Let´s Build a Crypto Custodian (Part IV) – What do Foreign Crypto Custodians have to Consider?

With the introduction of crypto custody services as a financial service that is subject to authorization, Germany positioned internationally as a location with clear and definite laws for the blockchain-business. Even though the German solo effort led to a still inconsistent crypto regulation throughout the continent which in terms of market harmonization within the EU is not beneficial, German crypto custodians, as of 1st January 2020, at least profit from a clear legal situation. Crypto assets are now clearly defined as financial instruments according to the German Banking Act (KWG) and the offering of crypto custody services for customers is a financial service that is subject to authorization. Not only German but also foreign businesses that intend to offer crypto custody solutions for crypto assets to German customers are interested in obtaining a BaFin license for crypto custody services. Therefore, it is highly relevant for these businesses to know if BaFin places additional requirements on non-German businesses in order for them to obtain a license for crypto custody services and how the BaFin application process can be conducted.

NO EU PASSPORTING: GERMAN CORPORATION OR A BRANCH OFFICE?

Since there is no legal basis in the EU directives and regulations for defining crypto custody services as financial services that are subject to authorization but the German legislator still opted to do so, a passporting of the license for crypto custody services neither to nor from Germany is possible. Therefore, businesses that intend to offer such services have to apply for BaFin authorization. The KWG stipulates that BaFin cannot approve an application of non-German companies that apply for authorization to offer a financial service in Germany if the company in question does not have its central administration in Germany. Non-German businesses are left with only two options. They can either establish a German company as a subsidiary which then, as a German company with a central administration in Germany, applies for authorization or, as an alternative, they can establish a branch office in Germany. A branch office is a subsidiary of a non-German company that operates without a German GmbH or AG or any other German corporation form. The branch office therefore is legally dependent and not a legal entity itself. According to the KWG, branch offices are however considered to be institutes in the sense of the German banking regulations if they intend to offer crypto custody services or other financial services that are subject to authorization. In this constellation the branch office would file the application.

WHAT ARE THE DIFFERENCES FOR THE BAFIN APPLICATION PROCESS?

If a German subsidiary corporation is founded for the purpose of applying for a license to offer crypto custody services, the application requirements are basically comparable to those of a “regular” application. A special requirement however must be fulfilled if the foreign parent company is a credit institution that is regulated and authorized in its home country. In that case, an authorization can only be granted if the foreign supervising authority accepts the founding of the branch in Germany. The branch office has to prove the consent of the supervisory authority of the parent company to BaFin. If the business instead chooses to apply for the license through a German branch office, additional requirements have to be met. This includes that the branch office has to keep special record of the ongoing business activities in order to report to BaFin and the Bundesbank for the ongoing supervision. Keeping one single record with the parent company is not sufficient. Furthermore, the place of jurisdiction at the branches’ facilities for lawsuits by customers and business partners against the branch office cannot be excluded contractually, so that plaintiffs always have the opportunity to sue the branch office at its location.

Attorney Lutz Auffenberg, LL.M. (London)

I.  https://fin-law.de

E. info@fin-law.de

Read More:

Let´s Build a Crypto Custody (Part I) – What Qualification is Required by the Management?

Let’s Build a Crypto Custodian (Part II) – How Much Regulatory Starting Capital Does a Crypto Custodian Require?

Let’s Build a Crypto Custodian (Part III) – What Requirements Will BaFin Place on Risk Managing Strategies?