On 26 May 2021, the German Ministry of Finance launched a consultation (in German) on draft rules on recording information relating to cryptoasset transactions (Kryptowertetransfer-Verordnung). The consultation ends on 14 June 2021 and the final rules will be issued by the ministry via a statutory order supplementing the German Anti Money Laundering Act (Geldwäschegesetz, GwG).
According to the German legislator, cryptoassets are used as a means of payment for illegal transactions via the so-called ‘dark web’, mainly because the payments in cryptoassets are usually anonymous or pseudonymous. In addition, tracing cryptoasset transactions is severely hindered by the use of so-called 'tumbler' or 'mixer' services, which blend cryptoassets from different sources.
Planned extension of the Money Transfer Regulation
Generally speaking, the draft rules extend the rules of Regulation (EU) 2015/847 (known as the Money Transfer Regulation) to cryptoasset transactions. This regulation harmonises the information that must accompany a funds transfer. The rules aim to ensure funds transfers are fully traceable in order to prevent, detect and investigate money laundering and terrorist financing.
The Financial Action Task Force (FATF) recommends the same requirement. Known as the 'travel rule', it requires virtual asset services providers, such as custodian wallet providers and exchange service providers, to obtain, hold, submit and make available to authorities certain information on virtual asset transfers. These obligations also apply to financial institutions that send or receive virtual asset transfers on behalf of their customers.
According to the draft rules, financial institutions, securities firms and credit institutions licensed in Germany and German branches of foreign institutions that transfer a cryptoasset or private keys must apply the regulation. In particular, these firms must send and receive relevant payer and payee information Instead of the relevant account number that must be used for money transfers under the Money Transfer Regulation, the relevant public key must be recorded.
Should an obliged institution (or a similar foreign entity for cross-border transfers) only act on behalf of one party of the transfer, ie on behalf of the transferor or the transferee, the institution must identify and try to verify the name and address of both parties.
The final rules will enter into force two months after their publication. Should obliged entities not (yet) be able to implement these requirements due to a lack of technical standards, they must notify BaFin and seek an exemption on an annual recurring basis.
Small amendment – significant impact?
The legislative amendment appears to be relatively simple. However, the practical implementation of the travel rule raises significant technical difficulties and it may turn out that many obliged entities will have to temporarily rely on the exemption. For transactions on a distributed ledger network, institutions do not have to share the information required under the Money Transfer Regulation to initiate a transaction. Therefore, a messaging infrastructure will often have to be set up in parallel.
It’s not just in Europe that implementing the travel rule for cryptoassets is proving a challenge. As early as May 2019, the travel rule was extended to 'convertible virtual currencies' by way of guidance issued by the US anti-money laundering authority FinCEN. However, FinCEN published an additional proposed rulemaking in October 2020 (together with the Federal Reserve) and in December 2020 to address further clarification needs. Consultations have received more than 7,000 comments but final rules have not yet been adopted.
In November 2020, the European Council also urged the Commission to comply with the travel rule.
[The Council] URGES the Commission to expand the list of obliged entities beyond the current EU framework with regard to virtual asset service providers in accordance with FATF Recommendation 15 and RECALLS that FATF requirements must be fully addressed by Union law, notably the application of Recommendation 16 regarding wire transfers to virtual asset service providers (“travel rule”).
Therefore, it is possible that additional steps will be taken at a European level.
In Germany, it remains to be seen how the legislator will consider – and if the draft rules are adopted – BaFin will administer these technical complexities, and how German financial institutions can ensure they comply.