As of the first of January 2020, crypto custodian services will be regulated as a new financial service in Germany. The safekeeping of cryptocurrencies and crypto tokens for customers on a commercial extent will at that point in time require a prior authorization by BaFin. The new financial service touches on a core issue of crypto-related business models which is the reason why numerous market participants already expressed interest in acquiring a BaFin license for the crypto custodian service business. The first mandatory step for a successful BaFin application for a crypto custody service provider license has to be a meticulous planning of the application and related to that a thorough examination of the regulatory requirements to fulfil. The first part of our multipart blog “Let’s Build a Crypto Custodian” covered the requirements that BaFin places on the managing directors of a crypto custody service provider. The second part addresses the question of how much starting capital must be shown to BaFin in order to successfully obtain a license to provide crypto custody services.
MINIMUM STARTING CAPITAL DEPENDS ON THE PLANNED ACTIVITIES
The German Banking Act (KWG) stipulates that German banks and financial service providers must have a certain minimal capital at their disposal at any point in time. If the starting capital drops below the statutory minimum, BaFin has to be notified immediately and, as a worst-case-scenario, might revoke the authorization of the company. The legal term “starting capital” is therefore somewhat misleading. The legal minimum amounts depend on the specific activity that the applying company plans to offer. Crypto custody service providers which solely offer custody services for crypto assets and no further banking or financial services and that do not plan to trade financial instruments for their own account require a starting capital of at least 125.000 euros according to the regulations. In the case that further banking services next to the crypto custody service like deposit or lending services are offered, the minimum starting capital increases to 5.000.000 euros. If the intention is to deal in financial instruments on own account beside the crypto custodian services the amount increases to a minimum of 730.000 euros. This might be the case if e.g. a crypto trading platform offers their customers by way of proprietary trading or financial brokerage the option to sell or acquire cryptocurrencies as well as the custody service.
STARTING CAPITAL FOR THE CUSTODY OF SECURITY TOKENS IS PROBLEMATIC
A special case must be made for companies intending to offer their clients custody services for security tokens that qualify as securities. As of the first of January 2020, security token will constitute crypto assets and so be suitable objects for crypto custodian services as the definition in the German Banking Act will state that crypto assets are digital representations of values that can be transferred, saved and traded and that are designed for investment purposes. If the tokens are designed as a security, the custody of these tokens would most probably also constitute a security depository business which would require a substantially higher starting capital. Insofar, the legal wording does not suggest a subsidiarity of the crypto custody service to the security depository service. Even though the explanatory memorandum to the governmental draft indicated the legislative will of such a subsidiarity, the actual wording of the finalized law does not contain it.
HOW MUCH STARTING CAPITAL IS REQUIRED FOR THE OPERATION OF A DEPOSITORY BUSINESS?
Interestingly, the German Banking Act (KWG) does not stipulate a minimum starting capital for providers of security depository services. The starting capital of 5.000.000 euros according to sec. 33 subsection 1d of the German Banking Act only applies to CRR regulated institutions and therefore only to banks that provide deposit and lending business in relation to money in the form of legal tender. Even though there is no legal regulation, there are many good arguments that the regulatory starting capital of 5.000.000 euros should also apply to security depository banks. From a regulatory point of view and in consideration of the risks associated, it does almost make no difference if the service provider safeguards values of their customers in the form of money or securities.
Attorney Lutz Auffenberg, LL.M. (London)