1. Preliminary remarks

On 1 January 2020, the German Act Implementing the Amendment Directive on the Fourth Anti-Money Laundering Directive (Gesetz zur Umsetzung der Änderungsrichtlinie zur Vierten EU-Geldwäscherichtlinie) (Federal Law Gazette I of 19 December 2019, p. 2602) entered into force. As a result, all companies which, on the law’s taking effect, became subject to the requirements for crypto custody business under the new provisions of section 1 (1a) sentence 2 no. 6 of the German Banking Act (Kreditwesengesetz – KWG) are governed by the new transitional provisions of section 64y of the KWG.

If the conditions of section 64y of the KWG are met, such companies are deemed to have provisionally been granted the authorisation required, effective on the law’s entry into force. These companies are thus “obliged entities” in terms of anti-money laundering law within the meaning of section 2 (1) of the German Money Laundering Act (Geldwäschegesetz – GwG) as from 1 January 2020 – irrespective of when the notification of intent is submitted.

2. Scope

BaFin understands the scope and legal consequences of the requirements as follows:

1. Companies without KWG authorisation and tied agents conducting crypto custody business

A company that does not yet have KWG authorisation but – prior to the law’s entry into force – provided custody services for cryptoassets within the meaning of section 1 (11) of the KWG is now deemed a financial services institution as a result of the new definition added in section 1 (1a) sentence 2 no. 6 of the KWG. In such a case, the authorisation for conducting crypto custody business will be deemed provisionally granted in accordance with section 64y (1) of the KWG until the decision on the application for authorisation under section 32 (1) sentences 1 and 2 of the KWG – also in conjunction with a statutory order under section 24 (4) of the KWG – becomes final and binding, provided the company submits a complete application for authorisation by 30 November 2020 and notifies BaFin in writing by 31 March 2020 of its intention to submit an application for authorisation.

To enable companies also operating as tied agents within the meaning of section 2 (10) of the KWG as per 1 January 2020 to adapt their business model, the law permits such companies to continue to conduct crypto custody business in addition to conducting their activities as agents until 30 November 2020.

2. Companies conducting cryptoasset-related banking business or providing cryptoasset-related financial services hitherto not subject to authorisation requirements

As the definition of “financial instrument” (section 1 (11) of the KWG) has been extended to include cryptoassets, companies conducting banking business or providing financial services pertaining solely to cryptoassets now require authorisation under section 32 (1) sentence 1 of the KWG as from the law’s entry into force. In accordance with section 64y (2) of the KWG, the authorisation for business now subject to the authorisation requirements under the new legislation will be deemed provisionally granted until the decision on the application for authorisation under section 32 (1) sentences 1 and 2 of the KWG – also in conjunction with a statutory order under section 24 (4) of the KWG – becomes final and binding, provided the company submits a complete application for authorisation by 30 November 2020 and notifies BaFin in writing by 31 March 2020 of its intention to submit an application for authorisation.

The transitional provisions cannot be utilised if the cryptoassets to which the services pertain could have been assigned to another category of financial instruments in accordance with the legislation in force until 31 December 2019. This includes, for example, services related to Bitcoin or other virtual currencies, as the units of such cryptocurrencies were already deemed to be units of account within the meaning of section 1 (11) sentence 1 no. 7, second alternative, of the KWG under the supervisory legislation in force until 31 December 2019. For this reason, those providing such services are, as a rule, subject to the authorisation requirement under section 32 (1) of the KWG and are “obliged entities” in terms of anti-money laundering law within the meaning of section 2 (1) of the German Money Laundering Act (Geldwäschegesetz – GwG) (see legislative intent, Bundestag printed paper 19/13827, p. 48 et seq.).

3. Companies with KWG authorisation already conducting crypto custody business

Where a company has already been granted KWG authorisation for conducting banking business and/or providing financial services and already conducts crypto custody business, section 64y (1) of the KWG applies to such companies accordingly.

4. Companies with KWG authorisation seeking to conduct crypto custody business

Where a company already has KWG authorisation for conducting banking business and/or providing financial services, but has not yet conducted crypto custody business– for which it would require authorisation due to the new legislation – but seeks to do so as from 1 January 2020, section 64y of the KWG does not apply. Before undertaking the new cryptoasset-related activity, the company must submit an application for authorisation under section 32 (1) sentences 1 and 2 of the KWG, also in conjunction with a statutory order under section 24 (4) of the KWG.

5. Foreign companies already conducting cross-border crypto custody business in Germany

Foreign companies are also subject to the authorisation requirements under section 32 (1) of the KWG if they conduct cross-border crypto custody business within the meaning of section 1 (1a) sentence 2 no. 6 of the KWG in Germany. They can make use of section 64y (1) of the KWG but must ensure in particular that there are no reasons why BaFin should refuse to grant authorisation under section 33 (1) sentence 1 no. 6 of the KWG or section 33 (2) of the KWG. Until the application for authorisation is submitted, i.e. by 30 November 2020 at the latest, the transitional provision will be deemed to apply if the foreign company has provided relevant services for customers in Germany as at 1 January 2020 and if the foreign company or the applicant company notifies BaFin by 31 March 2020 of its intention to submit an application for authorisation.

3. Annex (text of the law)

Section 64y of the KWG reads as follows:

“(1) An undertaking that becomes a financial services institution on 1 January 2020 based on the new definition under section 1 (1a) sentence 2 no. 6 is deemed at such time to have provisionally received authorisation for conducting crypto custody business if the undertaking submits a complete application for authorisation within the meaning of section 32 (1) sentences 1 and 2, also in conjunction with a statutory order under section 24 (4), by 30 November 2020 and if the undertaking notifies BaFin in writing by 31 March 2020 of its intention to apply for authorisation. Undertakings as referred to in sentence 1 which also operate as tied agents within the meaning of section 2 (10) as per 1 January 2020 can continue to conduct crypto custody business in addition to conducting their activities as agents until 30 November 2020.

(2) An undertaking requiring authorisation under section 32 (1) sentence 1 due to the extension of the term “financial instrument” as defined by section 1 (11) to include cryptoassets as per 1 January 2020 is deemed at such time to have provisionally received authorisation for conducting the business subject to authorisation under this law if the undertaking submits a complete application for authorisation within the meaning of section 32 (1) sentences 1 and 2, also in conjunction with a statutory order under section 24 (4), by 30 November 2020 and if the undertaking notifies BaFin in writing by 31 March 2020 of its intention to apply for authorisation.”