The probably most essential innovation of blockchain technology is the enabling of transactions of digital assets between two parties without the need to involve a central intermediary like a bank or any other payment service provider as a settlement institution. Cryptocurrencies exist purely virtual and can be digitally transferred between the payer and the payee. Nevertheless, crypto exchanges have established themselves early in the crypto market as the central marketplaces for cryptocurrencies and settle nowadays the majority of the global crypto transactions. Because of the increasing interest of institutional investors in cryptocurrencies, the number of so-called Over-the-Counter transactions (OTC) for cryptocurrencies increased this year. In Germany, tradings with cryptocurrencies via OTC as well as via exchanges may be subject to authorization, because the German legislator regulated most cryptocurrencies as crypto assets and therefore as financial instruments in the sense of the German Banking Act (KWG).



Proprietary trading, which is subject to authorization according to German regulatory banking law may occur in four variants. Provider of fixed price trades with cryptocurrencies may be subject to authorization as well as providers that offer to acquire or sell cryptocurrencies as a service for their clients, but as a trade for own account. Another variant of proprietary trading that is subject to authorization is the one in which the service provider operates a crypto exchange, which is designed as a multilateral trading facility and if the trading of crypto assets is conducted by utilizing a high-frequency trading technique. Another variant of proprietary trading which is subject to authorization in accordance to the KWG is given with operations which frequently trade financial instruments in an organized and systemic way for their own account to a relevant extent outside of an organized market, a multilateral trading facility or an organized trading facility without operating an own multilateral trading facility. Such an activity is called systematic internalization. Even though crypto assets are financial instruments according to German regulatory law, systematic internalization may not necessarily be an activity that is subject to authorization from BaFin.



According to the legal definition, systematic internalization requires that organized and systemic trades for one’s own account outside of an organized market or a multilateral trading facility are conducted. Because most crypto exchanges are organized as multilateral trading facilities, the systematic internalization is primarily relevant in the crypto market when it comes to OTC trading. Nevertheless, in order to trigger authorization obligations in accordance to the KWG, a systematic internalizer has to trade with specific financial instruments to a significant extend. The KWG explicitly stipulates that systematic internalization that is subject to authorization can only be given, if the upper limits that are set out in the articles 12 to 17 of the Commission’s Delegated Regulation (EU) 2017/565 for organized and systematic trades as well as those for a relevant extend are exceeded. The aforementioned regulations do not stipulate upper limits for trades with crypto assets, because crypto assets are not yet defined as financial instruments in the sense of the European financial market regulation. Therefore, the variant of proprietary trading of systematic internalization cannot be realized by trading crypto assets on the OTC-market.



Even though systematic internalization in the sense of the KWG cannot be given when trading crypto assets, the obligation to obtain authorization may still result from other variants. Especially the catch-all-variant that regulates the acquisition and/or selling of financial instruments as a service for others, but as a trade for own account is often applicable for example where trades are conducted in order to be able to fulfill client orders.


Attorney Lutz Auffenberg, LL.M. (London)





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