In October 2023, the Federal Ministry of Finance (BMF) published an initial draft bill for a new Financial Market Digitization Act (FinMaDiG). In addition to the introduction of national implementation provisions regarding the EU Regulation on Markets in Crypto Assets (MiCAR), which will to a large extent come into force in summer 2024, the core content includes a planned amendment to the German Banking Act (KWG). According to this, cryptographic instruments are to be introduced as a new category of regulated digital units, which are to be clearly distinguished from the crypto assets now regulated under MiCAR. At the same time, the national definition of crypto assets is to be removed from the KWG and the custody of cryptographic instruments is to be made subject to authorization. According to the draft legislation, the custody of cryptographic instruments is to constitute qualified crypto custody in future and as such constitute a regulated financial service. But what is the legislator aiming to achieve with the new introduction of cryptographic instruments and qualified crypto custody?
German Crypto Asset Concept Cannot Simply Be Removed from the KWG
In the explanatory memorandum to its proposal for the introduction of qualified crypto custody and cryptographic instruments, the BMF states that the new terminology is necessary in order to regulate a remaining area of application that is not covered by MiCAR but was regulated under the previous national crypto regulation. In particular, financial instruments within the meaning of MiFID2 regulation do not fall under the scope of MiCAR. The KWG, on the other hand, also covers tokenized MiFID2 products as regulated financial instruments and does not exclude the possibility that a crypto asset is also a financial instrument within the meaning of MiFID2 regulation according to the KWG. Crypto custodians licensed under the KWG in Germany may therefore currently also hold security tokens that constitute financial instruments within the meaning of MiFID2. However, the crypto custody license under MiCAR will no longer permit to do so. In order to prevent crypto custodians already licensed under the KWG from retroactively prohibiting previously permitted business in the course of the transition to MiCAR, the German legislator is now proposing to retain the current definition of crypto assets in the KWG, but to apply it to cryptographic instruments in the future. According to the draft bill, cryptographic instruments should therefore in the future be digital representations of value that have not been issued or guaranteed by any central bank or public authority and do not have the legal status of currency or money, but are accepted as a means of exchange or payment or serve investment purposes on the basis of an agreement or actual practice and which can be transferred, stored and traded electronically. According to the intended legal arrangement in the draft, e-money, crypto assets under MiCAR, crypto securities under the eWpG and crypto fund shares in particular are not to be considered cryptographic instruments.
Cryptographic Instrument and Qualified Crypto Custody Should Be Terminologically Revised
The legislator’s intention to continue to supervise crypto custodians with a BaFin license under the KWG to the same extent as before, even under MiCAR, is not objectionable in terms of content and is a logical consequence of the historically chosen approach of a licensing requirement for crypto-related business models in Germany. However, the terms “cryptographic instrument” and “qualified crypto custody” proposed in the draft bill are unnecessarily complicated and misleading. It is not clear why the term “crypto instrument” cannot be used instead of “cryptographic instrument”. After all, the current version of the KWG also refers to crypto assets instead of cryptographic assets. The term “qualified crypto custody” is even misleading. This is because the term suggests that the financial service is an extension of crypto custody in accordance with MiCAR. In fact, however, qualified crypto custody should refer exclusively to the custody of cryptographic instruments and therefore not to the custody of crypto assets. The new financial service would therefore represent an activity that is clearly distinct from crypto custody under MiCAR and would not have any overlaps with it. It would therefore be more appropriate to call it crypto-instrument custody, for example.
Attorney Lutz Auffenberg, LL.M. (London)
The competent lawyer for questions regarding tokenization and applying for a BaFin license under MiCAR and the KWG in our law firm is Attorney Lutz Auffenberg, LL.M. (London).
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