A growing trend on the world’s capital markets is to bring cryptocurrencies in line with traditional finance, as there is an increased involvement in the industry from traditional market participants and growing awareness that cryptocurrencies are a part of the global financial system.
The need for regulatory changes
Comprehensive regulation of the crypto sector is an essential step in order for the acceptance of cryptocurrencies to happen as the 2017 ICO hype brought with itself a chain of negative events – stolen bitcoins, thousands of defrauded customers, market manipulation, money laundering, etc. For the further successful development of the crypto market, however, the participation of established financial institutions is a necessity as unclear regulation is among the major obstacles deterring institutional investors from adding crypto to their portfolio. As a result, the requirements to operate in the crypto market must meet the same standards as we know them from traditional capital markets.
Crypto to become an accessible asset class in Europe
Against this background, it is rather positive that Europe has taken the initiative and will regulate crypto assets on a large scale. The Fifth Anti-Money Laundering Directive or AMLD5 aims to improve transparency and strengthen the fight against financial crime across the EU and as of 10 January, 2020 requires the European Union’s 28 member nation-states to adopt the Directive. The new rules require crypto exchanges and custodial service providers to register with their local regulator and demonstrate compliance with thoroughgoing know-your-customer (KYC) and anti-money laundering AML procedures covering only cash to crypto transactions and vice-versa.
Germany is breaking new ground as a pioneer in the EU as the German Parliament passed a legislation transposing AMLD5 into national law. The German Banking Act (KWG) has been changed according to the guidelines of the AMLD5 which allows banks to sell and store cryptocurrencies in the same manner as stocks and bonds to both institutional and retail investors with a license from the Federal Financial Supervisory Authority (known as BaFin ), instead of dealing with third-party cryptocurrency custodians which are also subject to licensing requirements from BaFin.
Germany, being one of the largest economies in the world and the EU’s most influential state often sets the tone economically and politically for many nations in Europe, meaning their commitment may be very well received in other states.
Impact on banks and financial service providers in Germany
Until now, German banks like Commerzbank and DZ Bank stated that while the cryptocurrency market is being monitored with suspense, there has so far been no concrete interest in jumping on the crypto train. But with the new regulation at hand, a greater trust in crypto is starting to show from financial institutions. In particular, it should make banks more open to providing their services to crypto companies and attract more institutional capital.
Financial institutions will now be allowed to combine safe keeping and/or trade of crypto-assets with traditional banking and financial services as long as the required licence is obtained.
The lack of homogeneity on the European market still looking for answers
However, a good deal of complexity remains over how AMLD5 will be implemented and operated from one European country to the next. As it stands, the accepted norms of traditional finance don’t map on to the crypto world. While something like an e-money license in one European country can be passported into another, the AML authorization schemes regarding crypto vary across Europe; France has one approach, Germany another, the Netherlands is different again and so on.
Overall, however, the new legislation is sending out a positive signal. Finally, a regulatory framework for the safekeeping and handling of cryptocurrencies is emerging. It is therefore only a matter of time before the major German and European banks open up to the token economy.
To learn more about how banks and financial service providers embark on the digital journey of the future, follow us and subscribe to our newsletter!