The draft of the Federal Ministry of Finance’s crypto value transfer ordinance is an overregulated bulwark that will place disproportionately large burdens on crypto companies in the future. The consequences for Germany as a crypto location could also be devastating, says the digital association Bitkom.
The crypto space has always been attached to the stigma of a shadow economy, which, due to its anonymous nature, favors money laundering and terrorist financing. The Federal Ministry of Finance therefore issued one a month ago Working draft that lays down a set of rules to curb crypto financial crime. The “Crypto Values Transfer Ordinance” calls for stricter duties of care for crypto value service providers, who in future will have to collect, store and transmit data on clients and beneficiaries when crypto values are transferred. According to the digital association Bitkom, Germany is gambling away its competitiveness in the European market – and ultimately promoting criminal activities with crypto currencies.
Bitkom points out gaps
In practice, the requirements of the Federal Ministry of Finance can basically not be afforded, it says in the Bitkom opinion. The requirements for transaction processing between two crypto value service providers, i.e. custodians or financial service providers and credit institutions, are simply not feasible, “because there is currently no technical standard for data exchange”.
In addition, it is questionable how the globally networked problem of money laundering can be solved by rushing ahead at the national level: “Going it alone at a national level can be an obstacle to such a comprehensive system, since existing national standards would have to be subsequently harmonized with international requirements”. If the draft were implemented in its current form, Germany would not only jeopardize “its international pioneering role in blockchain technology and in the crypto sector”. Because the regulation ultimately even promotes the misuse of crypto transactions for criminal purposes. “This would only mean that customers would increasingly migrate to the unregulated market and to foreign providers,” says Patrik Hansen, Head of Blockchain at Bitkom.
Rope trap: Unhosted wallets
In this regard, the transfer of crypto values to an “unhosted wallet” is particularly problematic. According to the draft, crypto value service providers should ultimately determine and save the name and address of beneficiaries or clients of a transfer in connection with an “unhosted wallet”. In doing so, they have to take “risk-appropriate measures to ensure that the name and address determined are correct”.
But “the determination and identification of the owner of these“ unhosted wallets ”is practically impossible,” says Bitkom. In addition, it is unclear what is meant by “risk-appropriate measures”. Ultimately, the impossibility of identifying the owners of unhosted wallets leads to “German crypto value service providers either having to refrain from these transfers entirely or having to carry out disproportionately high and costly, but nonetheless insecure checks”.
This means that the Federal Ministry of Finance is not only overshoting the target, but is ultimately also shooting itself on its knees. Because:
This will urge market participants to act with “unhosted wallets” or with foreign (unregulated) crypto service providers instead of regulated German crypto value service providers. That would significantly counteract the aim of combating money laundering, since from a German point of view one would lose any insight into these transmissions – for example through suspicious transaction reports and AML scores occurring today.
Bitkom serving suggestion
Last but not least, the consequences for companies that are deprived of their economic basis are fatal. According to Bitkom, the regulation ultimately gave German service providers a serious competitive disadvantage. The digital association therefore calls for “obligations to be structured in a proportionate manner” and a risk-oriented adjustment of the data collection. For this, common criteria such as AML scores should be taken into account and the given advantages of blockchain technology such as transparency and traceability should be used.
In terms of “data economy”, the transmission of a transaction ID would therefore suffice for transfers between crypto value service providers instead of recording “a large amount of personal data”. For service providers with suspicion of money laundering, however, “automatically higher due diligence and data transmission obligations apply”.
Last but not least, the regulation must “take advantage of the properties of the blockchain and advanced blockchain analytics tools for tracking and monitoring transactions”. Finally, all transaction flows can be traced back on the blockchain. With the help of analytic tools or crypto forensic experts such as Chainalysis, these can be checked for compliance with or violation of the Money Laundering Act.
European solution instead of going it alone
In addition, decisions on the fight against crypto financial crime are still pending at European level. The draft is therefore a “quick shot”, especially since Germany’s going it alone would not guarantee “an effective fight against money laundering”. On the contrary:
Only a broad information system with a critical number of participants can provide the necessary overview of potential money laundering activities. Going it alone at national level can be an obstacle to such a comprehensive system, as existing national standards would have to be subsequently harmonized with international requirements.
Solutions at European level that set a uniform framework are to be preferred in any case. Otherwise, there is a risk of a regulatory patchwork quilt – with catastrophic consequences for large parts of the German crypto industry.