In Germany, investment advice on crypto assets has already been regulated for many years and may only be provided on the basis of a BaFin license under the German Banking Act (KWG) or the German Investment Firm Act (WpIG). Once the new EU Regulation on Markets in Crypto Assets (MiCAR) comes into force, a permit for advisory services relating to crypto assets will eventually be required throughout the European Union. Crypto asset service providers intending to advise their clients on investment opportunities in crypto assets will then have to comply with the general regulatory requirements of MiCAR and – to the extent they operate in Germany – possess a corresponding BaFin license. In addition to professionally suitable and reliable business managers, a proper business organization and a regulatory minimum capital of 50,000 euros, crypto investment advisors must fulfill numerous specific obligations when providing their advisory services. Specifically, these are far-reaching duties to provide information and clarification to the client. Additionally, crypto investment advisors will have to collect detailed information on the investor profile of their clients prior to providing advice.

Strict Transparency Obligations and Kickback Prohibition for Investment Advice under MiCAR

In the future, investment advice on crypto assets is to be provided in Europe only in compliance with strict transparency standards. Specifically crypto asset service providers must disclose to their clients whether they provide their advice independently. In this context, MiCAR provides for a general ban on provider commissions (so-called kickbacks). Crypto investment advisors will thus be prohibited from receiving commissions or other payments or valuable benefits from providers of crypto assets or third actors other than the client for the provision of their advisory services. Crypto asset service providers must also disclose whether they provide advice based on a general analysis or only on selected crypto assets of specific issuers or providers. They must also declare whether they have any economic relations with issuers or providers of crypto assets. Crypto investment advisors will also have to explain to their clients what costs and fees, including advisory fees, will be incurred by the client in the event of an investment. With respect to risk disclosure, MiCAR requires advising crypto asset service providers to explicitly disclose to clients certain risks associated with crypto assets. These include risks of value fluctuation and loss, liquidity risks, and where relevant, risks related to the transferability of crypto assets. They shall also point out to clients that – if applicable as a matter of principle, no deposit protection schemes exist for crypto assets.

Investment Advice by Crypto Asset Service Providers Only with Detailed Customer Profile

Prior to providing advisory services related to investments in crypto assets, crypto asset service providers under MiCAR will have to thoroughly screen their clients and create investor profiles. They are required to inquire about the client’s specific situation and, in particular, their financial circumstances. In addition, they must determine the customer’s risk propensity and determine how high the customer’s risk tolerance and loss-bearing capacity are. Only on basis of this information are crypto investment advisors able to assess which specific crypto assets might be suitable for the specific customer and may fit into his portfolio. According to MiCAR, the information collected in the course of the client review must be reviewed and, if necessary, updated at the latest after two years in the case of advisory contracts that are intended to last for a longer period of time – especially in the context of portfolio management. Crypto asset service providers advising clients on investments in crypto assets must also, under MiCAR, provide a detailed advisory record on a permanent data carrier after each advisory service provided. The advisory protocol must, on the one hand, present the expectations and needs of the client prior to the advice and, on the other hand, the specific recommendation given.

Attorney Lutz Auffenberg, LL.M. (London)