The crypto market is not only attractive for direct investments in Bitcoin, Ethereum or Ripple. Especially in times of declining prices, investors may focus on alternative investment options – crypto derivatives. Such offers have been around for many years. These alternative options are futures which allow investors to bet on a rising or declining market price of a crypto asset. The German Banking Act (KWG) and concurrent to it the German Investment Firm Act (WpIG) regulate futures, which reference financial instruments as the underlying asset as well as futures that reference a non-financial underlying asset. Futures may be designed as fixed or option transactions. They may be either be conducted over the counter (OTC) or at regulated markets. The offering of derivatives is regulated in Germany. Providers require authorization to conduct proprietary trading in accordance with the KWG or the WpIG.
Are Crypto Derivatives Financial Instruments in the Sense of German Regulatory Law?
German regulatory law differentiates primarily between two forms of derivatives. On the one hand, derivatives are futures that reference an underlying asset which qualifies as a financial instrument. The KWG as well as the WpIG define securities and money market instruments, foreign exchange and units of account, interest rates or other revenues, financial indexes, derivatives or emission certificates as underlying assets that qualify as financial instruments. Crypto assets are missing from this list even though both regulatory regimes recognize them as financial instruments. Crypto derivatives therefore only qualify as futures that reference an underlying asset of non-financial nature. Futures on non-financial base values are only derivatives in the sense of German financial regulatory law, if they additionally are either settled in cash or may be settled in cash at the option of one or more of the parties, or traded on a regulated market or a Multilateral Trading Facility, or serve non-commercial purposes and fulfill the other requirements laid out in Art. 7 of the Commission Delegated Regulation (EU) 2017/565.
Next to the two alternatives laid out above, crypto derivatives may in individual cases also be designed as contracts for difference (CFDs).
Who May Offer Crypto Derivatives in Germany?
The trading of derivatives is strictly regulated in Europe and therefore also in Germany. In the end, derivatives are contracts between two parties that enter into a bet regarding the development of an underlying asset. Providers offering the opportunity to enter into these kinds of contracts are – depending on the business volume and other business activities – required to obtain authorization from Bafin to conduct proprietary trading in accordance with the KWG or WpIG, if they conduct this activity in a commercial or at least professional scope. In cases in which the crypto derivatives are designed as CFDs, it must additionally be observed that the marketing, distribution and sale of CFDs to retail investors have been severely restricted by BaFin via general ruling in 2019. For the offering of OTC derivatives regulations stemming from the European Market Infrastructure Regulation (EMIR) obligate providers to fulfill broad transparency and documentation obligations.
Attorney Lutz Auffenberg, LL. M. (London)