Legal framework for cryptocurrency regulation in Germany

As one of the countries with a relatively complete financial regulatory system within the European Union, Germany has always been at the forefront in addressing the legal challenges brought by cryptocurrencies. Since 2020, Germany has officially included cryptocurrencies in the regulatory scope of the Banking Act (Kreditwesengesetz, KWG). Since then, the Anti-Money Laundering Act (GwG) and relevant laws such as tax laws have also gradually included crypto assets in their adjustment objects. With the EU's 2023/1114 "Crypto-Asset Market Regulation" (MiCA for short, also known as the "Crypto-Asset Market Supervision Act") officially coming into effect in 2024, the regulatory framework for cryptocurrencies has been further concretized and systematized. In order to implement this regulation, Germany has specially formulated the "Crypto-Asset Market Supervision Act" (Kryptomärkteaufsichtsgesetz, KMAG) as the implementation rules.

1. Legal definition of cryptocurrency

Cryptocurrency, also known as virtual currency, was first legally defined in the EU's Fifth Anti-Money Laundering Directive (AMDL5) in 2018. The directive added item 18 to Article 3 of the original EU directive in 2015, defining virtual currency as: "a digital representation of value that is not issued or guaranteed by a central bank or public institution, does not have to be linked to legal tender, and does not have legal tender status, but can be accepted as a medium of exchange by natural persons or legal persons and can be transferred, stored and traded electronically." In 2020, Germany converted this legal concept into Article 1, paragraph 11, sentence 1, item 10 of the German Banking Act, but adopted the term "crypto assets" (Kryptowert) and deleted the expression "does not have to be linked to legal tender." According to the regulation, crypto assets are classified as financial instruments and are regulated by the German Federal Financial Supervisory Authority (BaFin). The Crypto-Asset Market Supervision Act will come into effect in 2024 and is directly applicable throughout the European Union. According to Article 3, Paragraph 5 of the Crypto-Asset Market Supervision Act, "crypto assets are digital representations of value or rights that are transferred and stored electronically using distributed ledger technology or similar technologies." In order to cooperate with the application of the Crypto-Asset Market Supervision Act, Germany made corresponding amendments to the Banking Act on February 28, 2025. From then on, the concept of "crypto assets" will directly apply the unified definition in the Crypto-Asset Market Supervision Act.

Cryptocurrencies currently have no unified classification standards. According to their development stage, they can be roughly divided into Bitcoin, platform tokens (such as Ethereum) and stablecoins (such as Tether). However, in the legal context and regulatory framework, especially in the EU Crypto-Asset Market Supervision Act and the German Banking Act, cryptocurrencies and stablecoins are distinguished. According to the Crypto-Asset Market Regulation Act, crypto assets are divided into three categories: (1) Asset-referenced tokens (Vermögenswertereferenzierte Token), which refers to a crypto asset that is not an electronic currency token, and its value stability will be maintained by reference to another asset or right or a combination thereof (including one or more official currencies) (Article 3, paragraph 1, item 6), such as Diem (formerly Libra) and sXAU (synthetic gold token), which have been discontinued; (2) Electronic currency tokens (E-Geld-Token), which refers to crypto assets that maintain their value stability by reference to the value of official currencies (Article 3, paragraph 1, item 7), such as USDC (US Dollar Coin) and USDT (Tether); (3) Other crypto assets, such as utility tokens (Utility-Token) (Article 3, paragraph 1, item 9). Asset-referenced tokens and electronic currency tokens are stablecoins, but the former references one or more assets, rights or a combination thereof to anchor their value, and is closer to an investment product, while the latter anchors a single legal currency, is closer to traditional electronic currency, and is used for payment. Cryptocurrencies such as Bitcoin and Ethereum belong to other crypto assets, which have no value anchor and have large value fluctuations. It can be seen that "crypto assets" is a higher-level concept of "cryptocurrency". From a regulatory perspective, cryptocurrency is regarded as a financial instrument and means of payment. Although it does not have the status of legal tender, it must be regulated by the German Federal Financial Supervisory Authority.

2. Specific legal regulatory framework for cryptocurrency

1. German Banking Act

Since January 1, 2020, the German Banking Act (Kreditwesengesetz, KWG) has officially included crypto assets in its regulatory scope and defined it as a financial instrument (Finanzinstrument). In order to cooperate with the implementation of the Crypto-Asset Market Supervision Act, Germany revised the Banking Act again on February 28, 2025 to ensure that it is aligned with the regulatory framework at the EU level. According to Article 32 of the Banking Act, any institution that provides financial services related to crypto assets must obtain a license from the German Federal Financial Supervisory Authority. In addition, Article 1, paragraph 1a, sentence 2, item 6 of the Banking Act stipulates "crypto-asset custody business" (Kryptoverwahrgeschäft), which is to provide custody and management services for cryptographic tools for others or to keep private keys for others. If the relevant services are provided without permission, the German Federal Financial Supervisory Authority has the right to order the cessation of operations in accordance with Article 37 and impose a fine in accordance with Article 54. In addition, operating crypto-asset business without permission is subject to a maximum of five years in prison in accordance with Article 44.

2. Germany's "Crypto Asset Market Supervision Act"

In 2024, in order to implement the EU's "Crypto Asset Market Supervision Act", Germany formulated the "Crypto Asset Market Supervision Act". According to the Crypto-Asset Market Supervision Act, the German Federal Financial Supervisory Authority should supervise the issuance, trading, custody, and issuance of stablecoins of crypto assets (Article 9); service providers that provide crypto-asset trading, custody, and wallet services need to obtain a license from the German Federal Financial Supervisory Authority (Article 15); administrative penalties such as fines and imprisonment (Articles 46 and 47) are set for violations of the Crypto-Asset Market Supervision Regulations; the regulatory details of "electronic currency type" and "asset reference type" stablecoins are clarified: the German Federal Financial Supervisory Authority may require issuers of asset reference tokens and electronic currency tokens to set a minimum denomination or an upper limit on the issuance amount (Article 27); in order to protect the interests of holders and investors, the information disclosure and risk warning obligations of crypto asset service providers are clarified (Articles 18 and 35).

3. German Anti-Money Laundering Act

According to the German Banking Act, cryptocurrency is regarded as a payment investment tool, which means that activities related to cryptocurrency must comply with anti-money laundering obligations. According to Article 2 of the German Anti-Money Laundering Act, cryptocurrency custodians, trading platforms, cryptocurrency exchanges, and financial institutions and banks that provide financial services related to crypto assets are all anti-money laundering obligation subjects (Verpflichtete), and must fulfill customer identification obligations (KYC), suspicious transaction reporting obligations (Verdachtsmeldung), and transaction monitoring and recording obligations. With the entry into force of the Crypto Asset Market Supervision Act, Germany will further refine its anti-money laundering rules for crypto assets. For example, unify the customer identification obligation standards of crypto asset service providers (Article 68 of the Crypto Asset Market Supervision Act). In addition, crypto-asset service providers must submit the necessary information to their national competent authorities when providing cross-border services, which will communicate this information to the competent authorities of the other Member States, the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) within 10 working days (Article 65 of the Crypto-Assets Act).

4.TaxLaw-related

In the field of taxation, cryptocurrencies are considered "other economic assets" (sonstige Wirtschaftsgüter) pursuant to Section 23, Paragraph 1 of the German Income Tax Act (Einkommensteuergesetz, EStG). The sale constitutes a "private transfer transaction" (privates Veräußerungsgeschäft) and the resulting gains are subject to personal income tax rates.

For individual investors, if the speculation period (Spekulationsfrist) of holding cryptocurrencies exceeds one year, the relevant gains are tax-free; if the holding period is less than one year and the annual total profit exceeds EUR 1,000, personal income tax must be paid; if the profit does not exceed the tax-free amount, no tax is required (Article 23, paragraph 3, sentence 5). The same provisions apply to the exchange of cryptocurrencies. The applicable tax rate ranges from 0% to 45%, depending on the taxpayer's total taxable income.

In terms of commercial use, if the user is deemed to be engaged in commercial activities, he or she must apply for a business license. Individuals or partnerships are subject to turnover tax (Section 11 of the German Turnover Tax Act (Gewerbesteuergesetz, GewStG)) on profits from cryptocurrency transactions exceeding the tax-free amount of €24,500, but this tax-free amount does not apply to legal entities such as limited liability companies. In addition, for commercial transactions, the speculation period does not apply - that is, even if the cryptocurrency is held for more than one year, the profit on the sale is not tax-free.

In addition to the sale of cryptocurrencies, other cryptocurrency-related activities also involve tax issues: such as airdrops: For cryptocurrencies obtained through airdrops, general tax regulations apply when they are sold, that is, they are treated as "other economic assets" and taxed in accordance with Section 23 of the German Income Tax Act. Non-fungible token (NFT) transactions: The purchase and sale of NFTs usually constitute an exchange transaction between tokens, which is taxed in accordance with Section 23 of the German Income Tax Act. Staking and Lending: Rewards from staking or lending cryptocurrencies are considered income when they are actually received. If the total amount of such income exceeds 256 euros in the tax year, it is subject to personal income tax rates. Mining: If mining is a personal act, it is subject to the personal income tax law. If mining is a commercial act, it is subject to the business tax law.

Three. Summary

Germany has adopted a systematic and multi-level legal framework for cryptocurrency regulation, covering the three core areas of banking supervision, anti-money laundering obligations and tax compliance. First, in the German Banking Act, crypto assets are clearly defined as financial instruments, and activities related to cryptocurrencies are regulated by the German Federal Financial Supervisory Authority. After the formulation and implementation of the German Crypto Asset Market Supervision Act, the supervision of cryptocurrencies has become clearer and more specific. Secondly, according to the Anti-Money Laundering Law, crypto asset service providers are included in the obligated subjects and must fulfill the corresponding anti-money laundering obligations. Finally, in the field of tax law, Germany implements different tax treatments for individual investors and cryptocurrency trading income for commercial purposes. Private investors can realize tax exemption after holding for more than one year, while companies must comply with business tax and corporate tax regulations.

In practice, matters related to crypto assets are becoming increasingly diverse. Common application scenarios include: contract breach or infringement lawsuits filed by clients due to platform bankruptcy or malicious closure; clients seeking criminal reports and asset recovery support due to false initial public offerings (ICOs) or token scams; tax authorities launching audits of crypto trading accounts and tax audits against high-frequency traders; analysis of regulatory conflicts and reporting obligations caused by cross-border holding and transfer of crypto assets; and compliance reviews and license applications required by corporate clients when they intend to establish crypto exchanges or issue stablecoins. These types of cases require lawyers to have not only traditional legal knowledge, but also to be familiar with the principles of high-tech technologies such as blockchain and the latest regulatory trends of European and international cryptocurrencies.