The importance of cryptocurrencies, and above all Bitcoin, is growing as fast as their tradability. At the same time, however, this makes them a vehicle for money laundering. This is because, as the first fully digital form of payment, cryptocurrencies can in principle be transferred anonymously, in part because they have not been subject to regulation – until now.
According to Germany’s Federal Criminal Police Office (BKA), the aim behind almost all criminal activity is to generate profit. In order to legalize their ill-gotten assets, criminals invest significant energy and resources in money laundering, often moving money through foreign institutions. Law enforcement agencies, on the other hand, do everything they can to combat such activities, or at least to make it as hard as possible for criminals. Their core strategy is to make the transfer of high values of money or assets more transparent and to remove the anonymity of the parties involved. At the national level, this is regulated in German law by the Money Laundering Act (GWG).
For example, the legislation requires anyone wishing to open an account to prove their identity. Banks will be obligated to report large cash payments to the financial authorities. Banks, however, are not the only parties subject to new legal requirements: professional groups such as notaries, attorneys, auditors, and tax advisors will be required to examine their clients in detail.
This marks supervisory authorities’ first move to regulate cryptocurrencies. In the Fifth Revision of the Directive to Prevent Money Laundering and Terrorist Financing (AMLD5, 5th Anti-Money Laundering Directive), adopted by the EU on May 30, crypto values were defined in law as follows: “’Virtual currencies’ means a digital representation of value that is not issued or guaranteed by a central bank or a public authority and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.”
EU member states are required to implement the directive in national law by January 10, 2020. As a result, an accompanying draft bill from the German Federal Ministry of Finance describes “crypto values” as financial instruments within the meaning of the German Banking Act (KWG). The newly defined financial service “crypto custody transactions” comprises the custody, administration, and security of crypto values or private cryptographic keys that make it possible to hold, store, and transfer crypto values on behalf of others. This means that cryptocurrencies are not only regulated under money laundering legislation (in the GWG) but are now also recognized as a financial instrument under banking law (in the KWG) by the Federal Financial Supervisory Authority (Bafin).
This growing regulation of cryptocurrencies, and Bitcoin in particular, is an important step on their journey to becoming a generally accepted form of payment. It turns an unpredictable bronco into a versatile, dependable workhorse. Above all, supervision from Bafin will attract interest from new groups who have not invested in Bitcoin to date due to perceptions of uncertainty and speculation. The carefully planned regulation shows that Bitcoin is now being taken seriously on the capital and financial markets. Bitcoin has arrived – and it’s here to stay.