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Regulation of crypto custody in Germany from January 2020

  • Germany
  • United Kingdom
  • Financial services and markets regulation


As part of the implementation of the Amending Directive of the Fourth EU Directive on Money Laundering (Directive (EU)2018/843), the German Federal Government has decided to include crypto assets in the list of financial instruments and to regulate custody of such crypto assets (and/or of the private cryptographic keys pertaining to them) for third parties (“crypto custody services”) as a financial service within the meaning of the German Banking Act (Kreditwesengesetz). From 01 January 2020, companies offering such services will thus need a licence from the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin).

End of ring-fencing/amendments to capital requirements

The Bundestag’s Finance Committee report after the session on 13 November 2020 had clarified many questions which have been discussed since the publication of the draft act. The financial committee argued in favour of removing the much discussed "separation rule" pursuant to which the same legal entity would not have been able to provide both crypto custody services and other regulated banking or financial services. Upon the Federal Government's announcement to allow electronic securities, the question arose as to whether custody of such securities under one roof with other crypto values such as Bitcoin would be possible. These amendments to the draft act mean that a separation between the custody of securities (deposit business) and crypto custody business would no longer be legally required. Nevertheless, depending on the business model, there may still be reasons for a separating the different regulated services: In line with repeated demands from the industry over the last few months, the Finance Committee has recommended granting significant exemptions from the capital requirements of the CRR (Capital Requirements Regulation) to service providers who only offer crypto custody. This does not pertain to the required initial capital but the additional capital requirements which, pursuant to the CRR, would increase along with the value of the assets under custody and the associated risks. A separation of the custody of (tokenized) securities (i.e. deposit business) and other crypto assets could therefore still provide an economic advantage despite the proposed amendments. Although outsourcing such services to another legal entity means an increased organisational effort, exempting the crypto custody services from the requirements of the CRR leads to an overall decrease in tied-up capital.

These latest adjustments to the draft act are supplemented by exemptions from specific institutional reporting obligations and from the requirements regarding institutional remuneration models. The revised draft act has been passed by the Bundestag and now needs approval of the second legislative chamber (Bundesrat).

Transitional period for crypto custody providers already addressing the German market

For companies already providing crypto custody in Germany before the new regulations enter into force on 01 January 2020, the transitional period already included in the draft bill has been extended. A provisional licence is deemed granted provisionally and retroactively if BaFin is informed in writing by 31 March 2020 of the intention to apply for such licence and a complete application is submitted by 30 November 2020. Tied agents already holding crypto values in custody for third parties before the statute comes into force are exempt from the duty to obtain a licence until 30 November 2020. They are therefore free to either use the transitional period to apply for a licence or to stop providing crypto custody services by the end of November. Such a transitional period would have also be desirable for other financial services providers (such as asset managers) who hold crypto assets for their customers. Such service providers must either obtain a licence/announce their intention to apply for a licence or find a crypto custody provider before 01 January 2020. They will not have the option to monitor the market over the coming months and take its development into account when choosing a suitable custody provider.

Eversheds Sutherland Global Financial Blockchain and Crypto Assets Hub

At Eversheds Sutherland, an globally connected team provides advice on all questions regarding digital business models and Blockchain-based investments. Amongst other services, we provide advice in licence applications, token offerings and the structuring of crypto funds. For further information, please visit our Global Financial Blockchain and Crypto Assets Hub.