Over the last couple of years, crypto staking has become an attractive and very profitable possibility to generate passive income. It is not only possible for investors to stake their crypto holdings themselves, but instead the market offers numerous easy-to-access offers of service providers offering investors access to staking projects. Such providers pool their client’s funds in so-called staking pools in order to receive more block rewards and thereby generate higher return rates. There is an abundance of service providers for these kinds of services and investors are promised return rates of up to 20% or more per annum. It is obviously highly relevant for the operators of these staking pools, if their services may qualify as Alternative Investment Funds (AIF) from a regulatory point of view. In that case, the management of the assets that are bundled in the pool would require authorization or at least registration according to the German Capital Investment Act (KAGB). There would also be restrictions and information obligations with regards to the marketing of such a staking pool.
Staking Pools as Investment Funds
Staking pools may only be qualified as AIFs, if they qualify as investment funds in the sense of the KAGB. According to the legal definition of the KAGB, an investment fund is any organism for the purpose of joint investments which procures capital from a number of investors in order to invest it in accordance to defined strategies for the benefit of the investors and which is not an operating company outside of the financial industry. An organism in the abovementioned sense can be given in almost any conceivable form. It is e.g. not required that the company is a registered legal entity. Rather, it is sufficient that the capital is pooled in any form. Therefore, silent investments, participation rights constructs or smart contracts may qualify as organisms in the sense of the KAGB. Staking pools in which fiat or crypto funds are being pooled in order to have more assets to dispose over can therefore also qualify as organisms in the abovementioned sense. A defined strategy is generally also given, because staking pools disclose in which staking projects they intend to invest the pooled capital. Since most of the staking rewards will generally be distributed amongst the participants the investment is made for the benefit of the investors.
Do Staking Pools Serve the Purpose of Joint Investments?
The requirement of the KAGB according to which the organism must have the purpose to serve joint investments poses problems. An organism serves joint investment purposes, if it procures and pools capital in order to generate a joint rate of return for the investors which results from the joint risk of buying, holding and disposing of assets. This is not necessarily the case with staking pools. This requirement may not be fulfilled, should the participation in a staking project merely require the delegation of the tokens or a voting process associated with the crypto assets and not a direct transfer of the crypto assets itself. The organism will neither buy nor dispose over crypto asset but instead merely hold them, should the investors transfer their crypto assets to the organism solely for the purpose of participating in a staking process. Should investors on the other hand transfer fiat money, the organism will regularly have to acquire the crypto tokens first which it will subsequently use for staking purposes.
Are Staking Pools Operating Companies Outside the Financial Industry?
Finally, for the organism to be qualified as an investment fund pursuant to the KAGB it is also required that it is not an operating company outside the financial industry. This requirement is problematic with staking pools, because it cannot be generally assumed that staking pools are a part of the financial industry. Even though many blockchain units that are suitable for staking are also crypto assets and therefore financial instruments pursuant to German regulatory law, there are also other crypto units which do not qualify as financial instruments. Furthermore, the activity of staking blockchain units in staking projects is not necessarily a regulated activity. An activity which would be relevant in the sense of German financial regulatory law cannot be assumed in cases in which the staking pool has no power of disposal over the blockchain units of the investors, because a mere delegation is sufficient or in cases in which the stakeable units do not qualify as financial instruments. In these cases, the staking pool cannot be qualified as a company of the financial industry.
Attorney Lutz Auffenberg, LL.M. (London)