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BaFin’s New Guidelines Recognize Cryptocurrencies As Financial Instruments in Germany

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BaFin, the Financial Watchdog in Germany, announced on March 3rd that cryptocurrencies will now fall under financial instruments in terms of regulation. Earlier on, the regulator had only considered security tokens within this classification. The new guidelines define crypto assets as;

“A DIGITAL REPRESENTATION OF A VALUE THAT HAS NOT BEEN ISSUED OR GUARANTEED BY ANY CENTRAL BANK OR PUBLIC BODY AND IS NOT NECESSARILY LINKED TO A CURRENCY SPECIFIED BY LAW AND THAT DOES NOT HAVE THE LEGAL STATUS OF A CURRENCY OR MONEY, BUT IS ACCEPTED AS A MEDIUM OF EXCHANGE BY NATURAL OR LEGAL PERSONS AND CAN BE TRANSMITTED, STORED AND TRADED ELECTRONICALLY.”
According to BaFin, the definition is pretty close to that of the Financial Action Task Force (FATF) and was necessary in order to recognize digital assets that are not accounting units. Furthermore, this is a step towards implementing the 5AMLD E.U crypto regulation which requires a change in German’s Payment Supervision services and Banking acts.

Crypto Custodian Licenses

Apart from the clarification on cryptocurrencies, BaFin also directed that firms operating as crypto custodians should obtain licenses. The regulator gave these entities up to 30th March to show an intention for registration while they should have initiated the process by the end of November, 2020. Based on the guidelines, crypto custody involves;

“TAKING THE CRYPTO VALUES INTO CARE AS A SERVICE FOR THIRD PARTIES. THIS PRIMARILY INCLUDES SERVICE PROVIDERS WHO STORE THEIR CUSTOMERS’ CRYPTO VALUES IN A COLLECTIVE INVENTORY WITHOUT THE CUSTOMERS THEMSELVES BEING AWARE OF THE CRYPTOGRAPHIC KEYS USED.”
These developments are likely pace setters within the E.U region. So far, over 40 banks in Germany have filed for the crypto custodial license; a notable mention in this list is the country’s second largest stock exchange which joined the crypto market as ‘Boerse Stuttgart’. Other jurisdictions that crypto assets have been legally recognized include Australia where one judge ruled that they are investment vehicles. It therefore follows that cryptocurrencies can be used as collateral within its financial markets.
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