A crypto exchange platform does not always have to be designed comparable to professional stock exchanges for requiring the operator to obtain a BaFin permission. Platforms not automatically matching and executing the buy and sell orders of the users can also be required to acquire a BaFin permission prior to its launch if it is supposed to be accessible for German customers. The requirements of a successful license application in these cases are not necessarily lower than those for a multilateral crypto trading facility. An operator wanting to offer his customers the option to buy and sell cryptocurrencies from and to his own stockpile commercially or to an extent that requires professional structures can be, according to BaFin administrative practice, dealing in financial proprietary trading and is therefore offering financial services being subject to a prior BaFin permission. The key criteria for the classification of a crypto exchange platform as a crypto exchange bureau is that the operator of the platform enters into an agreement with his customers.
WHAT IS FINANCIAL PROPRIETARY TRADING AND WHEN IS AN ACTIVITY QUALIFIED AS SUCH?
Every time that financial instruments are traded for one’s own account it might be a case of financial proprietary trading. To trigger an obligation to obtain a license in accordance to the German Banking Act (KWG), certain further circumstances must accrue. One of these circumstances is e.g. a service character of the activity. If someone offers his customers to sell or buy cryptocurrencies from or to them out of or to his own stockpile as a service, he is operating a crypto exchange bureau. It does not make any difference if this service is offered via the internet or in a local shop. A service of this kind will generally be subject to a BaFin license requirement if financial instruments are traded to the account of the operator and that the offering is a service to the operator’s customers.
CAN PRIVATE TRADING OF CRYPTOCURRENCIES ALSO QUALIFY AS FINANCIAL PROPRIETARY TRADING?
The obligation to obtain a permission from BaFin in accordance to the German Banking Act is only triggered if banking services or financial services are actively offered to German customers and if those services are either offered commercially or to an extent which requires professional structures. Whether this commercial extent is given or not is a case to case decision which is made by BaFin as the competent authority. Generally, such extent can also be reached by private traders of cryptocurrencies. BaFin therefore developed a rule of thumb for financial proprietary trading according to which no approval is needed if the transactions made on average per month do not exceed 25 single transactions, even if the activity qualifies as financial proprietary trading and a license requirement would generally be given. So, whenever someone performs less than 25 trades on monthly average, he generally does not operate a business that would require BaFin’s permission. The final decision if a license is necessary or not always rests with BaFin because individual cases might deviate from the rule of thumb. A close coordination with BaFin is therefore always advisable.
WHAT ARE THE REQUIREMENTS A CRYPTO EXCHANGE BUREAU MUST FULFILL IN ORDER TO OBTAIN A BAFIN LICENSE?
As with other financial services BaFin issues the admission for financial proprietary trading only if the applicant is run by fit and proper managers that are professionally apt. Professional aptitude requires that the manager in question has sufficient theoretical knowledge and practical experience in the area of business in which the applicant wants to operate. If it comes to financial proprietary trading this means that the manager should be experienced in the trading of financial instruments e.g. from working in investment banking. Next to that he or she should have some management experience. A fundamentally solid business plan and budget figures for the first three years of business as well as all the sample contracts and internal manuals that are necessary to run the business are further requirements of the applicant by BaFin. On top of that a minimum starting capital of 730.000 euros has to be shown to BaFin and the applicant needs to be in free disposition of this amount at any time. The requirements for a BaFin license to operate a crypto exchange bureau are therefore relatively substantial. Small businesses only wanting to offer to their customers a limited or entry level access to cryptocurrencies should in most cases refrain from this design option. For companies willing to access the German crypto market with high trading volumes the requirements are manageable and a crypto exchange bureau might be a viable design option.
Attorney Lutz Auffenberg, LL.M. (London)