The Markets in Crypto Assets Regulation (MiCAR) will impose authorization requirements on crypto asset service providers in the future. For example, operators of crypto trading platforms, other crypto exchange providers and crypto custodians will have to obtain authorization from the competent national supervisory authority – in Germany, BaFin – prior to commencing their business operations. In Germany, the obligation to obtain authorization from BaFin for the operation of many crypto asset business models has long existed based on national law because the German legislator gave crypto assets the status of a financial instrument. However, current regulation in Germany requires crypto asset service providers to obtain a license as a credit or financial institution under the German Banking Act (KWG) or the German Investment Firm Act (WpIG). European law does not follow this approach and will continue to not regulate crypto assets as financial instruments as defined by the European financial market directives and regulations. While markets in financial instruments will continue to be regulated via the MiFID2 Directive, MiCAR will regulate markets in crypto assets, which do not qualify as financial instruments in the sense of MiFID2. But what does this separation imply for German banks and investment firms that have crypto asset-based business models and hence have obtained an authorization pursuant to the KWG or the WpIG?
MiCAR Provides Exemptions for Credit Institutions and Investment Firms
Authorized credit institutions will not require any further authorization for offering crypto asset services pursuant to the new MiCAR. In this respect, MiCAR stipulates that they will only have to notify their national authority – i.e. BaFin in Germany – at least 40 days in advance of commencing the respective business that they intend to provide crypto asset services with pursuant to MiCAR. There will also be facilitations for investment firms. Under MiCAR, these firms will be authorized to provide those crypto asset services that they are already permitted to provide in connection with financial instruments according to their existing authorization. Investment firms will also have to notify the competent authority 40 days prior to providing crypto asset services in order to use this exemption. MiCAR explicitly specifies which specific crypto asset services pursuant to MiCAR correspond to which specific investment services pursuant to MiFID2. In this respect, it is advantageous for the interpretation of MiCAR that it is systematically closely based on the systematics of MiFID2.
Will German Crypto Custodians Also Benefit from the Exemption?
In this context, the fact that crypto custodians in Germany are not regulated as investment firms in the sense of the WpIG, but as financial services institutions pursuant to the KWG, poses problems. The crypto custody business is a national regulatory specialty of the German legislator without a legal basis in MiFID2 or any other European Directive. In this respect, the question arises whether German crypto custodians will also be able to claim the exemption for investment firms provided for in MiCAR. With regards to crypto custody, the wording of MiCAR merely refers to the ancillary securities service of custody and administration of financial instruments, from the facts of which, however, the German legislator has expressly excluded units of account and crypto assets in the WpIG. According to the wording of MiCAR, the exemption should therefore not apply to German crypto custodians. However, it must also be taken into account in this context that MiCAR and MiFID2, as European laws, hierarchically take precedence over national laws and national laws cannot be used to interpret European regulations. In addition, it can be assumed that authorized German crypto custodians will be better positioned with respect to the fulfillment of the regulatory requirements for crypto custody provided for by MiCAR than securities institutions that also hold financial instruments in custody as an ancillary service. If interpreted appropriately, German crypto custodians should also be allowed to take advantage of the exemption provided by MiCAR. In any case, BaFin will have to comment and position itself in this regard in due time prior to the MiCAR coming into force. The German legislator will also be able to contribute to the solution of this problem by making the necessary adjustments to national law for the implementation of MiCAR anyway.
Atty. Lutz Auffenberg, LL.M. (London)
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