On 23 October 2023, the Federal Ministry of Finance (BMF) sent a draft bill for a new Financial Market Digitization Act (FinmadiG) to associations and experts from the crypto industry with a request for critical feedback. In particular, the FinmadiG provides for the creation of a Crypto Markets Supervision Act (KMAG), in which the responsibility and powers of BaFin with regard to the granting of MiCAR licenses and the performance of the supervisory tasks provided for under MiCAR are to be regulated. In particular, the draft KMAG contains provisions on the necessary transition of crypto asset service providers already operating on the basis of national BaFin licenses to the new MiCAR supervisory regime. Corresponding regulations are needed in German law, as in Germany, unlike in other member states of the European Union, crypto assets have already been regulated as financial instruments within the meaning of the German Banking Act (KWG) and the German Investment Firm Act (WpIG) since 2020, with the consequence that business models based on corresponding instruments are subject to the prior procurement of a BaFin license. Those crypto asset service providers that have already received a BaFin license for their business operations on the basis of this national crypto regulation must now be transferred to the new supervisory regime under MiCAR.
How Is the Transition to the MiCAR License to be Made According to the KMAG?
The draft KMAG includes transitional provisions stipulating that companies that already hold a BaFin license under the KWG, the WpIG, the Payment Services Supervision Act (ZAG), as an exchange operating company or as a capital management company may also perform activities in relation to crypto assets within the meaning of the current national regulation under the new law if they are in possession of the BaFin license required for these activities under the then applicable legal framework on 29 December 2024. The date has been chosen in view of the 30 December 2024 deadline provided for in the MiCAR, from which it will take full legal effect. Crypto asset service providers operating on the basis of a German BaFin license are thus granted a transitional period, albeit a very short one. The draft bill for the KMAG stipulates that the transitional possibility of providing crypto services is to expire by 31 December 2025 at the latest. German crypto asset service providers therefore do not have much time to manage the transition from the current national license to the MiCAR license. Based on the fact that applications for a MiCAR license can only be submitted to BaFin once the MiCAR license requirements are also legally effective, crypto asset service providers would only have one year to successfully complete the transition process. It is likely that numerous German crypto asset service providers will be able to take advantage of the simplified procedure under MiCAR. However, if they wish to license additional crypto services that are not yet covered by their current license, the simplified procedure would not be available to them.
Crypto Asset Service Providers Might be Subject to Both KWG and MiCAR According to the KMAG Draft
It is interesting to note that, with regard to the necessary amendment to the KWG, the BMF’s draft legislation provides for the legal definition previously used for crypto assets to be retained almost word for word. However, tokens covered by the definition should no longer be considered crypto assets under the KWG in the future, but rather cryptographic instruments. In addition, crypto custody under national law is to be considered qualified crypto custody in the future and may only be provided in relation to cryptographic instruments. The reason for this is that the legislator must create a regulation to enable crypto custodians licensed under the KWG to continue to hold security tokens, i.e. financial instruments as defined by the MiFID2 regulation and crypto securities under the German Electronic Securities Act (eWPG), for example. This is because these instruments are excluded from the scope of MiCAR, meaning that they cannot be the subject of crypto custody on the basis of a MiCAR license. German crypto custodians will therefore require both a license for qualified crypto custody under the KWG and a crypto custody license under MiCAR in order to be able to conduct their business to the extent to which they are accustomed under current national regulation.
Attorney Lutz Auffenberg, LL.M. (London)
The competent lawyer for questions regarding crypto asset services and BaFin license under MiCAR in our law firm is Attorney Lutz Auffenberg, LL.M. (London).