Cryptocurrency Regulations in Germany – Crypto Capital of Europe

Hi, This is Qadir A.K, Crypto lover, and Research Columnist. 

Having an authentic response is always a positive thing and being rewarded with great reviews would be ‘icing on the cake!!!’

Well, moving forward with the same positivity and actual information in the next chapter of my writing series, ‘The Cryptocurrency Breakthrough 2020 – Synopsis 13’ Cryptocurrency Regulations in Germany

Germany is known for its quality which is always in high demand whether its goods or any services. In past years, Germany has successfully labelled itself as ‘Crypto Capital of Europe’.

The government also intends to use blockchain in various sectors making the country the first among the European Nations completely regulating cryptocurrencies with sufficient documents.

German Government on Cryptocurrencies

The Germans are well aware of the benefits of the latest Fintech innovations and the country had a leading role in the EU with most of the innovations and industries. The government wants more and more youth and start up’s to get involved in the recommendations and participate to reinforce the German economy.

In addition to fintech, there is a huge interest in blockchain and crypto from a wide range of industries. The Germans exhibit their head towards digital assets and blockchain technology. The German youth within the age group of 18-29, occupy the major share among the interested people in investing in digital assets.

Regulations on Cryptocurrencies

Germany is crypto heaven and an ideal place to hold them. The reason lies back in 2013 when the whole world was just getting acquainted with the internet, Germany legalized Bitcoin and termed it as ‘Private Money’. 

The cryptocurrencies are termed as ‘financial instruments’ under the German Banking Act. Any person or organization who wishes to offer crypto services needs to obtain permission from The Federal Financial Supervisory Authority (BaFIN), the financial regulatory authority of Germany. 

In 2019, the government passed a bill that significantly impacted the cryptocurrency services and crypto enthusiasts. The EU Fifth Anti-Money Laundering Directive (5AMLD) drastically changed the licensing requirements and the anti-money laundering obligations. The law came into effect on Jan 01, 2020. 

The new rules not only affect the service providers within the country but the companies working outside Germany for the German customers. Germany has not adopted laws specific to ICO’s, but ICO’s are subjected to existing regulations.

In the case of ICO’s, you need a local financial licence to start with and authorized capital must be at least 730,000 Euros. 

Banks are very Friendly with Cryptocurrencies!

The 5AMLD which came into effect from 01 Jan 2020, enabled the German banks to sell and store cryptocurrencies. The bank customers can now buy and sell cryptocurrencies on the banking platform. More than 40 licensed German Banks applied to the German Federal Financial Supervisory Authority BaFin who wish to provide cryptocurrency services to their customers.

Banks are also allowed to auction the cryptocurrencies like any other sized properties. The Bitcoin popularity has raised many cybercriminals. The cryptocurrencies seized from these criminals and also by illegal activity, now can be auctioned by the bank authorities.  

Solarisbank in Berlin was the first financial institution to provide crypto services to their customers. Micheal Offermann, head of crypto banking at Solaris said,

“We have been dealing intensively with the topic of crypto custody for a year and a half. The new regulation in the new Money Laundering Act is a good time to start practically. After all, we are not a research institute, but a commercial bank.”

Taxation and Mining

Taxes on Cryptocurrencies

Germany is known as ‘Bitcoin tax heaven’. But why??

In Germany, cryptocurrency transactions are exempted from VAT and have no capital gains tax. The buyers are required to hold their digital assets for a minimum period of 12 months to get exempted from the taxes. If the cryptocurrencies are sold before 12 months, then the gains on the sale will be taxed with a Progressive Income Tax of 45%.

In case of the exchanges which buy or sell cryptocurrencies with their own name working as an intermediate, will be exempted from tax.  But the exchanges working in the technical marketplace would not be entitled with any relief.

Cryptocurrency Mining

Mining usually requires high computing power which is not budget-friendly for any private users. The miners have to withstand the cost of purchasing the equipment where-in they need to make payment in advance.

 And nowadays, more than only mining, mining pools or mining rigs are in great demand which is a pool of resources by miners. These can perform the mining process within a reasonable amount of time due to high computing power. 

For this reason, the miners are joining the network to form mining pools. Here, one can invest in a mining pool under certain laws formed under Investment Laws. The third-party investment enables the miners to increase their mining power and investors can also be benefited from the mining profits.

Now coming to taxes on the profits gained by mining cryptocurrencies, they would not be subjected to any taxes as their services are considered to be voluntary.

Series of Events

04-03-2020:- German federal authority BaFin, officially clarified the status of Bitcoin and other cryptocurrencies as ‘Financial Instruments’.

21-02-2020:- The Federal Financial Supervisory Authority of Germany, BaFin released additional guidance with reference to its stands on cryptocurrencies. Cryptocurrency issuers are required to get a license from the regulator.

Access the detailed guidance HERE.

24-07-2019:- BaFin announced that from 01 January 2020, a licence is mandatory for all crypto exchanges and wallet providers. Cryptocurrency businesses should abide by the Anti-money laundering law no matter whether they might be any overseas entities targeting german customers.

20-05-2019:- German government is very keen to introduce blockchain regularization and tokenization. They released guidance for the same. The main focus was on German laws specifying capital investment and security which are regulated by their respected regime. The guidance also emphasised on the characteristics of the tokens and also explained the effects of new tokens on the financial regulation of Germany. And hence BaFin approved its first security token.

• Token- A cryptocurrency coins are referred to as tokens.

15-11-2017:- The German Federal Financial Authority (BaFin) issued a statement to customers warning them about the risks involved in Initial Coin Offerings(ICO’s). The authority considered ICO’s lack of legal requirements and transparency obligations. This could result in an immense risk for the customers.

12-06-2017:- The German and Austrian governments came together to fund research,’Bitcrime’  which focused on the use of digital currencies in organized crime. 

20-09-2016:- The Deutsche Bank Bundesbank termed Bitcoin and other virtual currencies as ‘trustless’ and also expressed its doubt on authenticity. Delivering a speech at the Official Monetary and Financial Institutions Forum(OMFIF), a member of the executive board indicated that the nature of the peer-to-peer transfer of virtual currencies does not have any natural value.

23-05-2014:- The German Ministry of Finance, the Bundesministerium der Finanzen (BMF) published a new document suggesting a tax on Bitcoin sale. The retailers would be taxed twice, once on sale of goods and secondly, when they seek to sell bitcoins they accept in purchases.

19-12-2013:- BaFin releases an overview of risks related to virtual currency. It also indicated that the use of Bitcoin for the commercial purpose would require a licence and could be permitted in some circumstances.

19-08-2013:- German Finance Ministry says that virtual currency are not e-money or foreign currency. But also made it clear that they are still financial instruments as mentioned under German rules. It further stated that virtual currency can be taxed as capital.

22-12-2011:- German Financial supervisory Authority BaFin, said that Bitcoins are commodities that are subject for tax. They further said that Bitcoins are exempted from the definition of e-money as they are not tied to any legal tender currency.

Concluding Note

Despite the 5AMLD effect, the new rule of Banks providing the crypto services is encouraging. Germany successfully balanced both the status of the cryptocurrencies and also the country’s monetary system from preventing the cryptos to surpass them. At the same time, the governments support on blockchain technology could boost up the economy in future.

Cryptocurrencies have the most friendly environment here in Germany, with tax exemption and legal mode of payment. Hence it would more interesting to see the future of cryptocurrencies and the blockchain technology in the country with new innovations and regulations.

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