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Overview of new German and French crypto regimes

Overview of new German and French crypto regimes

  • France
  • Germany
  • Crypto assets
  • Financial services and markets regulation

05-03-2020

Part A: Regulation of crypto assets

 

 

Germany

France

 

 

 

What crypto/digital assets fall under financial or digital asset regulation?

-    Security token

-    Payment token (like crypto currencies)

-    Utility token      
(if designed for payments or if the structure is security-like, for example if shareholder rights are represented)

All these tokens qualify as financial instruments subject to financial regulations, except for those payment token that qualify as e-money.

E-money is subject to e-money regulation and is not a financial instrument.

-    Security token

-    Payment token (like crypto currencies)

-    Utility token     

Only security tokens qualify as financial instruments and fall under financial regulations. Other tokens qualify as digital assets and fall under digital regulations, except for those payment tokens that could qualify as e-money.

E-money is subject to e-money regulation and is not a financial instrument or digital asset.

Licence requirements

 

Mandatory license for

-       providing services in relation to security/pay-ment/(certain) utility token (for example crypto exchange services)

-       providing crypto custody services.

Optional license: n/

Transition period (for crypto custody only!):

until end of Nov. 2020

Requirements for the use of the transition period:

-       Company has provided crypto custody in Germany or into Germany by end of Dec. 2019

-       Notification has been submitted to BaFin by end of March 2020

-       Complete application has been submitted to BaFin by end of November 2020.

Mandatory investment service provider license for

-       providing services in relation to security token.

Optional digital asset service provider license for

-       providing digital asset services (including crypto custody and fiat-to-crypto exchange services for which the registration remains mandatory if no license is requested – see below).

Reasons to opt for a license:

-      Benefit from the label of the AMF (French Financial Markets Authority);

-      Avoid applicability of certain prohibitions on solicitation under the French Monetary and Financial Code and the French Consumer Code;

-      Benefit from a protection against the banks’ arbitrary refusal to open a bank account.

Transition period: n/a

 

 

Registration  requirements

 

n/a (unless general corporate law requirements)

 

Mandatory registration for

-       crypto custody service providers

-       fiat-to-crypto exchange service providers

Transition period: until end of 18 December 2020

Requirements for the use of the transition period:

Company has carried out the activity before 18 December 2019.

 


 

Part B: Crypto custody 

 

Germany

France

 

 

[In France, the following requirements apply to every digital assets service provider, not only custodians]

What is crypto custody?

-       custody/administration/securing of

-       crypto assets or

-       private cryptographic keys used to access/hold/store/transfer crypto assets

-       on behalf of third parties

Please note: Safekeeping of tokenized securities can only be performed by a depositary bank.

 

Scope of regulation:

Custodian vs. tech provider

No clear criteria for demarcation between technical services and financial or digital services; regulators will operate on a case by case basis.

However, under German law it is not regulated

-     to simply offer storage space, e.g. through web hosting or cloud storage unless marketing of the services refers to the storage of private cryptographic keys;

-     to sell hardware or software to secure crypto assets or private keys,  

  • if it is operated by the customers themselves and
  • as far as it is not intended that service providers have access to the stored data.

Under French law, it is not regulated to simply offer technical cryptographic key storage solutions.

 

Capital requirements

Initial capital (minimum requirements):

-     Crypto custodians: of EUR 125,000.

-     If crypto exchange services are provided as well: up to EUR 730,000 depending on the type of service.

BaFin may require additional capital under risk aspects.

On-going additional capital requirements:

-     Crypto custodians: they are exempt from most parts of the Capital Requirements Regulation (CRR) if the company does not provide other regulated financial services

-     If crypto exchange services are provided as well: CRR may apply.

Digital assets service providers who apply for an optional licence can opt either for

-     minimum equity (fonds propres) to be calculated according to an instruction of the AMF (see below) or

-     the subscription of a professional liability insurance with a minimum coverage of EUR 400,000 per claim and EUR 800,000 per insurance year.

If a digital assets service provider opts for the minimum equity requirement, it should always have a level of equity at least equal to a quarter of its general costs and amounting to at least

-     EUR 50,000 for services without holding of client funds (RTO, advice, unguaranteed placing) and

-     EUR 150,000 for services involving the holding of client funds (other services).

Furthermore, the minimum level of equity should also be permanently > 4.5% of the digital assets held by the service provider for its own account and it also depends on its level of activity in the category of services provided.

For crypto custody service, it should be greater than 2.0% of the value of the portfolio of digital assets held on behalf of third parties.

 

Required staff (management)

There is no final statement yet but BaFin will probably request Crypto Custodians to appoint at least two managing directors having knowledge and experience reg. crypto business and traditional financial services and the related regulation.

 

Financial service providers shall appoint at least one managing director with sufficient knowledge and experience to understand the key risks of providing digital assets services and to ensure compliance with all legal and regulatory obligations.

 

In both countries, managers must have a background and sound understanding of both financial institutions and crypto businesses.

 

Required staff (other key functions)

Appropriate persons for

-     AML/KYC,

-     data protection,

-     IT resilience and

-     compliance.

In smaller companies some of these functions may be performed by the same person.

 

Requirements for foreign service providers

 

Companies with registered seat outside of France/Germany usually need a subsidiary in the respective country applying for the respective license/getting registered.

The parent company will have to demonstrate that it will:

-     dispose of the necessary human and technical resources to carry out its activities, including the internal control function

-     allocate funds equivalent to the equity requirements mentioned above. In France, this can be facilitated in the form of a letter or any other appropriate guarantee with an unconditional and irrevocable commitment to make the funds available to the branch.

-     at least one Managing Director will most likely have to be based in the respective country.

For more information contact

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