On June 9, 2023, the Markets in Crypto Assets Regulation (MiCAR) was finally published in the Official Journal of the European Union. It will officially enter into force 20 days later, on June 29, 2023. It will then take legal effect gradually. The rules on the issuance of asset-referenced tokens and e-money tokens will apply on June 30, 2024, and the remaining rules on the regulation of crypto service providers will apply on December 30, 2024. Crypto custodians will then be regulated by MiCAR. It has not yet been clarified whether German crypto custodians will additionally continue to be regulated by the German Banking Act (KWG) once the MiCAR rules on crypto service providers apply. It is indeed the case that the regulatory requirements for a crypto custody license under MiCAR are very similar to those for a crypto custody license under the German KWG. However, they are not congruent. It will admittedly take another year and a half before the regulatory requirements for crypto custodians under MiCAR will apply. Nevertheless, the German legislator and also BaFin as the competent supervisory authority in both cases must set the course in a timely manner so that crypto custodians regulated in Germany have sufficient time to prepare for the new regulatory situation.

Additional Regulatory Requirements for Crypto Custodians Imposed by MiCAR

MiCAR will impose some additional regulatory obligations on crypto custodians. For example, under the MiCAR regulatory regime, crypto custodians will in particular have to ensure that the crypto assets they hold for clients are kept strictly segregated from their own crypto assets. Such segregation of client assets is currently not regulated in the German KWG for crypto custodians, even though the legislator has already proposed corresponding provisions also for national law in the first draft bill for the Future Financing Act. It can therefore be assumed that the German legislator intends to introduce the obligation to segregate customers’ crypto assets under supervisory law in any case. However, it is not yet clear whether the adjustments will actually be made to the German KWG as currently envisaged or whether the legislator will perspectively opt for a departure from the national special regulation for crypto custodians. In the latter case, the obligation to segregate client assets would follow directly from MiCAR. However, abandoning the regulation of crypto custodians via the German KWG could lead to the corresponding institutions being in a worse position than they are with their current BaFin license.

Crypto Custody of Security Token not Possible under MiCAR

According to the German KWG, tokenized securities that qualify as securities in the sense of MiFID2 are also considered to be crypto assets. As a result, no custodian bank license is required for the custody of securities represented in crypto securities, but merely a BaFin license for crypto custody under the KWG. The reason for this is that a custodian bank license is only required for securities that are covered by the German Securities Deposit Act. This is not the case for tokenized securities because they lack the required certification in a physical document. Under the MiCAR regulatory regime, however, securities as defined by MiFID2 are specifically not covered as crypto assets. Rather, they are to continue to be exclusively covered by the MiFID2 regulation. As a consequence, the custody of tokenized securities using a MiCAR license for crypto custody will not be possible. Therefore, if the German legislator were to abolish the national regulation of crypto custodians under the KWG without replacement, the crypto custodians already supervised by BaFin under the KWG would be deprived of the possibility to also hold security tokens in custody for their clients. The German legislator will have to take this aspect into account when adapting the national regulation with regard to the upcoming validity of MiCAR.

Attorney Lutz Auffenberg, LL.M. (London)

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