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Category: blog EN

Mar 13, 2023

NFT – BaFin Provides Guidance on the Qualification of Non-Fungible Tokens

In a technical article dated March 8, 2023, BaFin comments on how it classifies NFT (Non Fungible Token) for regulatory purposes. BaFin understands those to be cryptographic tokens based on distributed ledger technology (DLT), whereby the main manifestation of DLT is blockchain. As already implied by the name, NFTs are not fungible among each other due to their technical properties and are therefore not interchangeable. The potential fields of application are numerous. Collectibles and digital art are likely to be considered the most popular class of NFT. In the supervisory qualification of NFT, BaFin plans to proceed in the same manner as for fungible tokens, according to its publication that has now been published. The decisive factor for the regulatory classification of the tokens should therefore not be their technical characteristic of individuality, but the rights and content assigned to them in the individual case. BaFin therefore intends to decide on a case-by-case basis whether an NFT is, for example, a crypto asset, an asset investment or a security.

NFT May Be an Asset Investment – Classification as Security Currently Not Intended

NFTs may qualify as securities if they embody rights similar to securities, are transferable and tradable on the financial markets. BaFin defines rights similar to securities as membership rights or pecuniary claims, for example, to payment of returns, as in the case of shares or debt instruments. BaFin considers the transferability of the tokens to be given as long as it is not artificially restricted. With regard to the tradability of tokens, the authority expects a certain degree of standardization to the effect that equal rights must be conveyed by the NFT of a tranche. However, because the rights and content associated with NFTs are fundamentally individual in nature, most of them lack the tradability required to qualify as securities under the statutory definition. According to its own statement, BaFin has therefore not yet become aware of any NFTs that qualify as securities. Even if the regulatory classification of NFTs as securities may generally not be assumed, they can nevertheless be asset investments in individual cases and thus still be regulated as financial instruments. The decisive factor in each individual case is the rights with which the token is equipped. For example, if a token serving as proof of ownership for an art object embodies the issuer’s obligation to sell the art object at a profit and to grant the token holder a repayment and interest claim, the NFT is likely to qualify as an asset investment. In the case of a public offering of an NFT qualifying as an asset investment, there is an obligation to prepare a capital market prospectus, unless an exemption from this obligation is applicable.

NFT May be a Crypto Asset – Service Providers May Require BaFin License

In specific cases, an NFT may qualify as a crypto asset within the meaning of the German Banking Act (KWG) or the German Investment Firm Act (WpIG). Crypto assets are digital representations of a value that are accepted by third parties as a means of payment or serve investment purposes. Use as a means of exchange or payment can usually be ruled out due to the lack of interchangeability of NFTs. The situation is different, however, with the second alternative of use for investment purposes, which may well be the case with NFT. In this regard, however, BaFin clarifies that the mere fact that, for example, users speculate on price gains with an NFT, is not sufficient for the assumption of an investment purpose. When examining the legal classification of an NFT as a crypto asset, BaFin rather intends to take into account which rights are associated with the token and which marketing activities are undertaken in its distribution. If, for example, the expectation of price gains is stoked in the course of offering the token to the market, this may be an indicator for the regulatory classification as a crypto asset. To the extent that an NFT must be classified as a crypto asset, this may lead, in particular in the secondary market, to a situation in which the involved service providers require a BaFin license for their business dealings with the tokens, i.e. for proprietary trading, investment brokerage or financial commission business.

Atty. Dr. Konrad Uhink

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    Mar 06, 2023

    Securities Issuances of SMEs – EU Commission Plans Attractive Facilitations

    In order to ease the documentary burden associated with the issuance of securities for small and medium-sized enterprises when raising money on the capital markets, the EU Commission has proposed amendments to the Prospectus Regulation (EU) 2017/1129. According to these, the threshold for an exemption from the prospectus requirement for small public offerings of securities is to be increased. Small and medium-sized enterprises (SMEs) currently have the option of creating a so-called EU growth prospectus instead of a regular prospectus. Its requirements in terms of content are less extensive than those of a regular securities prospectus. The current EU growth prospectus is to be replaced by a new EU growth offering document with fewer requirements. The EU growth prospectus can also be used for cross-border offerings within the EU. This system is also to apply to the EU growth issue document.

    Threshold for Exemption from Prospectus Obligation to be Increased to EUR 12 Million

    The EU Commission’s proposal provides for the amendment of the Prospectus Regulation to the effect that a uniform harmonized threshold of EUR 12 million is set. According to the EU Commission’s proposal, no securities prospectus is to be prepared, approved and published for public offerings of securities that remain below this threshold. The threshold of EUR 12 million is to be calculated on the basis of the total amount of aggregated offers by a single issuer in the EU within a period of 12 months. Currently, this threshold is EUR 8 million, with issuers being allowed to prepare a prospectus on a voluntary basis. In the future, the EU Commission would also like to retain the restriction of the exemption clause, according to which member states may require disclosure documents under national law for public offerings of securities below EUR 12 million, provided this does not represent a disproportionate burden for issuers. The German legislator, for example, made use of this option in the current regime by stipulating the obligation to prepare a three- or four-page securities information sheet for public offerings in Germany with a total value of up to EUR 8 million. It remains to be seen whether the German legislator will change the structure completely or whether the current provisions will simply be increased to EUR 12 million.

    New EU Growth Document Intended to Facilitate Cross-Border Fundraising

    According to the proposal, a new EU growth issuance document would also be introduced to replace the EU growth prospectus permanently. According to the proposed amendments, the preparation and publication of an EU growth issuance document would in principle be mandatory for public offers of securities by certain categories of issuers, including SMEs. However, preparation and publication would not be required if an exemption from the obligation to publish a prospectus pursuant to the EU Prospectus Regulation would be applicable to a public offering. The EU growth issuance document should have a standardized format and order and be drafted in a language commonly used in the international financial community. If the EU growth issuance document is prepared for an offering of equity securities, the document will not exceed a certain number of pages. For securities other than equities (so-called non-equity securities), a limited number of pages is not intended. Nevertheless, due to the new standardized format, the size of the offering document for non-equity securities is expected to be smaller than for an EU growth prospectus.  In accordance with the systematics of the EU Prospectus Regulation, the EU growth issuance document shall also be applicable for cross-border public offerings of securities by SMEs.

    Atty. Dr. Konrad Uhink

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      Feb 27, 2023

      Europe goes Crypto (Part VIII) – The Capitalization of Crypto Asset Service Providers under MiCAR

      Crypto asset services are expected to be subject to authorization by the competent supervisory authority once the provisions of the new Markets in Crypto Assets Regulation (MiCAR) come into force presumably at the end of 2024. The crypto asset service providers who will then be regulated will only receive the authorizations necessary to conduct business if they comply with the comprehensive regulatory requirements provided by MiCAR. A key requirement will be the obligation of crypto asset service providers to hold at all times sufficient capital to back up the business operations. However, despite MiCAR being fundamentally similar to securities regulation, the actual amount to be held is regulated differently than under the second Markets in Financial Instruments Directive (MiFID2). This is because under MiCAR there will be two methods for determining the amount of prudential safeguards, of which the one resulting in the higher amount will be applicable to the crypto asset service provider.

      Minimum Capitalization Amounts for Crypto Service Providers under MiCAR

      Crypto asset service providers will have to maintain at least a regulatory minimum capital level when applying for a MiCAR authorization and also after the authorization has been granted, the amount of which will depend on the specific business model they operate and the crypto asset services they provide. In this respect, there will be three classes of crypto asset service providers, each of which will be subject to a different minimum capital amount for safeguard purposes. Crypto asset service providers who only offer their customers services related to order acceptance and transmission, advice, order execution, placement, portfolio management or transaction execution in relation to crypto assets will be assigned to class 1 and will need to hold a minimum capital of 50,000 euros. In contrast, the minimum capital for crypto custodians and crypto administrators as well as crypto asset exchange providers (class 2) amounts to 125,000 euros. For crypto asset exchange platform operators (class 3), the minimum amount required will be at 150,000 euros according to the wording of MiCAR.

      Determination of the Regulatory Minimum Capital via the Fixed Operating Costs

      The minimum amount of capital for crypto asset service providers specified in MiCAR will only be sufficient as a safeguard if it is higher than one quarter of the previous year’s fixed overhead costs. On the other hand, if this amount is higher, the crypto asset service provider will have to show this amount as minimum regulatory capital. MiCAR will require all crypto asset service providers to calculate their fixed operating costs annually, so the relevant amount will not be a static amount as it is under the MiFID regulation. In summary, crypto asset service providers can expect that they will always be required to maintain at least one quarter of their fixed overhead costs of the previous year as their minimum regulatory capital, and that this amount shall not be less than the minimum amount as specified in MiCAR for the applicable specific class of crypto asset service providers.

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

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        Feb 20, 2023

        The Blockchain-Based Dual Class Share – New Financing Opportunities for SMEs for Equity Raising

        The EU Commission presented proposals at the end of 2022 to facilitate stock market access and financing for small and medium-sized enterprises (SMEs). Among other things, the EU-Prospectus Regulation, the Market Abuse Regulation, the Markets in Financial Instruments Regulation, and the Markets in Financial Instruments and the Listing Directive are to be revised. A draft directive on dual class shares (Dual Class Shares Directive) was also presented. Up until 1998, dual class shares were permitted in Germany on the basis of a ministerial exemption, insofar as this was necessary to safeguard overall macroeconomic interests. Currently, the issuance of dual class shares is not permitted in Germany. This is about to change as a result of the new dual class shares. What is striking is that the EU Commission’s package of measures corresponds very closely in large parts to the proposals made by the German Federal Ministry of Finance in its key issues paper for a Future Financing Act.

        What is the Advantage of Dual Class Shares for Company Owners?

        According to the EU Commission, one of the main reasons for the reluctance of founders and families to go public is the fear of losing control over the company. A listing dilutes ownership, so founders and families lose influence over important investments in the company and operational decisions. Ownership structures with dual class shares are an effective way for a company’s owners to retain decision-making power in the company while obtaining financing through public markets. According to the draft Dual Class Share Directive, dual class shares are shares that belong to a specific and separate class and carry higher voting rights than other classes of shares that provide voting rights for resolutions of the general meeting of shareholders. According to the draft, member states must ensure that companies are allowed to introduce structures with dual class shares upon authorization of previously unlisted shares for trading on an SME growth market in one or more member states. A corresponding statement on the (re)introduction of the dual class shares in Germany is also contained in the Federal Ministry of Finance’s key issues paper for a Future Financing Act.

        Blockchain-Based Dual Class Shares in Germany

        The Future Financing Act is intended to enable companies to issue shares based on blockchain technology in addition to bearer bonds. The digitalization of share trading is intended to take a further important step towards increasing the attractiveness of the capital market in the process. To make this a reality, the Electronic Securities Act (eWpG) is to be opened up to shares. Even though it is already legally possible to issue blockchain-based registered shares today, an expansion of the eWpG to explicitly enable the issuance of shares in the form of crypto securities should provide more legal certainty in this area. This is because, as crypto securities, the shares would have the same legal effect as a security issued by means of a certificate. This should lead to an improved tradability of the shares, especially with regards to the possibility of a bona fide and unencumbered acquisition.

        Atty. Dr. Konrad Uhink

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          Feb 13, 2023

          Europe goes Crypto (Part VII) – The Compliance of Crypto Asset Service Providers According to MiCAR

          Providers of crypto asset services will be subject to licensing requirements when the European Union’s new Markets in Crypto Assets Regulation (MiCAR) comes into effect, presumably in 2024. In addition to the obligation to obtain an authorization prior to commencing business, crypto asset service providers will also have to fulfill far-reaching due diligence and conduct of business obligations in the new regulatory regime during ongoing business operations. In this respect, the legislator wants to ensure a professional, integer and transparent European crypto market. Admittedly, financial instruments within the meaning of the Markets in Financial Instruments Directive (MiFID2) will not be crypto assets itself, and thus will not be subject to the provisions of MiCAR. Nevertheless, the compliance requirements for crypto asset service providers are, to a large extent, closely aligned with the securities compliance obligations under the regulatory regime of MiFID2. But which due diligence and conduct of business obligations will crypto asset service providers in Europe have to fulfill specifically in the future?

          What Are the Compliance Obligations of Crypto Service Providers According to MiCAR?

          Like investment service providers regulated in accordance with MiFID2, crypto service providers will have to act honestly, fairly and professionally as well as in the best interest of their clients in the course of their business activities in the future according to the MiCAR regulations. Their business- and marketing-related communications will always need to be clear, unambiguous and not misleading. Marketing statements and communications must also be identified as such by crypto asset service providers pursuant to MiCAR. They will also always have to advise their clients of risks associated with crypto transactions and, to the extent that they operate a crypto trading platform, provide exchange services in relation to crypto assets, crypto advisory services or crypto portfolio management services, provide their clients with hyperlinks to white papers published about the crypto assets they provide crypto asset services for. Crypto asset service providers will always have to publish the prices of their services prominently on their website. Similarly, they will have to publish information on their website regarding the environmental and climate impact of the consensus mechanisms of those crypto assets that are the subject of their crypto asset services. Details regarding the future compliance obligations of crypto asset service providers are to be developed by ESMA within the framework of technical standards and published no later than twelve months beforeMiCAR takes legal effect.

          Specific Requirements for Crypto Custodians and for Customer Funds

          Specific obligations, however, are provided by MiCAR for crypto asset service providers that want to offer custody of crypto assets to their clients. In particular, crypto custodians will have to strictly separate crypto assets of clients from their own holdings. In the event of insolvency, crypto asset service providers should have effective processes and mechanisms in place to effectively protect customers’ crypto holdings from loss. Which specific processes and mechanisms these may be must be provided by the national insolvency law applicable in each individual case. In Germany, there are as of yet no specific legal regulations for the treatment of customer crypto assets in the insolvency of a crypto custodian, but the legislator has already announced that special regulations will be introduced in near future. Crypto asset service providers must also never mix customer funds with their own assets. Crypto asset service providers will therefore have to transfer customer funds to a segregated bank account at a central bank or an authorized credit institution at the end of each business day.

          Atty. Dr. Lutz Auffenberg, L.MM. (London)

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            Feb 06, 2023

            The Self-Issuance Privilege – What Are Issuers Permitted to Distribute Themselves?

            Issuers of investments or securities with relatively small issue volumes, i.e. in particular small and medium-sized entities, often have the understandable desire to market their products on their own. In Germany, the German Asset Investment Act (VermAnlG) and the German Securities Prospectus Act (WpPG) in conjunction with the EU Prospectus Regulation (ProspektVO) define the regulatory requirements that must be met by an investment or security before it can be offered to the public in Germany. In addition to the requirements relating to the prospectus and documentation obligations to be fulfilled by issuers and providers, these requirements also include restrictions and specifications relating to the distribution channels and the possibility of the self-issuance of the individual products. So is the direct distribution of financial products by their issuers in Germany not possible at all?

            Type of Product and Issue Volume Are Decisive

            Requirements with regard to the distribution of individual financial products result in particular from both the type of product and the intended issue volume. For example, in the case of securities with an issue volume of between EUR 1,000,000 and EUR 8,000,000 calculated over a period of 12 months and which are issued on basis of a securities information sheet instead of a securities prospectus, it is generally necessary to distribute the securities through an investment services company authorized to provide investment brokerage or investment advice, provided that the offer is also directed at non-qualified investors. In the case of asset investments, in principle only those asset investments may be authorized for public offering in Germany which are distributed by way of investment advice or investment brokerage by an investment services company or a financial investment intermediary. This is the case without exception for asset investments issued with the help of a swarm financier, although it should also be mentioned that distribution can only take place via an Internet service platform operated by the swarm financier, which must not have any interconnections with the issuer.

            What Options Are There for Self-Distribution in Germany?

            A proprietary sale of securities or investments is always possible if the planned public offering of securities or investments is subject to one of the legally regulated exceptions that exempt the issuer and offeror from the obligation to prepare a prospectus, a securities information sheet (WIB) or an investment information sheet (VIB). Such an exemption exists, for example, if the group of investors to be addressed by the offer is kept small or the offer is directed only at qualified investors. Another possibility for issuers of securities to market their investment products by way of self-distribution is to prepare a comprehensive securities prospectus in accordance with the ProspektVO instead of a WIB. This is because securities offered on the basis of a full securities prospectus are not subject to the restrictions regarding self-distribution. This arrangement has the additional advantage that the securities could also be offered in other member states of the European Economic Area on the basis of the securities prospectus and also on a proprietary basis via a comparatively simple notification procedure. Finally, the tokenization of products can also enable self-distribution for products which in principle would have to be classified as asset investments. This is because, according to BaFin’s current administrative practice, such products must be classified as securities sui generis for regulatory purposes, at least if tokenization leads to increased tradability. They are then subject to the provisions of securities regulatory law with all its disadvantages and advantages despite their legal design as an asset investment. In particular, securities sui generis can also be offered across borders in accordance with the ProspektVO.

            Atty. Dr. Konrad Uhink

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              Jan 23, 2023

              Europe goes Crypto (Part (VI) – Passporting Crypto Asset Services According to MiCAR

              The current regulation of cryptocurrencies in Germany and Europe is particularly grotesque because it regulates a market only at the national level that has always been international. Cross-border business models must therefore be regularly harmonized with all affected national regulatory regimes. One of the most important objectives of the European Union is the advancement of the European single market and the reduction of legal hurdles for the realization of cross-border cooperation of the European economy. It is therefore about time that the patchwork of crypto regulation that still exists within the EU is abolished and that the European single market is realized also in the crypto market. To this effect, the future EU Regulation on Markets in Crypto Assets (MiCAR) provides rules and regulations for the uniform offering of crypto services in more than one Member State. The legislator bases the new rules for cross-border crypto services largely on the rules of the so-called EU passporting in the area of investment services. As a result, crypto service providers will be able to offer their services in other EU states with comparatively little effort in the future, without requiring additional permits under MiCAR in the target countries.

              MiCAR Passporting Requirements for Crypto Services

              Providers who intend to offer crypto services across borders in the European Union are in any case required to be authorized in one of the member states in accordance with MiCAR. The responsible authority for the passporting procedure will initially be the authority that issued the MiCAR permit, i.e. BaFin in Germany. In order to successfully apply for passporting, the crypto service provider must submit a list to the authority indicating in which specific member states which specific crypto services are to be provided. It must also indicate from which time onwards the provider intends to actively offer the crypto services in the respective target countries. In addition, it is necessary to specify which other business activities that are not regulated under MiCAR the crypto service provider intends to offer. This includes activities that are not regulated at all as well as those that are subject to authorization and supervision under other regimes. Examples include payment services as defined in the Second Payment Services Directive (PSD2), investment services under the Markets in Financial Instruments Directive (MiFiD2), or other commercial activities not subject to authorization, such as e.g. the manufacture of hardware or the rental of buildings.

              Short Procedure Period in MiCAR Passporting

              BaFin will have to forward the information received to the national competent authorities in each of the target countries as well as to the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) within 10 working days. ESMA will subsequently publish the information on its single European crypto service provider registry maintained on its website in order to allow all market participants in Europe to verify whether a provider’s offering is legal and covered by a MiCAR authorization. Immediately after forwarding the information to the aforementioned bodies, BaFin will inform the crypto service provider about the forwarding that has taken place. As soon as the crypto service provider has received this notification from BaFin, but no later than 15 calendar days after the information has been forwarded to BaFin, the crypto service provider may actively offer its crypto services regulated under MiCAR in the selected target countries. The requirements for successful passporting under MiCAR are thus the existence of a MiCAR license in the home country and the transmission of the aforementioned information to BaFin. If this information is not complete, for example because the crypto service provider has concealed another commercial activity it provides, passporting under MiCAR may be inadmissible. Applications for MiCAR passporting will thus have to be prepared with maximum diligence.

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

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                Jan 16, 2023

                Decentralized Autonomous Organization – What Are DAOs and How Are They Regulated in Germany?

                Decentralized Autonomous Organizations (“DAOs”) are usually defined as organizations established for perpetuity that consist of program code executed and stored in a decentralized manner. They are allocated own capital in the form of crypto assets, which are directly managed by the capital providers according to the automated and fixed rules of the program code. These definitions are of limited help to the average user or interested investor. In particular, they do not provide any information on how DAOs or their shares are to be classified legally. However, it is precisely these questions that are naturally of decisive importance both for initiators of DAOs and for participants in a Decentralized Autonomous Organization. Thus, the first question that arises in this context is whether DAOs can qualify as companies under German corporate law. In this context, it is not possible to make a generally valid statement as to whether a DAO is a company. Should it be assumed on the basis of the specific structure of the DAO that the DAO is founded on a contractual basis, then a DAO could qualify, for example, as a partnership under civil law or as a general partnership. If the DAO in the individual case would be a structure under corporate law, then the subsequent question arises as to the supervisory qualification of such DAO shares.

                Regulatory Classification as an Investment or as a Security (Sui Generis) Through Tokenization

                If the DAO were to be a company, shares in a DAO which grant their owners a participation in the results of the DAO would generally be classified as an investment within the meaning of the German Asset Investment Act (“VermAnlG”). If these were tokenized, which is likely to be the rule, BaFin would – according to its administrative practice – qualify the respective tokens as securities of their own kind with the consequence that the provisions of the German Securities Prospectus Act (“WpPG”) would apply to the tokens. This would be the case if the transferability and tradability on the financial market of the tokens as well as the mediation of rights similar to securities through the tokens were achieved by the tokenization. Even in the case that the tokens would not convey a participation in the result of the DAO and thus would not be legally qualify as an asset, a qualification of the tokens as securities of their own kind is nevertheless possible, provided that the aforementioned characteristics of transferability, tradability and conveyance of rights are fulfilled. An example would be that a token does not grant any participation in the result of the DAO concerned, but conveys membership rights in the DAO, e.g. in the form of voting rights. A prospectus or securities information sheet would then have to be prepared and published prior to a public offering of such tokens.

                Applicability of MiCAR to Shares in DAOs

                In general, the EU Regulation on Markets in Crypto Assets (“MiCAR”) will not be applicable to the shares of DAOs described above. This is because the described shares are transferable securities and thus financial instruments within the meaning of the Markets in Financial Instruments Directive II (“MiFID II”). To such, however, MiCAR will precisely not be applicable. Should this not be the case for a specific DAO, i.e. in particular in cases where the shares of the DAO do not qualify as transferable securities in the aforementioned sense and thus not as financial instruments, the provisions of MiCAR would arguably be applicable to the shares. Here, as generally in this very complex subject area, a precise review will have to be carried out in each individual case in order to minimize liability risks and to achieve a legally compliant arrangement.

                Atty. Dr. Konrad Uhink

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                  Jan 09, 2023

                  Europe goes Crypto (Part V) – The E-Money Token According to MiCAR

                  With the EU Regulation on Markets in Crypto Assets (MiCAR), the European Union will create a uniform EU-wide definition of crypto assets in the future. From the time MiCAR is expected to come into force in the second half of 2024, crypto assets will thereafter be regulated as a digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology. In addition to this very broad and general definition of crypto assets, the MiCAR also provides definitions for specific forms of crypto assets in its final text. One of these specific forms will be e-money tokens. MiCAR defines these as a type of crypto asset that seeks to achieve stable value by referencing an official currency. Such e-money tokens have existed for some time and play a central role in international crypto markets. For example, Tether’s USDT and joint venture Center’s USDC, which reference the U.S. dollar, currently rank third and fourth, respectively, in terms of market capitalization. The BUSD of the crypto group Binance, which is also referenced to the US dollar, ranks seventh in terms of market capitalization and is thus also a top ten crypto asset.

                  E-Money in the EU Regulated So Far Only by the E-Money Directive

                  E-money has already been regulated in the European Union since 2005 through the Electronic Money Directive. The E-Money Directive defines electronic money as electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions and which is accepted by a natural or legal person other than the electronic money issuer. The EU Directive stipulates that electronic money may only be issued in the European Union by authorized credit institutions or by electronic money institutions. The e-money business in the European Union is thus a strictly and specifically regulated area of business. According to its wording, the e-money definition in no way precludes e-money from being issued via a blockchain solution. An entity that issues blockchain units that meet the e-money definition of the E-Money Directive will therefore, in principle, be deemed to be an e-money institution within the meaning of the Directive and will need to comply with the regulatory requirements for its business. In particular, such a company will have to obtain an authorization as an electronic money institution to the extent that it wishes to direct its business to the European market. If, on the other hand, a crypto asset lacks one of the prerequisites of the e-money definition, for example because there is no identifiable issuer, the regulatory regime of the E-Money Directive is generally not applicable.

                  E-Money Tokens to be Considered Traditional E-Money According to MiCAR

                  MiCAR’s definition of e-money tokens is significantly broader than the E-Money Directive’s definition of e-money. As a result, not all e-money tokens necessarily meet the definition of e-money under the E-Money Directive. Nonetheless, in this regard, MiCAR stipulates that e-money tokens under MiCAR should be treated as e-money under the E-Money Directive. This equation is not without problems, because according to the MiCAR definition of e-money tokens, the existence of an issuer, as seen, is not a mandatory requirement. Even e-money tokens without an issuer would be crypto assets and thus, for example, a suitable subject of regulated crypto asset services. The e-money definition of the E-Money Directive, on the other hand, requires that e-money must be a claim on the issuer. Following this approach, almost all of the requirements of the E-Money Directive relate to the rights and obligations of e-money issuers. MiCAR’s equation of decentralized created e-money tokens with traditional e-money is therefore meaningless. Nevertheless, MiCAR also stipulates that e-money tokens may only be offered by credit institutions or e-money institutions and that all holders of e-money tokens must be granted a claim against the issuer. In contrast, e-money tokens that do not provide for claims against the issuer are to be prohibited. Nevertheless, such prohibited e-money tokens will also be crypto assets within the meaning of MiCAR and may to that extent be subject to crypto asset services.

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

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                    Dec 19, 2022

                    BaFin Authorization for Crypto Asset Services – Is MiCAR Worth the Wait?

                    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 a BaFin authorization 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)

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                      Dec 12, 2022

                      Europe goes Crypto (Part IV) – Will BaFin-authorized Companies Need a MiCAR Authorization?

                      The Markets in Crypto Assets Regulation (MiCAR) will impose authorization requirements on crypto asset service providers in the future. For example, operators of crypto trading platforms, other crypto exchange providers and crypto custodians will have to obtain authorization from the competent national supervisory authority – in Germany, BaFin – prior to commencing their business operations. In Germany, the obligation to obtain authorization from BaFin for the operation of many crypto asset business models has long existed based on national law because the German legislator gave crypto assets the status of a financial instrument. However, current regulation in Germany requires crypto asset service providers to obtain a license  as a credit or financial institution under the German Banking Act (KWG) or the German Investment Firm Act (WpIG). European law does not follow this approach and will continue to not regulate crypto assets as financial instruments as defined by the European financial market directives and regulations. While markets in financial instruments will continue to be regulated via the MiFID2 Directive, MiCAR will regulate markets in crypto assets, which do not qualify as financial instruments in the sense of MiFID2. But what does this separation imply for German banks and investment firms that have crypto asset-based business models and hence have obtained an authorization pursuant to the KWG or the WpIG?

                      MiCAR Provides Exemptions for Credit Institutions and Investment Firms

                      Authorized credit institutions will not require any further authorization for offering crypto asset services pursuant to the new MiCAR. In this respect, MiCAR stipulates that they will only have to notify their national authority – i.e. BaFin in Germany – at least 40 days in advance of commencing the respective business that they intend to provide crypto asset services with pursuant to MiCAR. There will also be facilitations for investment firms. Under MiCAR, these firms will be authorized to provide those crypto asset services that they are already permitted to provide in connection with financial instruments according to their existing authorization. Investment firms will also have to notify the competent authority 40 days prior to providing crypto asset services in order to use this exemption. MiCAR explicitly specifies which specific crypto asset services pursuant to MiCAR correspond to which specific investment services pursuant to MiFID2. In this respect, it is advantageous for the interpretation of MiCAR that it is systematically closely based on the systematics of MiFID2.

                      Will German Crypto Custodians Also Benefit from the Exemption?

                      In this context, the fact that crypto custodians in Germany are not regulated as investment firms in the sense of the WpIG, but as financial services institutions pursuant to the KWG, poses problems. The crypto custody business is a national regulatory specialty of the German legislator without a legal basis in MiFID2 or any other European Directive. In this respect, the question arises whether German crypto custodians will also be able to claim the exemption for investment firms provided for in MiCAR. With regards to crypto custody, the wording of MiCAR merely refers to the ancillary securities service of custody and administration of financial instruments, from the facts of which, however, the German legislator has expressly excluded units of account and crypto assets in the WpIG. According to the wording of MiCAR, the exemption should therefore not apply to German crypto custodians. However, it must also be taken into account in this context that MiCAR and MiFID2, as European laws, hierarchically take precedence over national laws and national laws cannot be used to interpret European regulations. In addition, it can be assumed that authorized German crypto custodians will be better positioned with respect to the fulfillment of the regulatory requirements for crypto custody provided for by MiCAR than securities institutions that also hold financial instruments in custody as an ancillary service. If interpreted appropriately, German crypto custodians should also be allowed to take advantage of the exemption provided by MiCAR. In any case, BaFin will have to comment and position itself in this regard in due time prior to the MiCAR coming into force. The German legislator will also be able to contribute to the solution of this problem by making the necessary adjustments to national law for the implementation of MiCAR anyway.

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

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                        Dec 05, 2022

                        Europe goes Crypto (Part III) – The MiCAR White Paper

                        In order to provide the European crypto market with more security and professionalism, the Markets in Crypto Assets Regulation (MiCAR) of the European Union will not only impose authorization and compliance obligations on crypto-asset service providers but will also focus on issuers and offerors of crypto-assets. Prior to public offerings as well as listings of of crypto assets on crypto trading platforms, it shall be required in the future that the responsible persons or companies prepare a white paper, which is required to have a legally prescribed minimum content, prior to the start of the offering or listing. In addition to increasing the transparency of Initial Coin Offerings (ICO) and other token sales, the MiCAR legislator expects this to also significantly strengthen the accountability of providers of new crypto assets, which has been lacking until now. The white paper provisions of MiCAR are strongly modeled after the mechanisms known from securities prospectus law.

                        What will Offerors of Crypto Assets be Required to Disclose in the White Paper?

                        Offerors of crypto assets will need to provide potential investors with sufficient information via the white papers to enable them to make the right investment decision for their needs. For this purpose, it is first of all necessary that they provide information about themselves in their capacity as offerors or responsible person for a listing or – if deviating from this – about the issuer of the crypto assets to be offered or listed. This includes information about their legal form, their contact details and the Management Body of the company and, in the case of listings, also about the operator of the trading platform. In addition, sufficient information must be provided on the crypto asset project upon which the offer is based, and details must be published on the type and procedure of the offer or listing. The white paper must also specifically state which rights and obligations are associated with the crypto assets and which technology is the basis of the crypto assets to be offered or listed. White papers must also provide information about the risks associated with the crypto assets. Finally, offerors must present disclosure in the white paper as to whether the consensus mechanism underlying the crypto assets has any environmental or climate impact. According to MiCAR, the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) shall develop technical standards on the individual minimum requirements in the coming months in order to provide the market with specific guidance on what information must be provided in detail in white papers.

                        What Additional Requirements Do MiCAR White Paper Offerors Need to Fulfill?

                        In addition to the minimum content information, offerors of crypto assets will have to include an explicit statement in the white paper to be published that the white paper has not been approved or authorized by any authority and that the provider is solely responsible for the content of the white paper. This disclosure requirement derives from the liability regime provided under MiCAR for defective white papers. Offerors who fail to publish the information required under MiCAR in the white paper, or publish it incompletely or misleadingly, are liable to investors for compensation for any resulting damages. Although white papers do not have to be approved by authorities, they must be filed by the offeror with the competent authority in each member state in which the offer or listing will be available. MiCAR instructs that white papers are to be written in the language of the offeror’s home member state or in a language customary in the sphere of international finance.

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

                        I.  https://fin-law.de

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