Germany is a synonym for quality. Whether it’s German goods or services, they are always in high demand. Over the last couple of years, this reputable country has made an about turn in policy being dubbed the “Crypto capital of the EU”.
Local authorities are abreast of the times, actively introducing blockchain, a new lucrative sphere, and making Germany the first country in the European space with a sufficient number of regulatory documents on cryptocurrencies.
In Germany, selling, buying, and storing cryptos officially became legal on January 1, 2020. However, back in September 2019, most local politicians were hostile towards digital assets, proving yet another stereotype about Germans being conservative and risk-averse.
What made them change their minds? Discover the truth with Solomon Brown, head of PR at Freewallet, a family of mobile-first cryptocurrency wallets.
Cryptocurrency Regulations in Germany
In 2019, the German government adopted a comprehensive blockchain strategy. The plan calls for the development of blockchain applications in business and public administration. Concurrently, the strategy will secure state sovereignty and consumer rights.
As Finance Minister Olaf Scholz stated to Financial Markets, the Federal Ministry of Finance news outlet, “As part of the internet of the future, blockchain technology can play a key role in our efforts... One of the core activities of a sovereign state is to issue a currency. We will not cede this task to private companies.”
We’ll get back to this point but first, let’s take it slow to see how the German crypto story began. Looking deeper into the country's legislation, we found out that Germany legalized Bitcoin back in 2013, denoting it as “private money”, as Die Welt reports.
For the first time the status of crypto in Germany was discussed by the Member of Parliament Frank Schäffler, but the German Ministry of Finance did not acknowledge Bitcoin as electronic money.
Everything changed in 2017 when Germany called BTC a financial instrument. It is worth noting that the new amendments to the Banking Code indicate that Bitcoins are “units of value”.
So why is Germany called a “Bitcoin tax haven”? In 2018, the country exempted Bitcoin transactions from VAT.
From now on, buyers and sellers of Bitcoin have to pay a tax if the sale happens sooner than 12 months after purchase. In this case, a progressive income tax of up to 45% applies for all gains.
The good news is the income of individuals received from the sale of crypto coins is not subject to income tax if the period between purchase and sale transactions is 1 year or more. In other words, if you hold your (fraction of) Bitcoin for a year, it comes out tax-free. The taxation set the stage for crypto startups, but not for long.
In 2019, Germany passed a bill that had a significant impact on cryptocurrency services and local crypto enthusiasts including the vast German Freewallet community. The 5th EU Anti-Money Laundering Directive (AMLD 5) drastically changed licensing requirements, as well as anti-money laundering obligations for crypto service providers.
This legislation made amendments to the Anti-Money Laundering Act and the Banking Act, as well as it set new terms for providers of foreign exchange services and cryptocurrency exchange platforms. The bill went into effect on January 1, 2020, expanding the scope of responsibility for money laundering and terrorist financing (AML / CFT).
Crypto assets fall under the definition of financial instruments under the German Banking Act. Any person wishing to provide financial services related to crypto assets in Germany on a commercial and/or other scale will have to obtain permission from BaFin.
The new rules also affect service providers located outside Germany but working with German customers. During the year, a lot of European crypto companies shut down over impending EU money-laundering rules, for instance, the crypto mining pool Simplecoin. At times legislation gets tough for miners too. But luckily, the capital gains tax isn’t applied to mining cryptocurrencies in Germany.
Mining Crypto in Germany
In Germany, mining is not budget-friendly and requires high computing power. Private users can hardly afford it due to the large-ticket equipment.
The recent trend in mining is so-called mining pools. We are talking about extremely powerful computers (mining rigs) which due to their high computing power can perform the mining process within a reasonable amount of time. Miners, however, have to face significant costs purchasing used equipment and they often have to make payments in advance
For this reason, more and more miners are joining forces to work in mining pools. Investors participate in mining pools under certain conditions regarded as a capital investment in accordance with the Investment Law.
The law enables third parties to make direct investments in the commercial property of the enterprise, especially if the entrepreneur wants to make large investments in important production assets.
The mining pool equipment is very well suited for such investment models since it consists of mining rigs which do not have to be owned by miners. Some or even all computers may also belong to third parties that provide their computers to miners, whereby the former, in turn, have a share in the created tokens or take part in another way.
Thus, miners can increase their mining power and investors can benefit from the mining processes. When hardworking German miners finish their work, someone has to sell all those crypto coins. If you imagine trade is limited to cryptocurrency exchanges, then you're in for a surprise.
German Banks Trade Crypto
More than 40 licensed German banks applied to the German Federal Financial Supervisory Authority BaFin willing to provide custodial services related to cryptocurrency.
They got the opportunity after the introduction of the fifth EU directive, which allows financial institutions to conduct operations with digital coins while observing measures to combat money laundering and the financing of terrorism, local news outlet Handelsblatt reports.
On November 29, 2019, the German Parliament passed a bill amending the anti-money laundering directive to allow German banks to sell and store cryptocurrencies.
The new law took effect on January 1, 2020. It is noteworthy that permission was issued exclusively to regulated financial institutions, but legal entities providing banking services are prohibited from trading digital coins.
The law also stipulates that bank customers can use the services of selling or buying cryptocurrencies on the banking interface. This greatly simplifies user access to tokens, and financial institutions bring in additional income in the form of commissions for services.
Experts generally appreciated the innovation and the head of consulting company Distributed Ledger Consulting (DLC) Sven Hildebrandt even suggested that Germany could become a crypto-heaven.
Optimism was also expressed by representatives of the Association of German Banks. They noted that regulated banks are sufficiently adapted to provide asset storage and anti-money laundering services.
German Banks Even Auction Bitcoins
Mass adoption of cryptocurrencies in Germany started a couple of years ago in tourism, education and other spheres. If you aren’t thrilled yet, this case is sure to blow your mind. In January 2020,
Westfalen court auctioned Bitcoins on the official website www.justiz-auktion.de. As stated by the press service of the Cologne prosecutor's office, this was the first auction of its kind where judicial officials practiced selling digital assets.
Of course, Bitcoin hasn’t yet been mined in the prosecutor's office. The funds were seized from cybercriminals. According to the speaker of the department, the further fate of cryptocurrency depended entirely on the Land Regulation on sentence serving (Strafvollstreckungsordnung). All confiscated goods in such cases are put up for auction.
But as a rule the goods are physical: cars, jewelry, smartphones and other gadgets. Cryptocurrencies had never been on this list, so the participants were really surprised. Marcus Hartmann, head of the cybercrime investigation department (ZAC) decided to treat Bitcoin the same as the rest of the property to see how this scheme would work.
Digital Euro VS Libra
It might seem cryptocurrencies are 100% legit in Germany. Legalization is often associated with liberalization, but they are not the same thing. Legalization often involves control and regulation.
A typical example of the downside of cryptocurrency legalization is the requirement for exchanges to identify their users, known as KYC (Know Your Customer).
Moreover, some specific assets or operations may be limited. And that’s literally what Germany did by suppressing stablecoins and private corporation-backed currencies and presenting a state alternative crypto coin.
In 2019, it became obvious that politicians were most hostile towards two categories of projects: stablecoins and cryptocurrencies issued by private corporations.
The fall of Libra, the colossal lawsuit against Tether, and the suspension of the TON project fit well into this canvas. Together with other G7 countries, Germany condemned Libra and similar “global stable currencies”. Domestically, it shifted focus from stability to corporate spirit.
In September, Finance Minister Olaf Scholz refused to accept a “parallel currency,” implying corporate crypto projects. As for the classic currencies with distributed ledgers such as BTC, Germany is probably not going to ban them.
This would mean a complete rejection of the liberal achievements of 2018 and losing public face. However, some issues remain unclear.
Despite the fact that the specter of an enemy in Germany is set up – namely corporate currencies and the ill-fated Libra – the problem of stable global cryptocurrencies has not disappeared.
It is largely owing to the fact that the appearance of such projects in the countries that do not comply with European or American laws cannot be overlooked. Just as important, because not all stable cryptocurrencies are issued by private companies.
For example, Dai coin created by the decentralized autonomous organization DAO is stable like Tether or Libra. Nevertheless, it has a distributed ledger like BTC.
A power struggle with such projects is harmful for the reputation of developed countries and technically ineffective. Wishing to be a blueprint for the whole world, Germany didn’t dare to fill prisons with hundreds of thousands of illegal users of popular stablecoins.
Instead, in October 2019, the German government and a group of bankers came up with a more elegant solution - a state cryptocurrency that could compete with the potential Libra. The digital euro wasn’t only created for Germany, but for the entire EU.
The idea of state cryptocurrencies is often criticized because of their potential ability to give the government total control over the financial operations of citizens.
Commonly, the “scam” experience of the Venezuelan cryptocurrency Petro is given as an example. But let’s get real, the digital euro is unlikely to become the second Petro. On the contrary, it can potentially reduce the fears of politicians and soften the atmosphere around private coins.
If a global, stable non-state currency appears on the market but the German government already has its own “pocket” analog of Libra, then a significant part of the population will prefer to use the latter.
There are situations when anonymity is important to citizens, and they will choose a non-state coin. But in most cases, reliability is more important than anonymity and here the state, by virtue of access to payer data, can give much higher guarantees.
How Germans Use Blockchain and Crypto
As noted above, Germany was the first company to unveil a blueprint for taking advantage of the opportunities that blockchain technology offers. Becoming a crypto hub is a real money-spinner. To register an ICO in Germany you need a local financial license.
If you are willing to register your ICO here, your authorized capital must be at least €730,000. Over and above, your company must have competent managers who can be held accountable by the German Federal Financial Supervisory Authority.
Not surprisingly, the government and banks aren’t the only institutions seriously interested in blockchain technology. Automobile manufacturers, mechanical engineering, the energy sector, healthcare and other industries are following suit.
Porsche is testing blockchain-based applications. The auto magnate has implemented them in collaboration with the Berlin based start-up XAIN.
Currently, the app performs simple tasks like locking and unlocking the vehicle and temporary access authorizations but it will be further developed to improve autonomous driving functions.
Porsche has novelized the Panamera and Cayman model ranges and is currently working on new business models based on blockchain
Pfizer is partnering with Aimedis, a healthcare startup, to use blockchain and AI for improving medical services.
The problem they are dealing with is more of a business inefficiency - solving misalignments that happen between contracting and chargebacks in the pharmaceutical industry. As all data remains private, the initiative can dramatically improve business interaction processes across the industry value chain.
German-based Dürr probably doesn’t ring a bell for you. Nevertheless, it is famous as the world's leading mechanical and plant engineering firm that is into green finance. In August 2019, Dürr utilized a blockchain-based syndicated loan platform to secure a €750 million “eco-friendly’’ loan, the interest of which depends on the sustainability rating of the company.
Sounds like blockchain is thriving in Germany. However, for smaller businesses the situation is not as simple as it seems. The AMLD 5 forces foreign companies currently operating in Germany to establish a legal entity there.
They must apply for the license, notifying regulators of intent before March 31, 2020, and submitting formal applications to BaFin before November 31, 2020. After January 2, 2021, the companies that didn’t comply will be de-legalized.
But the upside is, the sizable German crypto community is getting more active. The Freewallet family welcomes Germany among the Top 7 loyal users. Due to the new regulations, crypto enthusiasts are looking for legislative workarounds and crypto trading applications are enjoying exponential growth of their audience. “We launched the Bison app on January 31, 2019, and over the past 13 months, we have registered roughly 92,000 users,” chief digital officer of Boerse Stuttgart Ulli Spankowski told cryptobriefing.
Germany: Turning to Crypto
Despite the AMLD 5 effect, the new law of November 29 which allowed banks to process cryptocurrency transactions is encouraging.
It is likely that German leadership is seriously ready to adhere to a liberal course regarding this matter, although very carefully, without quarreling with either G7 colleagues or bankers who remain wary of cryptocurrencies. It is trying to find a compromise that would allow the country to maintain a progressive image.
At the same time, it is trying to prevent such disasters as the collapse of the banking system due to its inefficiency in comparison with blockchain projects.
Most likely, EU countries will join forces around the digital euro. And with a high probability, the coin will be used not as an instrument of suppression, but as a relatively “honest” alternative to non-state projects.
The paradox is that the more successful the state stablecoin is, the less pressure politicians put on projects like Libra, Tether or Dai. If one thing leads to another, we are likely to live in a more free world where states don’t suppress alternative financial systems but compete with them sincerely trying to satisfy citizens' needs to the best of their abilities.