transparency in business transactions through the use of such precautions as risk assessment. According to section 4 of the Anti-Money Laundering Act, liable companies must have risk management functions in place in accordance with the type and scope of the business. It includes risk analysis processes pursuant to section 5 of the Anti-Money Laundering Act and internal risk measures pursuant to section 6 of the Anti-Money Laundering Act. These are the essential rules of the risk-based approach in relation to money laundering and terrorist financing.

Crypto businesses also have to adhere to customer due diligence rules. Apart from identifying the customer, a person acting on the customer’s behalf, and beneficiaries or beneficial owners, it’s also important to examine whether any of them are politically exposed persons, relatives of politically exposed persons, or known close associates. Besides, the purpose and the type of business relationship must be clarified every time when it’s not completely evident.

It’s imperative to engage in continuous monitoring of business relationships or processed transactions. Such liable businesses as cryptocurrency companies must ensure that the relevant documents and information are updated in a timely manner, in accordance with the established procedures. These measures enable the retracing of cash flows and identifying suspicious business transactions. Consequently, liable businesses are required to investigate such transactions by obtaining more information. In the cases where facts about criminal transactions are discovered, the Central Customs Authority’s Financial Intelligence Unit must be notified immediately.

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 introduced as financial service providers through the German Act Implementing the Amending Directive on the 4th EU Anti-Money Laundering Directive (the Amending Directive) of 12 December 2019. Under section 1 (1a) sentence 2 no. 6 of the German Banking Act crypto custody business is defined as the custody, management, and protection of cryptoassets or private cryptographic keys used to keep, store, or transfer cryptoassets for others.

The changes concern amendments to nine laws and five statutory orders. They cover the implementation of extended AML/CFT requirements, including the increased number of business areas subject to AML/CFT regulations, particularly among crypto businesses. Such aspects as public access to the European transparency register and reporting of discrepancies, as well as the introduction of the requirement to report suspicious activities in transactions are also detailed.

German Law on Electronic Securities

Germany is following the example of other European countries and moving towards laws dematerialising securities. In June 2021, the German Electronic Securities Act came into force. This law reformed German securities legislation and the related supervisory legislation. By establishing electronic securities, German lawmakers implemented one of the main points of the government’s blockchain strategy and 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 act that has altered 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

Recall that these financial laws, depending on the purpose and characteristics of cryptoassets in use, may also apply to your crypto business. Furthermore, the lawmakers adopted an option to facilitate the introduction of crypto funds by this regulation, which are unit certificates that are issued through a crypto securities register. Such a regulation would be issued by the Federal Ministry of Justice and Consumer Protection and the Federal Ministry of Finance. Subject to the clarification of various preliminary legal questions, it’s likely that the scope of the German Electronic Securities Act will be expanded to include other investment classes.

The German Electronic Securities Act allows for two types of electronic securities registers: central securities registers and decentralised crypto securities registers, which are typically operated on the basis of distributed ledger technology (DLT). Under the German Electronic Securities Act, electronic securities are classified as property within the definition stipulated in section 90 of the German Civil Code. Therefore, the transfer of electronic securities will generally continue to be governed by the provisions of the German Civil Code.

The German Electronic Securities Act also allows issuing bearer bonds as crypto securities that are entered into the Crypto Securities Register. The lawmakers didn’t restrict themselves to one particular technology but aimed to make room for market innovations. At the same time, the provisions of the German Electronic Securities Act are clearly aligned with fintech industry initiatives to issue securities by means of a DLT. These concepts should facilitate the creation of secure, decentralised databases that are also designed to record securities transactions.

In this process, the goal is for the technology to replace central securities depositories or custodian banks. This should be relevant to crypto securities only when the issuer doesn’t seek the tradability of the financial instrument on a stock exchange. It’s worth noting that a connection to the book-entry securities concept of a central securities depository is possible only under the conditions laid down in section 12 (3) of the German Electronic Securities Act and it’s not possible for crypto securities. Therefore, the tradability on a stock exchange is currently excluded due to conflicting requirements of European law.

In accordance with the German Electronic Securities Act, BaFin is obligated to keep the Crypto Securities Register in order to enforce the protection of investors and to ensure that market activities are transparent, frictionless, and don’t hinder market integrity. For this purpose, lawmakers have defined crypto securities registration as a financial service within the meaning of the German Banking Act. The process of maintaining the register might be automated and based on algorithms.

From a legal perspective, an electronic security only comes into existence when it’s entered into the register. As of June 2021, crypto securities registrars are allowed to apply for the necessary authorisation. Once the authorisation has been granted, the registrar entity can set up a crypto securities register the purpose of which will be to list crypto securities.

As required under section 20 (3) of the German Electronic Securities Act, BaFin will publish a public list of the crypto securities on its website. In the future, the list will only include crypto securities whose entry or amendment in a crypto securities register has been published by an issuer in the Federal Gazette pursuant to section 20 (1) of the German Electronic Securities Act and regarding which the issuer has informed BaFin of such publication. The list will only be published for information purposes and won’t give rise to any legal effects.

New EU-wide Crypto Regulations

The EU has been working relentlessly to standardise crypto regulations across the block which will also apply to German crypto businesses. The Markets in Crypto-Assets (MiCA) regulations should come into force between early 2023 and before the end of 2024. They are expected to provide legal clarity by harmonising regulations related to the prevention of the misuse of cryptoassets, while also encouraging the development of crypto innovations.

Among the key priorities and improvements are the environmental responsibilities that will obligate crypto businesses to contribute to the reduction of the high carbon footprint of cryptoassets.  In essence, significant crypto asset service providers (CASPs) will be required to declare information related to the environmental impact (e.g., the levels of their energy consumption) by publishing it on their business websites and reporting to the national authorities.

The next major EU-wide change is related to supervised experimentation with cryptographic technologies for commercial purposes. The Pilot DLT Market Infrastructure Regulation (PDMIR) will come into force in March 2023. It will provide a legal framework for the trading and settlement of transactions in cryptoassets that are categorised as financial instruments under MiFID 2.

CRYPTO REGULATION IN GERMANY

Crypto Licence in Germany

The provision of crypto products and services in Germany on a commercial basis or to an extent that requires the formation of a commercial undertaking, requires written authorisation from BaFin, irrespective of the legal form of the business (sole trader, partnership, limited company or other). Such business will only require authorisation under section 32 (1) of the German Banking Act if it’s carried out in Germany.

Firstly, it’s considered to be conducted in Germany if the company’s registered office is located in Germany, even if it deliberately only conducts this business with persons that aren’t residents of Germany. Secondly, it’s considered to be conducted in Germany if the company opens a legally dependent branch office or maintains another physical presence in Germany from where it engages in these economic activities, even if it deliberately does it with persons that aren’t residents of Germany.

Thirdly, a connection to Germany counts if, from outside Germany, the service or product is also, and in particular, offered to companies or individuals whose registered office or habitual residence is located in Germany, while communicating remotely to engage in the cross-border provision of services, without having a network of intermediaries or a physical presence. According to section 1 (1a) sentence 2 no. 6 of the German Banking Act, the possibility of engaging in cross-border activities by notifying German authorities about the process (i.e., availing of the European passporting) doesn’t apply to crypto custody businesses, although it applies to other financial services.

Since January 2020 all companies intending to provide crypto custody services in Germany, just like crypto exchange businesses, must apply for authorisation granted by BaFin who considers applications in accordance with the German Act Implementing the Amending Directive on the 4th EU Anti-Money Laundering Directive (4th AMLD) and the German Banking Act where crypto custody businesses are treated as new financial services. Key requirements for crypto custodians include the initial capital of at least 125,000 EUR, reliable owners and reliable and qualified managing directors of the company, as well as a viable business plan.

Anyone wishing to conduct a business in addition to the authorised activities must receive new authorisation, so-called written permission, from BaFin first. This applies  even if the company conducts its own business as a member or participant of an organised market or a multilateral trading system or with direct electronic access to a trading venue or with commodity derivatives, emission allowances, or derivatives on emission allowances. New authorisation from BaFin is also required if a company that has been granted the above-mentioned licence pursuant to Section 32 (1) sentence 1 of the German Banking Act sells its own financial instruments unless this is already classified as conducting a banking business or providing a financial service.

In those cases where business activities also include financial instruments in accordance with MiFID 2, the authorisation process might be based on Delegated Regulation (EU) 2017/194 instead of section 32 (1) sentence 1 of the German Banking Act. If you wish to receive further clarification, don’t hesitate to book a personalised consultation with our dedicated team who will gladly explain what regulations specifically apply to your crypto business model.

How to Start a Crypto Business in Germany

The very first step in starting a crypto business in Germany, is opening a German company, the incorporation of which is governed by Company Law. The most common legal business structure in Germany is a Company with Limited Liability (GmbH). You can establish it within three weeks and then start applying for a crypto licence while we support you every step of the way.

Key requirements for a Company with Limited Liability include initial share capital, a registered office in Germany, qualified directors, and a compliant name of the company. All the accompanying documentation requires certified translation and authorisation which we also can help you with. Notarised applications are submitted to the Commercial Register Court, which registers new companies with the Commercial Registry.

It’s also important to register with the Federal Central Tax Office as crypto companies are liable for paying most of the taxes. Therefore, once a crypto company is established and fully licensed, you must ensure adherence to tax and reporting regulations, which might be rather complex and time-consuming. While German corporate taxes are among the highest in Europe, certain Corporate Income Tax exemptions can be applied. For instance, company-level capital contributions upon the company’s formation or capital increase are exempt from the tax.

If you’re determined to delve deeper into crypto regulations in one of the most stable and trusted economies, highly qualified and experienced consultants of Regulated United Europe (RUE) will be delighted to share theoretical and practical insights. We very well understand and closely monitor crypto-related legislation in Germany and the entire Europe, and thus can elucidate the situation efficiently and confidentially. Moreover, we’re more than happy to assist you with the formation and licensing of the company, financial accounting, and tax optimisation. Book a personalised consultation now to start a new journey in the crypto industry.