Transfer of Crypto Values - New German Money Laundering Regulation

Transfer of Crypto Values - New German Money Laundering Regulation

December 10, 2021, Covington Alert

I. Overview

On 1 October 2021, the new German Regulation on Increased Duties of Care for the Transfer of Crypto Value (Kryptowertetransferverordnung - "KryptoWTransferV") entered into force. In a nutshell, by this Regulation the German legislator implemented the so-called ‘Travel Rule’ for transfers of crypto values (Kryptowerte) as suggested by the Financial Action Task Force (FATF). This basically means that material provisions of Regulation (EU) 2015/847 ("Funds Transfer Regulation") will apply to transfers of crypto values by financial entities. Germany has gone ahead with implementing the Travel Rule although there is no European legislation in place yet. The Proposal for a Regulation of the European Parliament and Council on information accompanying transfers of funds and certain crypto-assets - which is part of the Commission’s anti-money laundering and countering terrorist financing legislative package - is still in negotiations with the Council and the European Parliament and it is not yet clear when it will enter into force. The KryptoWTransferV will apply until the entry into force of the new EU Regulation.

II. Material Provisions

A. Scope of Application

The KryptoWTransferV applies to credit institutions and financial services institutions which carry out transactions involving crypto value. The term ‘crypto value’ is defined as a digital representation of value

• which has not been issued or guaranteed by a central bank or authority;
• which is not an official currency but (i) accepted by other persons as currency or exchange medium or (ii) serves investment purposes; and
• which can be traded or transferred electronically.

B. Obligations under the KryptoWTransferV

The scope of obligations depends on whether so-called Crypto Assets Service Providers ("CASP") – which are defined as credit institutions or financial services institutions that provide banking services, financial services or securities services in relation to crypto values – act on behalf of the originator and the beneficiary or whether a CASP only acts on behalf of the originator or the beneficiary.

1. Crypto Asset Service Providers acting on behalf of Originator and Beneficiary

Where CASPs act on both sides, Art. 4 and 6 of the Funds Transfer Regulation apply to the CASP acting on behalf of the originator and Art. 7 to 9 of the Funds Transfer Regulation apply to the CASP acting on behalf of the beneficiary.

This means that the CASP acting on behalf the originator must ensure that transfers of crypto values are accompanied by the name and account number (e.g., public key) of the originator and the beneficiary as well as the originator’s address, official personal document number, customer identification number or date and place of birth.

On the other side, the CASP of the beneficiary must ensure that it receives the aforementioned information from the originator’s CASP by implementing effective procedures, including, where appropriate, ex-post monitoring or real-time monitoring, in order to detect whether any of this information on the originator or beneficiary is missing.

In the case of transfers of crypto values exceeding EUR 1,000, the CASP of the beneficiary must verify the accuracy of the information on the beneficiary on the basis of documents, data or information obtained from a reliable and independent source.

The beneficiary’s CASP must also implement effective risk-based procedures to determine whether to execute, reject or suspend a transfer of funds lacking the required complete payer and payee information and for taking the appropriate follow-up action.

2. Crypto Asset Service Provider acting on behalf of Originator or Beneficiary

In cases where a CASP only acts on behalf of the originator or the beneficiary, the CASP must (only) determine and assess the money laundering and terrorism financing risk adhering to the crypto value transaction and take risk-appropriate measures to manage and mitigate such risks. Risk-appropriate measures will include, in particular, the collection, storage and verification of the name and address of the party on which behalf no CASP acts.

C. Grandfathering

CASPs which already conducted banking or financial services before the KryptoWTransferV entered into force benefit from a grandfathering provision of up to 12-months which can be prolonged for a further 12-month period. The grandfathering provision applies where, through no fault of its own, a CASP cannot fulfill its obligations under the KryptoWTransferV. An example would be a crypto token for which it is technically not yet possible to get all information required under the KryptoWTransferV. In order to profit from the grandfathering provision, CASPs must notify their inability to fulfill their obligations to the German Federal Financial Services Supervisory Authority (BaFin) by 30 November 2021 and submit an explanation thereof by 31 December 2021. The explanation must include a description of the reasons why the obligations under the KryptoWTransferV cannot be fulfilled and the measures that have been taken to remove the obstacle as well as a timeline (which must not exceed 12 months) when the matter will be resolved.

III. Meaning for the Financial Industry

The KryptoWTransferV requires full transparency by CASPs for trades with crypto values by applying the same rules that already exist for conventional bank transfers. Without doubt the increase of transparency will generally lead to more trust in crypto values. On the other hand, there is a large variety of different crypto values in the market and in many cases it will be a difficult if not an impossible task for the CASPs to obtain all information required by the KryptoWTransferV for trades with specific crypto values – at least, within the short timeframe of the grandfathering period. Rendering banking and financial services relating to crypto values where the requisite information is not obtained will no longer be allowed after the expiry of the grandfathering period.

The Covington Financial Services team will continue to monitor the situation and update you on any new developments.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Financial Services practice.