Proof of funds for crypto: Why comprehensive crypto documentation is becoming increasingly important

Would you like to sell cryptocurrencies and transfer the proceeds to your account? It doesn’t necessarily sound like a problematic process, but it can become a major challenge, keyword: crypto proof of origin or proof of funds.
As the crypto market becomes increasingly regulated, this proof is becoming more and more important. In the following article, we will show you why proof of the origin of funds may be required for crypto, what it must contain and how you can best prepare for it.

What is proof of origin for cryptocurrencies?

Proof of funds for cryptocurrencies is a documented collection of evidence that verifies the legal origin and ownership of crypto assets. This proof is required by banks, crypto exchanges and other financial service providers to comply with anti-money laundering and anti-terrorist financing requirements.

Why is proof of origin required for cryptocurrencies?

Proof of the origin of funds for crypto investments is required in the following situations:

• Crypto-to-FIAT transactions: When cryptocurrencies are converted into euros or other FIAT currencies, especially when withdrawing funds to a bank account.
• Large deposits: In Germany, the Money Laundering Act applies to amounts of €10,000 or more. However, crypto exchanges and banks may also request proof for lower amounts.
• Suspicious transaction patterns: Financial service providers are obliged to check suspicious transactions, such as those from known high-risk addresses, via mixers or tumblers, or with sanctioned addresses.
• Regulated crypto exchanges: Platforms such as Bitpanda, BISON or Kraken require proof of origin to comply with legal requirements.
• Banks: Especially for larger transfers from crypto exchanges to bank accounts.
• Tax authorities: Proof of origin may be required as part of tax audits.
• For other financial service providers if their services are used in connection with crypto assets.

Since the end of 2024, new EU rules (TFR) have imposed stricter controls on transfers exceeding €1,000 between exchanges and private wallets.

What are the legal bases for crypto proof of origin?

The proof of funds for cryptocurrencies is based on several legal foundations:

Money Laundering Act (GwG)

The German Money Laundering Act is the central legal basis for proving the origin of funds. It obliges financial service providers, including crypto exchanges, to verify the origin of large sums of money. The Money Laundering Act applies in Germany to amounts of €10,000 or more, although checks may also be carried out on smaller amounts.

Anti-money laundering regulations

International anti-money laundering regulations require banks, financial service providers and cryptocurrency exchanges to ensure that funds originate from legal sources. These regulations aim to prevent the use of cryptocurrencies to conceal illegal activities.

Tax law

Although not directly related to proof of the origin of funds, tax law plays an important role. Tax authorities may also request proof of the origin of cryptocurrencies during tax audits.

New EU regulations for crypto transfers since the end of 2024

On 30 December 2024, new rules for crypto transfers came into force in the European Union, introduced as part of the Transfer of Funds Regulation (ToFR) and the Markets in Crypto Assets Regulation (MiCAR).

The most important changes are:

1. Identity verification: Crypto service providers (CASPs) must collect and store accurate information about the sender and recipient of crypto transactions. This includes name, address and date of birth.
2. ‘Travel rule’: CASPs are required to transmit this information to the recipient’s crypto service provider at the time of the transaction.
3. Self-managed wallets: Transactions with self-hosted wallets must also be verified, especially for amounts exceeding 1,000 euros. Users must prove ownership of the wallet.
4. Data storage: CASPs must retain the data collected for a period of five years.
5. Reporting obligation: Suspicious transactions must be reported by service providers to the competent authorities.
6. Licensing requirement: Trading in crypto assets will be subject to licensing throughout Europe. Service providers must meet a number of organisational and operational requirements.
7. EU passporting: With a MiCAR licence in one EU Member State, service providers can operate throughout the EU.

Requirements and documents for proof of origin of funds for crypto

Proof of funds for cryptocurrencies typically includes:

• Purchase receipts as documentation for the acquisition of cryptocurrencies
• Transaction history: Proof of movements between wallets and exchanges
• Trading history: Record of trading activities
• Bank receipts for deposits to crypto exchanges
• Mining proof, if coins were acquired through mining
• Wallet addresses: Documentation of the wallets used

Proving the origin of crypto can be particularly challenging in the following situations:

• Self-custody and hardware wallets: Here, you must also prove ownership of the wallet addresses.
• Proof of older transactions: If you jumped on the Bitcoin bandwagon very early on, you will probably have greater problems documenting everything completely, e.g. because the trading platforms or accounts in question no longer exist or the bank statements are no longer available.
• Trading on unregulated international exchanges: In this case, the evidence may not meet the requirements of European financial institutions.

Risks associated with crypto proof of origin

If sufficient proof of origin cannot be provided for cryptocurrencies, there may be significant consequences:

• Account suspension and asset freezing: Crypto exchanges can disable access to accounts and freeze all funds until sufficient proof is provided.
• Trading exclusion: Without proof of origin, you will be excluded from trading on major crypto exchanges, which significantly limits the value of your cryptocurrencies.
• Suspicion of money laundering: There is a risk that a suspicion of money laundering will be reported, which can lead to criminal investigations.
• Banking problems: Your house banks or online banks could terminate your business relationship.

But even if the suspicion of money laundering is unfounded, there are still consequences. In this case, the authorities can impose a warning fine.

To avoid these problems from the outset, you should submit proof of the origin of the funds to your financial institution before the transaction. If requested to do so by the bank, you must provide the proof promptly in order to avoid the possible negative consequences described above.

Stay safe with crypto investments – only with careful documentation!

The requirements for documenting crypto transactions are becoming increasingly stringent. More and more service providers are required by law to request proof of origin for crypto transactions – this applies to transfers between crypto exchanges as well as transfers from crypto exchanges to bank accounts.

In addition, the triggers for requesting proof of crypto origin can be very diverse. Financial service providers tend to be rather secretive about this for security reasons. It is therefore essential that you document all transactions carefully in order to avoid reports of suspected money laundering, fines, account closures or even criminal proceedings.

Do you require assistance in preparing proof of funds for your crypto transactions? Are you suspected of money laundering due to crypto transactions? Our experts in blockchain tax consulting are the right people to contact for these and other issues relating to crypto proof of origin.