KryptoTransferV: Draft bill on the crypto transfer regulation

Background

According to the ministry, due to the increasing spread of crypto transactions, the risk associated with them is also growing. Crypto assets are often used as currency in online fraud and other criminal activities. In particular, the difficult traceability of the transactions poses a risk. The regulation is intended to ensure complete traceability of the crypto transfers.

What is covered?

The KryptoTransverV is intended to cover credit institutions and financial services institutions pursuant to Section 2 (1) of the German Money Laundering Act (GwG) that transfer crypto assets within the meaning of Section 1 (11) sentences 4 and 5 of the German Banking Act (KWG). Credit institutions are companies that conduct banking business on a commercial basis. Financial services institutions are companies that provide financial services to others on a professional basis. Only domestic companies and domestic branches of foreign companies are captured by this regulation.

Contents of the Regulation

The KryptoTransferV orders that, national level, the European Union's Funds Transfer Regulation (Regulation (EU) 2015/847 - FTR) applies to crypto assets.

Accordingly, the obliged parties must observe increased due diligence and documentation obligations. More precisely, they are obliged to collect and store personal information (including name and address) about the transaction participants and to check it for correctness. Particularly, if a transfer takes place to or from a self-managed electronic wallet (i.e. there is no crypto service provider on one side of the transaction - "unhosted wallet"), the information must be obtained.

If the obligations cannot be fulfilled, the business relationship may not be established and if it already exists, it must be terminated. The transaction may then not be carried out. If applicable, the obliged party must also need to report this to the Central Financial Transaction Investigation Unit (FIU).

Regulation within the European Union

Germany is moving forward with the draft of the KryptoTransferV in accordance with a recommendation of the FATF. However, the EU is already working on their way to regulate crypto value transfers. The European Commission has proposed a package of legislative proposals to prevent money laundering and terrorist financing. Among them is a proposal to directly adapt the FTR including crypto value transfers in addition to money transfers.

Other proposals include new regulations on AML/CFT and the Sixth EU Money Laundering Directive (AMLD6). Read more at EU publishes package of legislative proposals aimed at strengthening AML/CFTrules (twobirds.com).

Effect and what's next?

Both the proposed amendment of the FTR and the KryptoTransferV are based on Recommendation 15 - Interpretative Note 7b (so-called "crypto travel rule") of the Financial Action Task Force (FATF).

This is reflected in the content of the regulatory approaches: Thus, no substantially different obligations are envisaged in the German and the EU proposal.

However, the German draft would enter into force before the EU regulation and would be in place until the EU regulation enters into force. There should be no coexistence of the two regulations.

Whether the KryptoTransferV can ultimately achieve its purpose remains questionable. For example, users can transfer their crypto assets from their account with the obliged parties to their own self-administered wallet. From there on, it can be transferred further without giving any information. In the end the new regulation only attacks the business models of crypto custodians.

Additionally, obliged parties could avoid regulation by turning their backs on Germany as a business location. Users could also simply fall back on foreign companies. Therefore, the regulation is also criticised in regard to its suitability to distort competition.

The KryptoTransferV is to be evaluated by the Ministry of Finance in 2023 seeing if a comparable regulation under EU law has not entered into force by then or will not enter into force in the foreseeable future. It can be assumed that the regulation will enter into force at least on a transitional basis.