Bitcoins and comparable cryptocurrencies are, according to BaFin, classified as financial instruments as defined in the German Banking Act (KWG). Therefore, a BaFin license is a mandatory prerequisite for operating a crypto exchange in Germany. What are the requirements to fulfil in order to obtain such license and what are the conceptual design options for companies to tailor a crypto exchange to their needs while matching the aforementioned requirements? The second part of FIN LAW´s blog series “Building a Crypto Exchange” tackles multilateral crypto trading facilities, shows essential features of this kind of crypto exchange as well as the most important requirements to legally operate such a facility in Germany.
WHAT IS A MULTILATERAL CRYPTO TRADING FACILITY?
According to the German Banking Act, the operation of a multilateral trading facility in Germany is a financial service that requires prior approval from BaFin. A multilateral trading facility is legally defined as a multilateral system that brings together its users buying and selling interests in financial instruments within the system and in accordance with preset, non-discretionary rules in a way that leads to a sales contract between the users. If the only tradable financial instruments in such a system are cryptocurrencies, it’s a multilateral crypto trading facility. The key difference between this type of crypto exchange and others is the anonymity of the paired users. The actual matchmaking and execution of the buy and sell orders between the users on these types of exchanges happens anonymously and automatically by the system itself. The users of a multilateral crypto trading facility do therefore not know with whom they are trading cryptocurrencies. The transfer of coins to the buyer and the transfer of the acquisition price to the seller are also automatically executed by the system, so the users need a sufficient balance of cryptocurrencies or fiat currency with the operator when placing a buy or sell order.
WHAT ARE THE FINANCIAL MEANS NECESSARY TO ACQUIRE A BAFIN LICENSE?
The granting of the license to operate a multilateral crypto trading facility depends on a multitude of requirements that have to be matched. The exact requirements depend on the details of the individual case. These details should therefore be diligently reviewed and defined prior to the license application. If the operator of the crypto exchange will not be entitled to hold customer funds or customer securities himself a starting capital of at least 50.000 euros has to be proven in the license application to BaFin. Otherwise a starting capital of 125.000 euros is the minimum. If the operator additionally wants to trade financial instruments on his own account and for own interests – in this case cryptocurrencies- the minimum starting capital is at least 730.000 euros. In order to keep the starting capital low a cooperation with a licensed bank for payment processing is often advisable.
WHAT ARE THE REQUIREMENTS FOR THE EXECUTIVES OF THE CRYPTO EXCHANGE?
The managers of a multilateral crypto trading facility need to be fit and proper. They should, if possible, have relevant and appropriate working experience in a managing position in a comparable project or company. They need to have the theoretical and practical abilities to lead a multilateral crypto trading facility. The needed reliability to manage such a project may be compromised if the manager has a previous criminal conviction or a negative entry into the commercial register. This kind of reliability is also required from every shareholder holding more than 10% of the company. Moreover, BaFin expects the managers to be sufficiently available so that they can manage the crypto exchange in a diligent and prudent way.
WHAT OTHER DOCUMENTS ARE NECESSARY FOR A BAFIN LICENSE?
A successful application requires the applicant to submit a viable business plan that not only shows the financial planning of the project for the next three years but also detailed information regarding internal control and monitoring procedures to fulfil regulatory obligations such as anti-money laundering prevention, IT-security and basic risk management. The owners and the managers need to submit CV´s, clearance certificates and a multitude of other documents to BaFin. Furthermore, the most important contracts as well as the terms and conditions and the cooperation contracts should be submitted if possible. Depending on the individual design of the multilateral crypto trading facility and the owners and designated managers, further documents and statements might be necessary to submit. A diligent planning of the whole project ahead of time is therefore absolutely necessary.
DIFFERENCES IN CONTRAST TO CLASSICAL MULTILATERAL TRADING FACILITIES
The stated requirements also have to be fulfilled by applicants wanting to operate a multilateral trading facility for other financial instruments than Bitcoin and other cryptocurrencies. Multilateral crypto trading facilities have the regulatory advantage that the strict provisions which are applicable to securities trading are inapplicable to units of account and therefore to Bitcoins and comparable cryptocurrencies. As long as the listed cryptocurrencies on the crypto exchange do not qualify as security tokens or other financial instruments according to the second EU Directive on Markets in Financial Instruments (MiFID II) but are rather qualified as units of account, the securities regulations as for example the German Securities Trading Act (WpHG) are not applicable to multilateral crypto trading facilities. Therefore, classical multilateral trading facilities are prohibited to allow private investors to trade on their platform whereas multilateral crypto trading facilities are not prohibited to do so.
Attorney Lutz Auffenberg, LL.M. (London)