When it comes to providing their services to customers, financial service providers have traditionally been strictly regulated. Since the implementation of the second European Markets in Financial Instruments Directive (MiFID II) in 2018, the obligations of securities service providers became even more extensive. In Germany, the federal Securities Trading Act (WpHG) regulates how securities service providers must interact with their customers and obliges them to provide their services in an honest, fair and professional manner and in the best interest of the customer. Naturally, this often leads to conflicts between the financial interests of the service providers and customer interests. These conflicts are supposed to be resolved through the extensive catalogue of obligations included in the section of the WpHG which deals with conduct, organization and transparency obligations of the service providers. Despite the first impression to which the term securities service providers leads, these strict regulations not only apply to financial service providers that deal with securities in the narrow sense of the term. They also apply to financial service providers with business models related to financial instruments that are explicitly qualified as such by the WpHG. These are not only securities such as e.g. tradable stocks and debt instruments, but also e.g. investment funds shares, asset investments, derivatives and futures contracts. But what about crypto assets, which were introduced earlier this year as a new class of financial instruments?
CRYPTO ASSETS ONLY FINANCIAL INSTRUMENTS IN THE SENSE OF THE GERMAN BANKING ACT
Since there are currently no plans to include crypto assets as financial instruments in the MiFID II directive, crypto assets remain a purely German phenomenon. With the inclusion of crypto assets in the German Banking Act the German legislator tried to achieve that providers with crypto-related business models must obtain a BaFin authorization in case they provide financial services or banking activities. In contrast to that, the German legislator refrained from the inclusion of crypto assets as financial instruments in the MiFID II-based WpHG, This often results in the fact that for service providers with crypto-related business models the provisions of the German Banking Act are applicable while at the same time the compliance provisions of the WpHG are not.
CAN CRYPTO ASSETS NEVERTHELESS BE SUBJECT TO THE WPHG?
When dealing with crypto assets, financial service providers must observe the fact that this category of financial instruments was primarily designed by the German legislator to include certain instruments that are not already included in any of the other forms of financial instruments. The classification of a token as a crypto asset does therefore not necessarily exclude the classification of the same token as a security e.g. in the form of a tokenized stock or a tokenized bond. These security tokens would be financial instruments in the sense of the German Banking Act as well as the WpHG. Financial service providers that offer their services in relation to security tokens therefore have to fulfill the authorization and supervising obligations of the German Banking Act as well as the strict due diligence obligations of the WpHG. The specific type of tokens that a service provider with a crypto-related business model deals with is therefore the decisive factor for the obligations that this service provider has to observe when dealing with customers.
Attorney Lutz Auffenberg, LL.M. (London)
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