Some people have already bitten their fingernails down to the quick over the length of the German crypto custody licence application process. So it was not a total surprise to V-Bank board member Stefan Lettmeier that the crypto exchange Bitvao announced its complete withdrawal from the German market for regulatory reasons, just as it was obtaining a licence.

Lettmeier is the co-founder of V-Bank, which specialises in services for independent asset managers, family offices, bank asset management units, banks, and foundations. He initiated the process towards digital assets in 2020. ‘We submitted the application for the licence in mid-2021 – it then took three intensive years – and today we are the second German institution after Commerzbank to have the crypto custody licence,“ Lettmeier told Börsen-Zeitung.

„We want to guarantee our customers access to blockchain for the future," he says. "New asset classes are coming, and with them new settlement processes. As a custodian bank, we have to be able to reflect this. In this respect, it would be negligent not to engage with blockchain and tokenisation.“

The scenario is that asset managers will in future be adding cryptocurrencies or security tokens to their clients' custody accounts, alongside shares and funds. Bitcoin, for example, is being allocated as an addition to gold (which is already being tokenised by HSBC) in the portfolios of wealthy clients. Expensive works of art are also already being tokenised, and then made eligible for deposit as bearer bonds in digital denominations.

Lettmeier assumes that blockchain infrastructure will replace the traditional securities business in the long term, though this will happen gradually. However, a variety of coordination processes among market participants will be necessary to ensure compatibility. It is also clear that something needs to happen in cross-border business in particular, such as the transfer of securities abroad, which often involve antiquated processes. „Things like a wholesale central bank digital currency (CBDC), tokenised bank desposits, and stablecoins, also make sense," he says. "What goes into the custody accounts has to be paid for. And a conventional SEPA transfer is not suitable for this.“

The path to obtaining the crypto custody licence was a rocky one. Over the three years, amendments had to be submitted again and again as the regulations were amended – causing the application to grow to 1,000 pages. However Lettmeier was not put off. As BaFin took steps to streamline its process, things began to progress step by step.

What made the process so extensive was going through the three institutions, the Auditing Association of German Banks, BaFin and finally the ECB. It was an intensive dialogue, with the correct procedures, with each of the three bodies. And it was certainly worth the effort: „If you have the licence, then that's a seal of quality," says Lettmeier.

The blockchain forensic experts from Chainalysis are on board as service providers, while the application was supported on the legal side by the law firm DRRP. As the first specialised custodian bank with a crypto custody licence, V-Bank looks to be in pole position, and has already been approached by other banks, and invited to take part in tests. The Munich-based bank could actually set up a Europe-wide business on the basis of the licence, but that is not something for V-Bank, which focuses on its German customers, and the DACH region. „A cobbler should stick to his last," says Lettmeier.