New Crypto Laws Could Cost Germany its Innovation
What's the price of legitimacy?
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Although Germany’s new crypto regulations place it at the forefront, the cost of the so-called “crypto license” may still be too high for smaller businesses. And if one considers startups as a proxy for innovation, the country could be facing a serious trade-off.
Germany Takes the Lead
Germany made an amendment last year to the Fifth Anti-Money Laundering Directive (AMLD5) that came into force at the beginning of January.
This amendment stipulates that traditional German banks are allowed to buy and sell digital assets in the same way that they handle securities like stocks and bonds. To do so, they must first apply for a crypto license from the country’s financial regulator, BaFin. The same is also true for crypto-specific startups.
In a note shared with Crypto Briefing, Prof. Dr. Philipp Sandner, the head of the Frankfurt School Blockchain Center at the Frankfurt School of Finance & Management, explained that “within the EU, Germany is one of the first countries to adopt such a regulation.”
The new laws also mean that foreign companies currently operating in the country must establish a legal entity in Germany, as well as apply for the license.
Applying is a two-step process. First, businesses must notify regulators of an intent to apply before Mar. 31, 2020. Formal applications should then be submitted fo BaFin before Nov. 31, 2020.
Firms who continue to operate without a license after Jan. 2, 2021, will be doing so illegally.
The clarity among crypto enthusiasts has been good for business, said the chief digital officer of Boerse Stuttgart Ulli Spankowski. Since launching its crypto trading application, the Boerse Stuttgart subsidiary, Sowa Labs GmbH, has reported steep, month-on-month growth.
“We launched the Bison app on Jan. 31, 2019, and over the past 13 months, we have registered roughly 92,000 users,” Spankowski told Crypto briefing. Registrations have increased in the months following the new regulations in Germany.
The application focuses primarily on retail investors and allows users in 72 countries to trade cryptocurrencies like Ether, Bitcoin, Litecoin, and XRP for free. Institutional interest has also seen growth, but for slightly different reasons.
The Cost of Crypto Innovation
Alongside Bison, Spankowski and his team have developed Blocknox GmbH, a crypto-custodial service, to secure digital assets traded on the application. In September last year, they also began serving the Boerse Stuttgart Digital Exchange (BSDEX), the country’s first regulated crypto exchange.
Blocknox also offers “a white-label service to institutional clients” in which foreign companies “wouldn’t need their own license for crypto custody,” said another spokesperson from Boerse Stuttgart, Johannes Frevert. Instead of establishing a legal entity and applying for the crypto license, companies can tap Blocknox to do it for them.
And with over 1 million Bitcoin holders in Germany, this may make sense for some. For others, however, the cost of Blocknox and the crypto license may still be too high.
The price of the license itself varies on a case-by-case basis, but “it wouldn’t cost startups more than the equivalent of a Series A funding round,” said Spankowski. But even at an estimated $175,000 in capital, it may be difficult for some smaller businesses.
“As a result of [the crypto license], a few startups have announced incorporating elsewhere. This is predominantly driven by the fact that the application and the resulting regulation would lead to costs that smaller startups cannot cope with,” wrote Dr. Sandner in his brief.
This cost, although daunting to some, may be the price of legitimizing an industry. And over a long enough time horizon, this could still turn Germany into a key player in the European ecosystem, if not the world.