BaFin circular on virtual currencies

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BaFin published a new circular on virtual currencies

Shortly after the „Bitcoin-ruling“ by a German court (see below for additional information) BaFin has published a new draft circular (German only) on last Friday (18thOctober 2018) via their website which addresses financial institutions in Germany. In its circular BaFin outlines the required anti-money laundering measures with respect to virtual currencies.

We assume that the date of this publication by BaFin is a mere coincidence. However, BaFin implies that exchange plattforms for virtual currencies are still subject to a license requirement in Germany.

Background: The Berlin Court of Appeals (Kammergericht Berlin) has ruled that exchange platforms for cryptocurrencies are not subject to a license requirement. According to the court cryptocurrencies do not qualify as financial instruments. Thus, trading activities in connection with cryptocurrencies would not fall within the scope of the German Banking Act (Kreditwesengesetz). The court also critised BaFin’s view on this matter which caused a rather broad echo in the crypto-scene. The relevant court decided in criminal proceedings whether the defendant committed an offence by providing a trading platform without the respective license by BaFin. Although the court decided in favour of the defendant neither BaFin nor other German courts (in partiuclar the competent administrative courts) are bound by its decision. We already expected in a previous article that BaFin would not change its opinion.

Virtual currencies relevant for AML-Compliance

BaFin emphasises the due diligence obligations of financial institutions in connection with virtual currencies. Most institutions should already be aware of this fact because of the 5th Anti-Money Laundering Directive (AMLD5). The scope of the AML-provisions will be extended by virtual currencies.

According to art 1 para 2 lit. d AMLD5

virtual currencies means a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.

Notes by BaFin

BaFin explicitly pointed out that:

  1. Source of virtual currencies – Institutions might be obliged to collect additional information regarding the source of incoming payments if such payments are obviously connected to virtual currencies.
  2. Exchange platforms – according to BaFin exchange platforms for virtual currencies are generally subject to a license requirement (sec 32 para 1 Germany Banking Act).
  3. Anonymity – circumstances favouring anonymity shall be deemed as a risk factor.
  4. Suspicious report – BaFin emphasised that Institutions must submit suspicious reports without undue delay where applicable by law; this would also apply to transcations obviously connected to virtual currencies.

With respect to the license requirement for exchange platforms: number 2 of the above may allow the assumption that BaFin’s view has not changed despite the „Bitcoin-ruling“. We and other experts have already expected this view. However, a clear statement by BaFin remains to be seen.

For market participants

  • Institutions should re-assess their risk management in connection with virtual currencies and possibly adjust their measures to avoid any compliance risks. BaFin might take closer attention in this respect.
  • Operators of exchange platforms for crypto currencies should pay attention any publication by BaFin in this regards. As a precaution, exchange platforms should always consider a license requirement for now as BaFin and other courts are not bound by the „Bitcoin-ruling“ by the Berlin Court of Appeals.

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