Let´s Build a Crypto Custodian (Part V) – Reporting Obligations of Crypto Custodians in Ongoing Supervision

In order obtain a BaFin license for crypto custody services, service providers have to meet quite a number of requirements. The road to obtain a permit can be long and work-intensive. Even after obtaining the license the relation to the German financial supervisory authorities is far from over. Instead, the licensed crypto custodians from that point on forward are under the ongoing supervision of BaFin and the Bundesbank (German Central Bank). At that point they have to fulfill the ongoing regulatory requirements of the German Banking Act (KWG) as well as the requirements of the legislative decrees that are based on the KWG, just like any other supervised bank or financial institution. One of the essential obligations of supervised institutes in the ongoing supervision is the reporting obligation to BaFin and the German Central Bank. The scope of the reporting obligations is determined by the type of services offered, while the German legislator regulated some privileges for crypto custodians. But what kind of reporting obligations do supervised crypto custodians have exactly according to German supervisory banking law?

The obligation to continuously fulfill the legal reporting obligations is of highest priority to all banks and financial institutions. Missing, erroneous or late reports can lead to severe fines and may in addition lead to doubts regarding the reliability of the acting persons which can potentially provoke BaFin to revoke the license. Crypto custodians have to submit their financial information and a profit and loss offset every three months to the German Central Bank. If the crypto custodian is part of a group of institutions or a financial holding group, financial information concerning the respective groups must be submitted additionally. Additionally, crypto custodians have to immediately report certain events such as e.g. the appointment or release of a managing director or a deputy managing director, the decrease of the starting capital beneath the minimum of 125.000 euros, the intention to relocate the place of business or the intention to cease business operations altogether to BaFin and the German Central Bank. Crypto custodians also have to submit their approved annual financial statements with the associated annexes and audit reports immediately after receiving them to said authorities. Imminent insolvency or overindebtedness are other examples of events that have to be reported immediately. There are numerous other legally defined events that trigger reporting obligations for crypto custodians.

Due to the special characteristics of the crypto custody service in comparison to other financial services, the German legislator decided that parts of the KWG are not applicable to crypto custody service providers as long as they do not also offer any other banking or financial services in addition to the crypto custody service. As a result, the reporting obligations that are applicable to institutions concerning e.g. liquidity and the equity capital are not applicable to crypto custody service providers. Crypto custodians in contrast to other financial institutions are not obligated to regularly report on these matters to BaFin and the German central bank. The legal limitations concerning large exposures are also not applicable to crypto custody service providers. Since crypto custodians are regulated by national German law and not by European directives and regulations, the obligation to report the intention of founding a branch office in a member state of the European Economic Area (EEA) is not applicable to them. However, if a crypto custodian intends to open a branch office outside the EEA it has to report that intention to BaFin and the German central bank.

Attorney Lutz Auffenberg, LL.M. (London)

 I.  https://fin-law.de

E. info@fin-law.de

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