Blockchain technology created a veritable crypto-hype during the last couple of years, especially in the financial industry. That said, a direct investment in crypto assets is not necessarily at the center of attention for the established financial markets participants. Blockchain technology, especially when applied to the financial industry offers a variety of innovations and solutions that can be implemented in the business models of financial service providers. This applies not only to the simple inclusion of crypto assets in the consulting, placement and trading portfolios of a financial service institution but also to internal processes such as KYC or to the execution of projects such as the issuing of a tokenized capital markets product. But what do financial service providers under ongoing supervision have to observe when they intend to integrate blockchain technology or crypto assets into their business model?



The usage of technical innovations to fulfill obligations in areas such as AML or securities compliance or for the management of internal databases or access rights is not only permitted but also necessary for financial service providers in order to remain competitive. A coordination with the competent supervisory authority is not explicitly stipulated in the German Banking Act (KWG) for cases in which internal, technical processes are reformed, but is nonetheless advisable if the security and functionality of these processes are affected. Supervised institutes e.g. have to ensure that the requirements for IT-security in accordance to the Supervisory Requirements for IT in Financial Institutions (BAIT) are always met. The authority may impose measures to address any organizational deficiencies, should the fulfillment of these obligations be affected because of a technical alteration of internal processes. A coordination with BaFin prior to any alteration of internal processes is therefore advisable.



Financial service providers have less latitude in cases in which they intend to expand their business model with additional services and offers with regards to crypto assets. An investment broker e.g. that intends to provide personalized investment advice to his customers in the future will have to expand his authorization to include investment advisory services. Another example would be a securities trading bank that is authorized for financial commission business and proprietary trading and now intends to operate a crypto exchange with an automated order-matching process. The securities trading bank would need to expand its authorization to include the operation of a multilateral trading facility. The aforementioned cases require an application to BaFin to expand the existing authorization to include the intended activities. A successful application requires the applicants to match the regulatory requirements from the KWG and to prove this to BaFin. The authority therefore requires the applicants to submit an upgraded version of the sustainable business plan that includes the intended activities, proof of the necessary starting capital and proof that the internal business procedures are adjusted to the new business model.


Attorney Lutz Auffenberg, LL.M. (London)





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