The provision of services related to crypto assets has long been regulated under financial supervision law in Germany. Service providers offering financial commission business or proprietary trading activities relating to crypto assets in Germany, for example, require an authorization from BaFin in accordance with either the German Banking Act (KWG) or the German Investment Firm Act (WpIG). The mediation of supply and demand regarding the conclusion of contracts for crypto transactions or the operation of exchange platforms for crypto assets are also subject to authorization as investment brokerage or as the operation of a multilateral trading facility under the KWG or WpIG. Companies wanting to offer such services in the future are currently confronted with the question of whether it is even worth applying to BaFin for a corresponding authorization. This is because the new EU Regulation on Markets in Crypto Assets (MiCAR) will introduce an independent authorization regime for crypto asset service providers as of its validity 18 months after promulgation in the official journal of the EU. In about two years at the latest, it will therefore be a viable option to apply to BaFin for authorization to provide crypto asset services under MiCAR anyways. Crypto trading activities will then generally be regulated under the MiCAR regulations.

Application for Authorization in Accordance with KWG or WpIG Still Reasonable

Applying for authorization in accordance with the KWG or the WpIG is still reasonable in many cases for companies that plan to provide crypto asset services. On the one hand, ambitious companies with coherent business models regularly lack the time to wait for the new MiCAR to become applicable. In addition, under the MiCAR rules, companies will not need an additional authorization pursuant to MiCAR if they already have a corresponding authorization pursuant to the European securities regulation relating to financial instruments. As a result, investment firms authorized to engage in financial commission business and proprietary trading, for example, will also be permitted to provide these activities with respect to crypto assets within the meaning of MiCAR without having to apply for an additional MiCAR authorization. As a result, German investment firms will also be able to use their authorizations with respect to crypto assets immediately upon MiCAR becoming effective throughout Europe. BaFin authorizations granted under German supervisory law will thus also be passportable in the area of crypto asset services in the future. Special features exist for the financial services of crypto custody and crypto securities registry management, which are only nationally regulated in Germany under the KWG. While crypto custody business in the sense of MiCAR should in any case be able to be provided by investment firms with a license for the custody of financial instruments, crypto securities registry management refers solely to the registry management to crypto securities according to the German Electronic Securities Act (eWpG). Therefore, crypto securities registry management services can be exclusively authorized by BaFin under the KWG also in the future.

MiCAR Authorization Will Not Be Sufficient for Specific Business Models

In specific cases, even a MiCAR authorization may not be sufficient for certain business models. This will be the case, for example, if a company offers services relating to tokenized securities within the meaning of European securities regulation under the second EU Markets in Financial Instruments Directive (MiFID2). This is because financial instruments within the meaning of MiFID2 are specifically not intended to be regulated by MiCAR. This will also apply if a financial instrument covered by MiFID2 is tokenized, i.e. transferable on a blockchain. Therefore, companies intending to trade tokenized financial instruments as defined by the MiFID2 regulation will still require a financial regulatory authorization pursuant to the KWG or the WpIG for this purpose. An authorization according to MiCAR, on the other hand, will not be suitable for the implementation of such business models. As a result, applying for an authorization pursuant to the KWG or the WpIG in Germany is still worthwhile in most cases for companies with business models relating to crypto assets.

Atty. Lutz Auffenberg, LL.M. (London)