In 2011, German regulator BaFin treated virtual currencies as financial instruments, stating that bitcoin and related assets are "units of account" similar to artificial currencies. So in Germany, these are equal to special drawing rights that are not legal tender but can be used for payments. Buying or selling in virtual currencies requires a financial services license under the Banking Law.
Crypto and Money Laundering Regulation in Germany
With the introduction of crypto assets in our lives recently, their use is becoming more and more common. With the increase of this use, the existing crimes in this area have increased, especially for money launders. The crypto sector has become a target. However, regulators have made some regulations to prevent this crime. Regulations in this sector have started, especially with the regulations of the European Union. One of the European Union regulations is 5AMLD. In short, 5AMLD is the EU legislation that must be implemented by the EU Member States by 10 January 2020 and requires stricter rules to combat money laundering. With the Fifth Anti Money Laundering Directive, crypto-asset traders and crypto wallet providers subject to AML obligations of the European Union member states have been included.
EU member states may have chosen some different methods to comply with the directives. A typical example of Germany that has chosen a different way of implementing the 5AMLD has not created new mandatory categories of persons under the Money Laundering Act. Instead, the definition of crypto assets in banking law, crypto-assets in financial instruments, a new financial service regulated under the Banking Act, i.e., protection of crypto assets for others, management, and protection, or special "crypto protection" activity has been found in an application that serves to hold, store or transfer crypto assets. As a result of these changes in Germany, individuals engaged in certain activities are considered financial service providers and are subject to a registration requirement and licensing requirement stipulated by 5AMLD. Providers related to crypto-assets have also become regulated under the new rules in the Banking Law. Therefore the following parties have been regulated and supervised by BaFin in relation to crypto-assets:
- Portfolio managers
- Custodians of private keys to access wallets
- Wallet providers
- Nesting agents
On the other side should be considered, crypto traders of 5 AMLD only need to register against fiat currencies, not crypto traders against cryptocurrencies. Besides, the license requirement in Germany also covers crypto trading. In Germany, "Crypto-assets" are defined as representations of digital value that are not linked to a legally determined currency that is not issued by a central bank or a public authority but are accepted. It is also seen as a medium of exchange that serves investment purposes other than the monetary value used in limited networks exempt electronic payments that can be electronically transferred, stored, and traded by natural or legal persons or processed by e-money.
In particular, the words "serve investment purposes" have been added to this definition in Germany compared to 5AMLD. Furthermore, BaFin stated that it sees transferable digital tokens as securities, that is, a financial instrument representing a company's membership or a financial claim. Consequently, best practice obligations will apply to both virtual currencies or service tokens and asset and security tokens.
German Federal Ministry of Finance Advisory Document
The consultation document of the Federal Ministry of Finance suggests that German law should often be opened to electronic securities. However, it will not be necessary to issue securities electronically. In addition, the Ministry of Finance suggests that regulation should be technology-independent and therefore not privileged, especially in terms of blockchain technologies consuming too much energy and affecting the environment.
If it is proven that the blockchain technology will not allow for subsequent unauthorized changes, the issuer himself or an authorized third party can register electronic security. The blockchain securities registry can be included in another public register to provide legal certainty to issuers and investors that the securities listed here are securities within the meaning of German civil law. Institutional investors can only purchase blockchain securities. The issuer or the authorized third party that keeps the registration must be subject to government control. Private investors can only purchase blockchain securities if the respective blockchain registry is operated by a regulated loan or financial institution in the EU.
Furthermore, it is stated that the tokens are generally not classified as securities, investment assets, and not as electronic securities under the Securities Trading Act. In this way, they will not be subject to the provisions of the Securities Commercial Code, the Securities Disclosure Law, or the Investment Assets Law. Therefore, there is no obligation to publish a prospectus or information sheet for the public offering of benefit tokens. The recommendations of the European Securities and Markets Authority (ESMA) on ICOs and crypto-assets refer to the need to create adequate risk disclosure requirements.
Reducing the ML risks of Crypto Exchanges in Germany
After the realization of the money laundering risks faced by crypto exchanges, AML regulators, as we mentioned above, took action and issued AML recommendations and obligations for crypto exchanges. In the process, some regulators have issued new AML regulations for crypto exchanges, while some regulators have included crypto exchanges in existing AML regulations and laws. However, in Germany, crypto service providers like other banks and financial institutions must have an Anti-Money Laundering compliance program. According to FATF and EU standards, the key to an AML compliance program is the "risk-based approach." Also, for an AML compliance program to fulfill its purpose, it must work flawlessly. A qualified AML compliance officer should also run the cryptocurrency exchanges' compliance program because crypto providers can also face heavy fines and administrative penalties for failures in AML compliance.
As stated in regulations (5AMLD), the first step to creating a good customer experience is the client recruitment process. Crypto providers in Germany also aim for their customers to open accounts quickly and smoothly. As a result, crypto providers in Germany must protect themselves from risks and fulfill their obligations during the client recruitment process. Crypto exchanges should perform customer account openings under AML and KYC requirements, according to regulatory recommendations. The purpose of Know Your Customer procedures is for the business to get to know the person to be a customer. Once the customers are solved who they really are, it is necessary to know their risks. Not every customer is at the same risk, so Customer Due Diligence (CDD) procedures are important. CDD is the process of controlling the customers and collaborators of crypto exchanges in Germany. As a result, Crypto exchanges need to make a risk assessment by applying CDD procedures.
Apart from these, in crypto exchanges in Germany, it may not be sufficient to only know the customers or understand their risks because money laundering can be laundered through the accounts that seem innocent, so transactions have to be scanned. In the virtual currency world, Transaction Monitoring tools that automatically monitor customer behavior allow crypto exchanges to detect suspicious transactions. Crypto exchanges examine customer activities and identify high-risk activities of their customers. VASPs are required to control customer transactions in accordance with AML / CFT regulations.
Sanction Scanner AML Solutions for Crypto Exchanges in Germany
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