The German Financial Regulator Issues Guidelines for Foreign Crypto Custodians

BaFin, the Financial Supervisory Authority of Germany, recently issued guidelines that clarify how foreign crypto custodians will operate in the country. The authority issued the guidelines this January. According to the updated guidelines, those custody services operating in Germany's crypto sector would not be fined if they did not have a license. Instead, these firms will be grandfathered into the same regulation that regulates custody firms operating in Germany under a new law. This new law came into force on January 1, 2020.

What the Guidelines State

The guidelines require all foreign custody firms operating in Germany's crypto sector to apply for licensing by German authorities by March 31, 2020. Once approved, they must apply for the license by the end of November this year. For firms that were not offering custody solutions before January 1, they will not be allowed to operate in Germany unless they receive their license.

According to Carola Rathke, a partner at a firm working with BaFin on how the new law will be enforced, the reason for this is that nobody would be able to apply for a license immediately. It is the reason they decided to grandfather firms already operating in the German market into the new law.

Germany's Crypto Custodians Regulation

At the start of this year, BaFin published a non-binding application form, which meant firms were not required to use it. The latest guidelines published by the regulator clarifies that all crypto custody firms need to have completed the application process by the end of November. Rathke said that all firms must ensure they complete the application form was ahead of the November deadline. 

This new law is in line with the EU's AMLD5 regulation that requires crypto firms to comply with enhanced KYC and AML requirements. Firms familiar with BaFin are already working on their application. However, they remain at the mercy of the regulator. For instance, BaFin might decide to make updates to the application process before the November deadline.

How the German Regulator Works

For those unfamiliar with BaFin, this new process might come as a shock. According to Sven Hildebrandt, the head of crypto advisory firm Distributed Ledger Consulting Group, the German regulator does this quite often. They will create a law hastily, find out it does not work as hoped and begin making updates after it has been published. Firms hoping to register their business in Germany should work with an advisor to help them negotiate the complexity of the German legal system. However, he said that there was enough guidance out there to help firms navigate this legal quagmire.

Hildebrandt added that he believed more guidance would begin to appear based on specific applications in the coming weeks. His company is now seeking approval from BaFin to be the compliance arm of firms that cannot afford a license by themselves.

There are Still Gaps

While the German crypto custody law is quite comprehensive, there are still areas that have not been addressed. For instance, Hildebrandt noted that custody solutions, which leverage multi-party computation, were not addressed.

Various other aspects of the law will also need to be addressed with time. For example, firms that apply for a German license will need to have a branch in the country. They will also need to have "fit and proper" directors at this branch. However, the definition of who fit and proper directors of a crypto firm are is unclear. Rathke said that the most likely requirement for a fit director would be one with banking experience and some technical experience in blockchain technology.

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