In Germany, business models that are based on cryptocurrencies require prior approval by BaFin if their activity qualifies as a banking business or a financial service. This was already the case prior to the introduction of crypto assets as financial instruments into the German Banking Act (KWG) at the beginning of this year. BaFin qualifies Bitcoins and comparable blockchain tokens as units of account and therefore as financial instruments already since 2011. Business activities in Germany such as e.g. investment brokerage or investment advice, the operation of an exchange platform, proprietary trading or financial brokerage with cryptocurrencies therefore practically always required a corresponding BaFin license. Applications for authorization that were submitted to BaFin until the end of 2017 had to fulfil the provisions of the KWG and the corresponding reporting ordinance (AnzV). Since 2018, investment firms have to submit their permission applications in accordance with the Delegated Regulation (2017/1943/EU) and the corresponding implementing regulation (2017/1945/EU). In light of the above, the question arises which legal basis is the correct one for businesses with regards to crypto assets?
BUSINESS MODELS WITH “TRADITIONAL” CRYPTOCURRENCIES APPLY IN ACCORDANCE WITH THE KWG
The Delegated Regulation (2017/1943/EU) and the corresponding implementing regulation (2017/1945/EU) are based on the Second Markets in Financial Instruments Directive (MiFID II). They therefore only apply to businesses that are subject to the provisions of MiFID II. Business models with regard to cryptocurrencies are special in the way that “traditional” cryptocurrencies such as Bitcoin, Litecoin, Ether or Ripple are not (yet) considered financial instruments in the sense of MiFID II. The directive comprehensively defines in appendix I, section C which products are financial instruments in this sense. This catalogue lists neither cryptocurrencies nor units of account. Therefore, business models that are based on “traditional” cryptocurrencies are not subject to the MiFID II provisions. These businesses are not considered investment firms in the sense of the Delegated Regulation (2017/1943/EU) and the corresponding implementing regulation (2017/1945/EU). Approval applications for these business models therefore continue to be subject to the provisions of the KWG and the AnzV.
BAFIN APPLICATIONS FOR BUSINESS MODELS WITH REGARDS TO SECURITY TOKENS FOLLOW THE NEW RULES
BaFin applications for business models that are not (entirely) based on “traditional” cryptocurrencies differ from the aforementioned rules. Business models operating with blockchain tokens that are considered financial instruments in the sense of MiFID II are considered investment firms and therefore have to adhere to the new regulations. According to appendix I section C of MiFID II, this is the case with tokens that qualify as e.g. transferable securities, shares of investment funds, options such as futures, swaps, CFDs or derivatives businesses. This makes a considerable difference especially for the preparation of BaFin applications of future crypto custodians. Depending on the tokens that the crypto custodian intends to safeguard for his customers, the BaFin application would have to be prepared in accordance to the KWG (for “traditional” cryptocurrencies) or the Delegated Regulation (for security or investment tokens).
WHAT DIFFERENCE DOES THE LEGAL BASIS MAKE FOR THE APPROVAL APPLICATION?
With regards to the requirements the national (KWG) and the European (Delegated Regulation) legal basis differ only marginally from each other. While the approval application in accordance to the KWG can be made without any formal requirements, the Delegated Regulation and the corresponding implementing regulation require the usage of forms that are set out in the appendix of the implementing regulation.
Attorney Lutz Auffenberg, LL.M. (London)
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