Month: April 2024
From payment service providers to professional football clubs: New EU regulations to combat money laundering adopted
By Annabelle Rau on 30. April, 2024
Posted In Banking Supervision, Crypto Regulation, Financial Services, Money laundering, Payment Services
On April 24, 2024, the European Parliament adopted a new anti-money laundering legislative package to strengthen the EU’s tools to combat money laundering and terrorist financing.
The package includes
• the sixth Anti-Money Laundering Directive (“AMLD6”) as well as
• the EU Regulation on a Single Rulebook and
• a new central supervisory authority.
Extended access to beneficial ownership data
A key aspect of the new legislation is to ensure that persons with a legitimate interest – including journalists, civil society organizations, supervisory authorities and other relevant stakeholders – have direct and unhindered access to beneficial ownership data.
This information, stored in national registers and networked at EU level, also includes historical data going back at least five years. In the case of legal entities, a beneficial owner is any natural person who owns more than 25% of the capital or voting rights of a legal entity or exercises control in any other way. The information on the beneficial owner includes the name, date of birth, nationality, country of residence and the nature and extent of the beneficial interest of the owner.
Stricter due diligence obligations for obliged entities under money laundering law
The new regulations require obliged entities to implement stricter due diligence measures.
Obliged entities under money laundering law include, for example
• Banks
• Asset managers
• Crypto asset service providers (“CASPs”)
• Real estate and virtual real estate agents
• Lawyers, auditors and notaries
• Retailers of luxury goods
In future, the obliged entities will not only have to check the identity of their customers more thoroughly, but also report suspicious activities.
From 2029, this will also apply to professional football clubs involved in high-value financial transactions.
Restrictions on cash payments and stricter monitoring
The legislative package introduces an EU-wide limit for cash payments of EUR 10,000, except in the non-professional sector between private individuals.
In addition, increased monitoring of particularly wealthy individuals (total assets of at least EUR 50,000,000, excluding their main residence) will be implemented.
New central supervisory authority: AMLA
The new Anti-Money Laundering and Terrorist Financing Authority (“AMLA”) will be established in Frankfurt, Germany. AMLA will not only directly supervise the highest-risk financial companies but will also serve as a central coordination point for national supervisory authorities and monitor the enforcement of targeted financial sanctions.
Outlook
Formal adoption by the Council of the European Union is still pending before the new regulations can enter into force. Once adopted, the laws will be published in the EU Official Journal.
Those subject to anti-money laundering obligations should therefore familiarize themselves with the new regulations and extended due diligence obligations now.
Update for crypto asset service providers: Draft bill to transfer German crypto regulation to the EU MiCAR regime
By Annabelle Rau on 24. April, 2024
Posted In Crypto Regulation, Financial Services
On April 5, 2024, the German Federal Ministry of Finance (BMF) published a draft bill for two regulations intended to facilitate the transition of national crypto regulation into the EU MiCAR regime.
These proposed regulations specify the simplified authorization procedure and create the possibility of submitting applications before the MiCAR regulations become fully applicable.
In brief: Simplified authorization procedure for already regulated institutions
At the end of 2023, the German legislator presented the draft Financial Market Digitization Act (“FinmadiG“), which, among other things, provides for a separate Crypto Markets Supervision Act (“KMAG“) (we reported here). The KMAG enables a so-called simplified procedure through which institutions that already have a national license for crypto asset services can obtain a MiCAR license under simplified conditions.
Key points of the draft bill
The draft bill comprises two regulations:
- The MiCAR-TransitV, which specifies the simplified procedure for already regulated institutions, and
- the MiCAR-AntragsV, which allows applications to be submitted before the MiCAR becomes fully applicable.
Implementation of the simplified procedure through the MiCAR-TransitV
The MiCAR-TransitV is intended to structure the simplified procedure for companies already holding a license. This applies in particular to owners of a German license for the crypto custody business who do not also hold other (EU) licenses that would allow them to make use of the notification procedure. This is intended to enable already regulated institutions to make a simple transition to the MiCAR legal framework.
The BaFin review to be carried out in the simplified procedure in accordance with MiCAR-TransitV should be limited to those aspects in which the MiCAR requirements go beyond the existing requirements under current supervisory law and take into account the special features of the market and business models.
For example, applicants must present their current business organization and corporate governance to BaFin and submit an updated business plan. Depending on the specific crypto-asset service to be provided, additional obligations to provide proof may apply.
Application before MiCAR comes into force through the MiCAR-AntragsV
Parallel to the MiCAR-TransitV, the MiCAR-AntragsV regulates the details of the application for authorization as a crypto asset service provider (also “CASPs“) under MiCAR. This regulation is particularly relevant as it enables applications to be submitted before MiCAR comes into full force on December 30, 2024.
This is the BMF ‘s response to the business community’s need to make the transition as smooth and efficient as possible. Both already regulated companies and new market entrants should be able to enter into dialog with the supervisory authority at an early stage in this way. The MiCAR-AntragsV will expire once its purpose has been fulfilled, probably at the end of 2024.
Practical implications for CASPs
The new legal framework in Germany, which is to be introduced by the MiCAR-TransitV and the MiCAR-AntragsV, represents a significant step in the right direction for existing and prospective crypto asset service providers:
- Regulated institutions should now consider the substantive requirements that will be placed on their application as part of the simplified authorization procedure and start preparing their application.
- Furthermore, regulated institutions as well as new market entrants can prepare for the possibility of submitting an application as early as this year. With regard to the exchange with BaFin required as part of the application procedure, this option should be made use of in order to be able to offer crypto asset services in the EU single market at the same time as MiCAR becomes fully applicable.
Market participants and experts had until April 19, 2024 to comment on the proposed regulations. It is expected that the regulations will be adopted and enter into force by summer 2024 at the latest.
BaFin Declines to Act Against PFOFs (For Now)
By Dr. Frederic Peine | Renate Prinz on 18. April, 2024
Posted In Banking Law
The Federal Financial Supervisory Authority (BaFin) will, for now, not take action against payments by third parties to investment firms (Wertpapierfirmen) for forwarding client orders (known as payment for order flow, or PFOF).
In an announcement dated 22 March 2024 BaFin stated that, should investment firms violate the PFOF prohibition with domestic clients, it will refrain from taking measures or imposing sanctions until the completion of the national legislative process in Germany. The PFOF prohibition, as contained in the amended version of the Regulation (EU) No. 600/2014 of the European Parliament and of the Council (MiFIR), stipulates that investment firms acting on behalf of retail clients and professional clients may not receive any fees, commissions or non-monetary benefits from third parties for the execution of orders from these clients at a particular execution venue (Article 39a(1)(1) MiFIR).
This ban on kickbacks is based on the principle that investment firms working for their clients should strive to obtain the best possible price and the greatest chance of execution for the transactions they carry out. Therefore, investment firms should select the execution venue or counterparty for the execution of their clients’ transactions exclusively from the perspective of achieving the best possible result for their clients. In the case of receiving kickbacks, there is a risk that these client interests are at least not fully taken into account.
EU member states can deviate from the PFOF prohibition until 30 June 2026 (Article 39a(2) MiFIR). Germany, following the announcement by the German Federal Ministry of Finance (Bundesministerium der Finanzen), intends to make use of this option as it pertains to securities orders from clients residing or established in Germany. The corresponding exemption provision is expected to be included in Section 138a of the German Securities Trading Act (WpHG) and is currently in the legislative process (BT-Drucksache 20/10280).
Nevertheless, supervised investment firms must continue to adhere to the PFOF prohibition. However, until the new regulation in Section 138a WpHG comes into effect, BaFin will not penalize any violations, provided that the requirements of the new Section 138a WpHG are met.
BaFin’s supervisory communication is available at this link.
Bitcoin Halving Is Just Around the Corner
By Dr. Frederic Peine on 18. April, 2024
Posted In Crypto Regulation
After the approval of cryptocurrency exchange-traded funds (ETFs) in the United States, another fundamental event for the crypto industry is on the horizon: the expected bitcoin halving in mid-April 2024.
The approval of so-called bitcoin spot ETFs by the US Securities and Exchange Commission (SEC) in early January 2024 led to significant cash inflows into the crypto market, specifically targeting the market for bitcoin spot ETFs. Between March 4 and March 13, 2024, approximately US$3.8 billion was invested into the newly approved bitcoin ETFs, resulting in bitcoin reaching a new record high of around US$ 73,750.
Now, the industry eagerly awaits the so-called bitcoin halving. This is a halving, i.e. a reduction, in the reward that bitcoin miners receive for creating a new block. The halving is an inherent feature programmed into the underlying blockchain of bitcoins, intentionally designed to create shortage. In simple terms, each block in the blockchain contains a summary of all bitcoin transactions. Miners continuously verify the accuracy and completeness of these blocks. Once all transactions within a block are verified, the miner receives a specific number of bitcoins as a block reward. Currently, the block reward is 6.25 bitcoins per validated block. After the halving, this reward will decrease to 3.125 bitcoins per validated block.
Bitcoins are programmed to have a maximum limit of approximately 21 million coins. Every 210,000 blocks – i.e., after verification and creation of 210,000 blocks – a new halving event is automatically and immutably triggered in the source code. On average, a new block is created (mined) approximately every 10 minutes, resulting in a halving event roughly every four years.
The three previous bitcoin halvings, in 2012, 2016 and 2020, have consistently been accompanied by significant price increases for bitcoin. It is widely expected that the upcoming halving will follow a similar pattern. History has shown that the cryptocurrency market in general, and the bitcoin market in particular, is exceptionally volatile – similar to the rapid price movements following SEC approval – often driven by irrational herd behavior. Ultimately, all signs point to the upcoming halving being no exception.
From a regulatory perspective, there is currently no legal framework at either the European or national level to prevent such substantial price fluctuations. In the EU (including Germany), the crypto market is regulated by the European MiCAR (Markets in Crypto Assets Regulation – Regulation (EU) 2023/1114 of the European Parliament and of the Council of May 31, 2023) and, selectively for crypto assets such as security tokens, by MiFID II. MiCAR, which also applies to currency tokens such as bitcoin, will come into full effect on December 31, 2024. For issuers and providers of crypto assets, MiCAR imposes disclosure and business organization requirements, as well as specific licensing and ongoing government supervision. Similarly, crypto service providers offering services such as operating trading platforms, managing crypto portfolios, providing advice on crypto assets and placing crypto assets are also subject to licensing requirements under MiCAR.
The upcoming halving is not affected by this newly established legal framework, and the price fluctuations in the crypto market will not be prevented by the stricter and – at least EU-wide – uniform regulation of crypto assets.
