The Fifth Money Laundering Directive - Crypto Custody in Focus Effects and opportunities for the crypto market
The Federal Ministry of Finance takes the fifth Money Laundering Directive as an opportunity to further regulate the crypto market and transfers cryptographic values - including security tokens - as financial instruments to the KWG. As a result, crypto assets will in future be regulated and monitored by the BaFin.
The new EU Money Laundering Directive was published in June 2018 and must be implemented by the individual member states by tenth of January 2020. The aim is to tighten up prevention measures for money laundering in the context of organized crime. The ongoing digitalization of the sector and the emergence of new types of services, products and opportunities - as well as risks - are also leading to regulatory innovations, particularly in these countries. Financial service providers that offer services with crypto assets and custody of these assets will in future be subject to money laundering obligations - this applies, for example, to crypto exchanges and providers of external wallets and crypto HSMs.
From the draft bill of the Federal Government for the implementation of the directive:
„Crypt Values are digital representations of a value that has not been issued or guaranteed by any central bank or public authority and does not have the legal status of currency or money, but is accepted by any person or entity as a medium of exchange or payment by agreement or actual practice, or for investment purposes, and that can be transmitted, stored and traded electronically".
The area and services around crypto currencies and tokens will thus be regulated and monitored much more strictly in the future. On the one hand, this will significantly increase compliance efforts and costs for the players involved through new regulatory hurdles, but on the other hand it will also further professionalize the sector and create new trust and security. The treatment of coins and tokens as in the context of the German Banking Act (KWG) as well as the stricter regulation of related services will increase the sectors` professionality while at the same time Crypto assets will leave the legal grey area.
This creates new potential and opportunities for established institutions and banks to take on the market and exploit the investment potentials that arise there. Due to the increasing demand for crypto currencies such as Ether and Bitcoin, the interest of institutional providers such as traditional asset managers are also growing.
It is also very likely that cooperation between established players from the traditional world of finance and new players from the crypto market will increase. Banks can thus implement new technologies - also in the form of concrete products and services - whereas crypto providers can fall back on licenses and compliance resources.
At the same time, the attractiveness of Blockchain-based securities issues, the so-called Security Token Offerings (STO), which today already fully meet the strict requirements of BaFin, is also increasing. This in turn will increasingly require third-party providers to meet money laundering requirements in the future, who will, for example, carry out identity checks and risk assessments relevant to money laundering law. This includes, for example, automated verification of ID documents, personal verifications or comparisons with PEP and sanctions lists.
micobo GmbH already applies high standards for our services and software in the area of crypto assets and we welcome the innovations as a step in the direction of increased professionalism and expect that in particular the issuance of securities in the form of Security Tokens will increase in their acceptance and application. At the same time, it will make life initially harder for new startups in this area, due to the regulated nature of the financial services business.
The German government's current draft law as a reaction to the Fifth Money Laundering Directive therefore envisages regulating the entire crypto sector. This increases the security for investors and consumers, but also the costs for issuers of tokens or providers of related services. However, the term "crypto values" is far-reaching and not conclusive, so that points from bonus programs could also fall under this term - the extent to which regulation here still needs to be improved will become apparent in the future. In principle, stronger regulation and, above all, greater regulatory clarity are to be welcomed.