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In the European Union a third form of legally recognized tender exists next to cash and book money: E-money. According to the second e-money directive of the European Union being effective as of 2009 e-money is legally defined as an electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions and which is accepted by others than the issuer. Examples for e-money products are not only rechargeable chipcards but also and more and more frequently prepaid credit cards being connected to online accounts. The actual form of storage is irrelevant, e-money can be stored on mobile phones,
computers or tablets as well as on central and decentral servers. Companies willing to commercially offer e-money to customers in Germany must obtain a prior license from BaFin as the competent regulatory authority. Once a license for the e-money business is granted in Germany it may also be used in other member states of the European Union if the company complies with the regulations of the EU-passporting procedure without any need for obtaining a second license in the host country.
E-Money on a Blockchain
The question whether e-money can be distributed via a blockchain solution in the European Union is fascinating from a regulatory point of view. The European regulators and so BaFin have stated quite early that Bitcoins and comparable blockchain units cannot be qualified as e-money in the sense of the second e-money directive 2009/110/EC due to the fact that they lack a central emitter issuing and re-exchanging the e-money, which would be necessary according to the legal definition from the directive. Legal literature consents to this argument generally without further assessment of the question. But anyhow, that telling argument with regard to bitcoins and other decentral cryptocurrencies does not automatically preclude e-money from being designed via a blockchain. If one takes a closer look, the issuance of blockchain units by a central emitter is actually possible and much more frequent than decentral open source blockchains, especially when considering that the major part of the current blockchain projects consists of companies creating blockchain as central emitters tokens via smart contracts on a blockchain such as Ethereum, EOS or Stellar. In all these cases a qualification of these tokens as e-money is legally not impossible and may under specific circumstances actually be advantageous for quite a number of business models in the payment industry. E-money is therefore generally designable on a blockchain. At the same time, the issuance of blockchain token may in individual cases qualify as e-money business, as long as a central emitter of the tokens exists.
Bafin License for E-Money Business additionally Covers Payment Services
Since the appearance of Bitcoin in 2009 multitudinous new business models with relation to blockchain technology have come up. Service providers offer crypto wallet applications for the storage and administration of cryptocurrencies as well as of the private keys which are necessary for transferring them. Another first-generation business model is the operation of trading platforms for cryptocurrencies where users can exchange cryptocurrencies for other cryptocurrencies or even for legal tender. Such trading platforms operate usually online even though trading cryptocurrencies can also happen by the use of so-called Bitcoin ATMs, that is to say machines enabling users locally to exchange for example euros or US-Dollars for cryptocurrencies or vice versa. For all these and comparable crypto-related business models a sound and professional regulatory advisory is of utmost importance when realizing it in Germany because of BaFin’s qualification of cryptocurrencies as financial instruments. The German regulator is not only competent for the business model if the company realizing it has its seat in Germany but also whenever a company from the USA or any other country outside the European Economic Area actively addresses the German market with its services, for example by the use of a website in German, marketing events in Germany or any other marketing activities expressing its intention to win German customers.
Requirements for a Bafin License for E-Money Business
For a successful BaFin application for a permission for the e-money business the applicant must fulfil specific requirements. Next to the minimum starting capital of at least 350.000 euros which has to be to the free disposal of the company and free of third-party rights the e-money institution-to-be must present generally two fit and proper directors. In addition to that, a sustainable business plan has to be presented to BaFin that also shows how the applicant plans to handle business-related security risks and emergency situations and how the institution generally plans to comply with the applicable laws and regulations as for example regarding anti money laundering prevention.