The German Bundestag passed the new Investment Firms Act (WpIG) on the 15th of April 2021. The new legislation is scheduled to go into effect on the 26th of July 2021 and is intended to implement the statutory requirements of the European Investment Firms Directive (IFD). The new law will exclude small and medium-sized investment firms from the strict regulations of the German Banking Act (KWG), in order to subject them to a more fitting and suitable regulatory regime. According to the definition of the WpIG, investment firms are businesses which commercially or to an extend that requires a commercially organized business operation offer investment services and possibly associated ancillary services. Investment services in this context are largely those activities that are defined by the KWG as financial services, e.g. the financial commission business, investment brokerage services, investment advisory services, proprietary trading and the operation of a multilateral trading facility.
IS CRYPTO CUSTODY BUSINESS ALSO INVESTMENT SERVICE PURSUANT TO THE WPIG?
As of the 1st of January 2020, crypto custody services are defined as financial services, which are subject to authorization in Germany. However, since the European IFD does not regulate crypto custody services as services, that are subject to authorization, the WpIG in turn does not qualify the crypto custodian services as an investment service. The obligation of crypto custody service providers to obtain an authorization will therefore also in the future be determined by the regulations of the KWG. Companies providing other investment services related to crypto assets such as Bitcoin, Ether or Litecoin will have to apply for authorization according to the regulations of the WpIG, because the new legislation explicitly defines units of account as well as crypto assets as financial instruments in the sense of the WpIG. Companies dealing with crypto assets for own account (proprietary trading) or providing brokerage services (investment brokerage) may therefore qualify as investment firms pursuant to the WpIG. The majority of companies with crypto asset-based business models will therefore be subjected to the supervisory regime of the WpIG in the future.
HOW DOES WPIG AUTHORIZATION DIFFER FROM THE RULES OF THE KWG?
The applicability of the new rules to crypto service providers is not necessarily disadvantageous for them. One focal point of the new WpIG is the discharge of small and medium-sized, systematically not relevant firms, with regards to the capital requirements. The required minimum capital is slightly higher as it has been according to the regulations of the KWG. Companies intending to deal financial instruments for their own account have to show 750,000 euros instead of 730,000 euros. Investment advisors, investment brokers and financial portfolio managers without access to customer funds or customer securities must show 75,000 euros instead of 50,000 euros minimum capital and all other investment firms must show 150,000 euros minimum capital. On the other hand, investment firms authorized under the WpIG and ongoingly supervised by BaFin and the Bundesbank are not subject to the to the strict and static provisions of the CRR anymore, but instead must show a sufficient risk-bearing capacity. The exact requirements will have to be determined by the specific investment firms themselves in close coordination with the supervising authorities. An ongoing determination of the actual risks as well as sufficient risk-bearing capacity at all times will be required. Furthermore, medium-sized investment firms will also be required to guarantee a sufficient liquidity at all times.
AT WHAT POINT IS AN INVESTMENT FIRM CATEGORIZED AS SMALL, MEDIUM-SIZED OR BIG?
The categorization of investment firms as small, medium-sized or big results from the directly applicable European Investment Firms Regulation (IFR). Certain requirements must be fulfilled in order to categorize an investment firm as small. Specifically, the Assets under Management (AUM) must remain below 1.2 billion euros, the balance sheet total must remain below 100 million euros and the average total gross earnings may not exceed 15 million euros. Investment firms are categorized as medium-sized, if the IFR requirements are not entirely fulfilled. An investment firm is categorized as big, if BaFin categorizes the company as such or if the firm shows a balance sheet total in excess of 15 billion euros. Companies of the crypto industry will therefore regularly be categorized as small or medium-sized investment firms.
Attorney Lutz Auffenberg, LL.M. (London)
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