You can see the rules and regulations in other jurisdictions.
The German legislation stipulates specific requirements for the crypto custody business that were previously implemented by KWG in 2020 and might be regarded as the first fintech-specific or at least fintech-oriented license. The relevant amendments were adopted while the Fifth EU Anti-Money Laundering (AML) Directive was being implemented; however, no legal obligations to make the aforesaid amendments were imposed on the KWG. Crypto custody business is identified by the actual Section 1(1a), sentence 2, No. 6 of the KWG as custody, management and reserve of crypto values, as well as private cryptographic keys applied for the following: to reserve, possess or transfer crypto values providing these types of services for third parties. Section 1(11), sentence 1, No. 10 of the KWG unambiguously includes the cryptographic values in the list of financial instruments and identify them as digital equivalent of values that are not secured by banking regulators or public authorities; moreover, they are not assigned with statutory status of currency or money, however, they are eligible for acceptance by legal and/or natural persons as an exchange, payment and investing instruments since they are allowed to be transferred, reserved and marketed in digital manner. As a matter of fact, the term crypto value comprises not only of cryptocurrencies (Bitcoin and others), but also of investment tokens. In case we take a wider comprehension of the terms 'crypto value' and 'crypto custody business', including the transactions referring to personal cryptographic keys, we face a large-scale range of the current license requirements. Nonetheless, the KWG stipulates particular relief due to the fact that crypto custody service providers engaged in this sphere of financial transactions that avoid carrying out any other activities subject to regulation; this means that they do not have to comply with the full set of regulatory liabilities that are mandatory for other actors of the financial services market. The above-mentioned providers are not covered by the general obligations concerning general capital and liquidity as per under the Capital Requirements Regulation (CRR), with recent amendments made by CRR II, as well as by some other regulations. Needless to say, that the restrictions related to the authorized capital, bona fide of the board members, proper business structure and related reporting liabilities are still in force. The extended guidance in regard of crypto custody business has been laid down by BaFin.1
Meanwhile, the licensing scope that covers fintech business patterns has permanently been changing within the EU and within Germany in particular that includes amendments made in the licensing regulation actual for fintech businesses stipulated by the up-to-date EU legislation on European crowdfunding service actors for business (the ECSPR). The last also requires certain alterations to be implemented in the German legislation concepts, the proposed EU Markets in Crypto-assets Regulation (MiCA) and the current legal regulations on securities dematerialization. However, it requires expanding the existing legal regulations concepts in order to work out the relevant requirements for each fintech business model individually; to a certain extent we might depict it on the example of the robo-advice business model, since it has recently gained wide popularity in Germany.2
Evidently, that cryptocurrencies (Bitcoin and others) have posed an issue for the current legal practice in Germany due to necessity to bring regulations, civil and tax legislation to compliance with the status-quo. The situation has certainly been clarified by introducing some legal definitions concerning crypto values (such as Bitcoin) through coming into force the Fifth EU AML Directive (Germany, 2020). Due to the aforesaid act, crypto values have been incorporated in the list financial instruments as per the KWG and the WpIG understanding that has revealed the range of license requirement applied to crypto values. Moreover, the crypto custody activities have been identified as an up-to-date instrument related to the sphere financial services to be regulated by a license regulations laid down by the KWG.2
As we have already mentioned, crypto values are identified as digital equivalent of values that are not secured by banking regulators or public authorities; moreover, they are not assigned with statutory status of currency or money, however, they are eligible for acceptance by legal and/or natural persons as an exchange, payment and investing instruments since they are allowed to be transferred, reserved and marketed in digital manner. This extended definition covers all spheres within which crypto values are applied, including the sphere of investments. This means, that we have included in such broad definition not only tokens aimed at exchanging and paying (along with cryptocurrencies as well) to be included into the list of financial instruments (aka “units of account) as per Section 1(11), sentence 1, No. 7 of the KWG and Section 2(5), No. 7 of the WpIG, but also tokens regarded as means of investments, that, in their turn, might be considered as investment products, debt instruments or units engaged into joint investment transactions in the meaning laid down by Section 1(11), sentence 1, Nos. 2, 3 or 5 of the KWG and Section 2(5), Nos. 2, 3 or 5 of the WpIG.3
Internal and foreign tender, e-money and monetary value reserved on payment tools are excluded from the definition above since they are covered by the restricted network exemption as per PSD II and payment transactions effected by the actors that provide electronic communications networks or render the relevant services. E-vouchers aimed at purchasing of commodities and services provided by the issuer or a third party as they have their particular economic functionality referring just to the debt redemption of the issuer are also excluded from the definition. These instruments are deprived from the tradability, so that, their functionality does not provide for reflection of investor-like estimations concerning value of the voucher or overall business efficiency of the issuer or a third party in respect of their accounting value.2
The alterations in the sphere of crypto values regulations, up to a point, repel the preceding regulative practice of BaFin that implemented a wider comprehension of the term “financial instrument” within the depiction laid down by KWG when had launched the process of cryptocurrencies regulation in Germany. Nonetheless, such an approach found itself under the fire of criticism, and higher regional judicial bodies declined it while making their rulings in criminal proceedings.2
The situation has been clarified, to a certain extent, due to the recent amendments made by the KWG in order to comply with WpIG understanding. They have settled the contradiction on the qualification of cryptocurrencies as financial tools. Up to a point, the German legislative authorities just amended the definition of 'financial instrument' in the respect of licensing requirement, however, avoided making any changes referring to conduct regulations laid down by WpHG that completely repel the MiFID II provisions. Thus, a service provider managing a marketplace designed for operating with cryptocurrencies might be covered by the license requirement imposed on a multilateral trading facilities provider (in the comprehension stipulated by the KWG and WpIG), but meanwhile, is turned out to be excluded from the scope of the relevant conduct regulations imposed by WpHG.2
As for the current status-quo, each actor should analyze in detail the legal threats concerning the chosen business concept in order to estimate which license requirement is applicable for every single case. For instance, in case an actor buys and purchases cryptocurrencies on behalf of the own name that belong to particular service provider for the account of a third party, this might be regarded as a principal brokerage business that makes up banking business. Moreover, cryptocurrencies brokerage might require licensing as investment brokerage, and the purchase consulting might be considered as investment consulting. Alongside, Section 2(2), No. 6 of the WpIG implies that in case one effect a transaction within a facility aimed at trading cryptocurrencies, the facility might be recognized as a multilateral trading platform and is to be licensed. In case a transaction engages custody, management or safeguarding of crypto values or personal cryptographic keys, they also fall under regulations of crypto custody business. Rendering of such new financial service (as well the related requirements in the sphere of licensing) are actual for domestic enterprises, and relevant for the providers that have already been rendering (or just are inclined to render) the aforesaid services abroad.2
The important point is that mining, purchase and sale of cryptocurrencies are not covered by license requirement provided that they are effected in one's own name and for one's own account. No special permission concerning cryptocurrencies applied as instrument of payments or obtained through mining is to be obtained.2
What concerns civil legislation provisions, a plenty of items have not already been tackled. Many question are aroused while identifying the applicable jurisdiction and legislation designed for cryptocurrency market regulation. This uncertainty becomes especially significant in case, e.g., a cryptocurrency unit is a subject for transfer or pledge. Moreover, it has not already been identified the amount of data to be disclosed while carrying out cryptocurrency transaction.2
It is to be outlined, that ordinary complex fiscal analysis has not been partly revealed through a decision by the European Court of Justice so far.2
As per the general provisions of the enactment that were included into the German fiscal legislation, transactions aimed at exchanging regular currencies into Bitcoin or similar cryptocurrencies are exempted from taxation and, on the other hand, the reverse exchange is to be exempted from VAT-taxation that is laid down by Section 4, No. 8b of the Turnover Tax Code. Moreover, payments effect using Bitcoin or similar cryptocurrencies, as well as process of mining, are free of taxes.4
What concerns other transactions related to cryptocurrencies, they might be subject for imposing taxes.2
As for the current situation in the accounting sphere, Bitcoin and other cryptocurrencies are deemed to be listed as assets on balance sheets due to their transferability.2
Since they are regarded as assets aimed at sustaining business in the short run (current assets), it is stipulated that they should be displayed in the “Other assets” section as provided for by Section 266(2), B II, No. 4 of the Commercial Code (HGB). Otherwise, in case they are regarded as the assets to sustain business in the long run (“Fixed assets” section), they are to be included in the balance sheet as acquired immaterial assets as per Section 266(2), A I, No. 2 of the HGB.2
A white paper more substantially reveals the essence of ICOs that are the sales of virtual tokens aimed at raising funds streamed to carry out corporate purposes or to fund a specific project. The scope of specific rights provided by the tokens depends upon ICO structure and the way they have been purchased: either with regular or with virtual currency. It might vary from the level of participation rights and profit shares to absence of rights at all. The debates and ICOs structures are still discussed, but as for now, the tokens might be structured in the following way:
This structure complying with the basic concept supporting by BaFin is a certain approximation. It reveals remarkably different nature of tokens. Amendments as of January, the 1st, 2020, implemented by KWG say that the tokens aimed at exchanging and investing purposes (e.g., security and investment ones) are presumably covered by the extended definition of cryptographic values. This means, they are regarded to be financial instruments as identified by KWG (no matter if they might possibly be allocated to other kinds of financial instruments as estimated in every single case) and the WpIG.2
Eventually, any ICO is subject for detailed consideration in order to identify the regulatory and capital market provisions applicable to it.2
BaFin identifies the applicability of the relevant legislation, including the KWG, the WpIG, the ZAG, the WpPG, the KAGB and the VermAnlG, in every single case, that is rooted in the particular contractual provisions. In case tokens are analogues of participation rights, so, they might be identified as securities as per the WpPG or capital investments in compliance with the VermAnlG, an issue offering for the marketing of the tokens might be necessary unless they are exempted from taxation, what particularly concerns crowdfunding services under the ECSPR.5
The issue concerning prospectus in a full electronic format is a disputable one that has long been discussed in state authorities, and the concept was jointly supported by the German Federal Ministry of Finance and the German Federal Ministry of Justice that was delivered in their joint publication to identify the oncoming regulatory legal basis for the securities grounded upon blockchain and crypto-tokens. With a view to achieve the purposes laid down by the aforesaid paper, the German legislative authorities accepted a new legal enactment (the Act on Electronic Securities (eWpG), in force as from June 2021), that provides for optional and partial dematerialization of securities. The eWpG offers the definition of an 'electronic security' identified as a property object regulated by a right in rem. The up-to-date legal provisions provide the issuers with the options between two kinds of dematerialized securities. The first one is to be legalized by a general securities depository as identified by the Central Securities Depository Regulation (Clearstream Banking AG in Germany) or by an authorized custodian. The second kind are crypto securities, legalized by a crypto securities registry, in general on DLT basis, kept by the issuers on their own or by third parties. As for this case, reserving crypto securities registries needs a license issued by BaFin and is subject to the regulatory supervision. Having implemented this activity, the German legislative authorities are keeping track of other EU nations towards securities dematerialization.6
Apart from a requirements imposed on a prospectus, it is mandatory that rendering of any qualified service related to marketing of tokens – this might be an agreement to acquire, or the sale or purchase of tokens, in case they are identified as accounting units or crypto values – should, as a recognized rule, be licensed by BaFin. Moreover, tokens issuers should not forget that the sale of tokens via the internet is covered by the relevant consumer protection legislation. Thus, the underlying agreement might be identified as a distance agreement that entails information responsibility as Section 312(i) of the BGB. Due to the fact that the agreement is identified as a financial service, further data shall be provided in compliance with Section 312(d) of the BGB.2
Within the scope of the EU competence, any issue of cryptoassets and, consequently, ICOs as well has recently been regarded by the European Commission included in the EU Digital Finance Package as of September 2020. In order to regulate the sphere, the Commission legalized a proposal concerning regulation of crypto assets markets within the EU (MiCA). The above-mentioned proposal basically provides overall and fully harmonized concept that stipulates a unified mode on the following spheres: transparency and disclosure provisions for the issuance and admission to sales and purchase transactions, operation, arrangement and regulation of issuers and in-scope service providers; consumer security regulations; market abuse countering and ensuring integrity of cryptoassets markets. The proposal introduces different types of cryptoassets, including cryptoassets (as they are), asset-referenced tokens (also widely recognized as 'stablecoins'), electronic money tokens and utility tokens. Basically, all cryptoassets (identified as e-representation of value or rights that are admissible for transfer and store in digital formats, applying DLT or analogue technology) are to be regulated by MiCA if not already covered by the current EU financial services mode (e.g., as financial instruments regulated by MiFID II). Regulated cryptoasset services shall include custody and management on behalf of third parties, operation of a trading platform, exchange of cryptoassets for fiat currency that is legal tender and for other cryptoassets, accomplishment of orders on behalf of third parties, placing, reception and transmission of orders on behalf of third parties and provision of consulting services. Special relief, including exemption from the rather detailed white paper requireprovisions, must be applied to small-scale and medium-scale issuers in case the total estimation of issue prospectus to the public is equal or less than €1 million within the period of 12 months. More severe obligations shall basically be imposed on stablecoins. It is expected that MiCA ensures legal obviousness and solidity, provides secure promotion of cryptoassets as well as implementation of DLT while rendering financial services, promotes competition and innovative approaches in order to protect customers and investors, ensure prospective financial stability and monetary threats. Moreover, the proposal is assumed to skyrocket the funding of companies using ICOs and securities token prospectus.2
Regulation of cryptoassets all over the EU that is regarded to be the principal DLT application, as well as blockchain techs applied in the financial sphere, are coming along with pilot blockchain sandbox regime introduced by the EU. Being an integral part of the EU Digital Finance Package, the European Commission offered EU regulative provisions aimed at coping with market facilities grounded upon DLT. In case the regulative provision is implemented, it will become a pan-European blockchain regulatory sandbox intended for gaining benefits from temporary partial cancellation of regulative provisions for the enterprises that demonstrate active behavior in the DLT sphere. It will also become possible to ensure proper security level and will allow the regulators to substantiate their comprehension of the cutting-edge fintech concepts and emerging techs.2
As for Germany, the recent implementation of the Fifth EU AML Directive that introduced a wider legal definition of crypto values not only ensues strengthening of AML obligations for service providers involved in the cryptocurrency activities, but also implemented a license requirement for the crypto custody business. Alongside, the recently introduced eWpG pointed out the legal basis for partial dematerialization of securities applying DLT and blockchain technologies in the country.2
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