A lot of companies are interested in offering their clients access to the crypto markets, ever since cryptocurrencies successfully changed their image from the preferred payment method of money launderers and internet fraudsters to a modern alternative for the investment portfolio. However, because most cryptocurrencies are regulated as financial instruments in the sense of the financial supervisory law in Germany, the commercial offering of trading activities associated with cryptocurrencies generally requires authorization by BaFin. Crypto trading may be qualified as e.g. proprietary trading, financial brokerage or investment brokerage, depending on the specific design of the offered service. The application of the appropriate authorization requires a significant amount of time and financial resources, not only during the preparation for the application itself, but also during the subsequent ongoing supervision by BaFin and Bundesbank once the authorization is granted. The obtaining of such authorization is therefore a supposed showstopper for many companies. The cooperation with a sufficiently authorized institute – the so-called liability umbrella – may be a solution for business models that are designed as investment brokerage, investment advisory or as placement businesses.
Which Crypto Business Models Can Be Offered Under a Liability Umbrella?
Not all activities that require authorization can be offered under a liability umbrella. Specifically, proprietary trading, financial brokerage business and the operation of a multilateral trading facility cannot be designed this way. The exemption can only be utilized in cases of intermediary services. The connection to a liability umbrella as a supervisory design tool is out of question, should a business intend to acquire or sell cryptocurrencies in its own name. The activities that are permitted by the exemption being investment brokerage and placement business are only given, if the business itself does not become a contracting party of the commercial transaction, but instead merely acts as an intermediary respectively for the supply and demand. When it comes to placement business, there must also be a placing agreement between the offeror and the seller of the cryptocurrency. Investment advisory services, which are also permitted to be operated under a liability umbrella only relate to the issuing of investment advice that is tailored to the actual profile and needs of the investor.
What Are the Supervisory Requirements for a Tied-Agent-Solution?
The setup of a tied-agent-solution can be implemented relatively quickly and with low costs compared to the application for an individual BaFin authorization. It requires a contractual agreement between the business and an institute, which is authorized to perform Investment brokerage, Investment advisory services or placement business. That agreement must include stipulations for the inclusion of the tied agent in the compliance infrastructure of the liability umbrella and furthermore oblige the liability umbrella to be responsible for all damages vis-à-vis the clients resulting from the covered activities of the tied agent. The fact that the liability umbrella institution takes over the liability must be disclosed by the tied agent to his clients. The inclusion of the tied agent must be reported to BaFin by the liable institute. The liable institute also must confirm to the supervisory authority, that the tied agent is fit and proper. BaFin keeps a public registry on its website where the inclusion of the tied agent after disclosure by the liable institute is published.
Attorney Lutz Auffenberg, LL.M. (London)