Germany’s financial regulator weighs in on crypto custody

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Germany is one of the few countries working diligently to enhance the cryptocurrency ecosystem. Whether it stems from the recognition that digital currency is the future or just as an effort to protect consumers, the initiatives the country launches are helping to make the Bitcoin space more mature and responsible. When the country’s financial regulator, the Federal Financial Supervisory Authority (BaFin, for its German acronym) established new crypto custody regulations recently, banks were eager to jump on board. Now, BaFin has updated the custody guidelines to ensure that they’re clearer to all involved and acknowledges that crypto is a legal financial instrument.

In a publication from today, Notes On The Facts Of The Crypto Custody Business (original document in German), BaFin goes into great detail on how crypto custody is defined and how it is meant to work. It points out that crypto custody is allowed in accordance with the European Union’s anti-money-laundering efforts, and explains, “Service providers who offer the exchange of virtual currencies for legal tender and vice versa, as well as other crypto values, are already financial service institutions and, therefore, obligated to money-laundering law, because crypto values, depending on the design, are financial instruments…”

BaFin is also going to try to protect consumers better by providing guidance on how custodians manage their stores. According to the regulator’s announcement, “The storage, management and security of crypto values or private cryptographic keys that serve to hold, store or transfer crypto values are recorded. It is sufficient for the obligation to obtain a license … if the provider implements one of the alternatives. According to the wording of the regulation, it is not necessary that crypto values or private cryptographic keys that are used to hold, store or transfer crypto values are stored, managed and secured at the same time.” Personal crypto keys won’t be regulated, but public keys will be made available. BaFin explains, “The decisive factor is therefore always the possibility of access to the public addresses given by the custody of the private cryptographic key, under which the crypto values are stored decentrally.”

The regulator acknowledges that crypto is still not ready to be seen as a legal alternative to fiat, but that it is viewed as currency because it allows for payments and offers a digital representation of value. Because of its close ties to conventional currency, crypto is going to be held to the same standards as fiat, and companies working in the space will be held to the same requirements as traditional money-handling entities.

In other words, any company in the crypto space has to be licensed by BaFin if they want to operate in Germany, even if they only target foreign countries and non-residents. These companies have to apply for a license by the end of this November or will be violating the law. Those entities already up and running in the space have to confirm with BaFin by March 31 that they will apply for a license by the deadline.