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Category: blog EN

Dec 19, 2023

Can Security Tokens or Crypto Securities Meet the European Green Bond Standard?

On November 30, 2023, Regulation (EU) 2023/2631 on European Green Bonds and Optional Disclosures on Bonds Marketed as Environmentally Sustainable and Sustainability-linked Bonds (EU Green Bond Regulation) was published. The Regulation applies in its entirety from December 21, 2024. The EU Green Bond Regulation specifies the circumstances under which bond issuers may use the designation “European Green Bond” or “EuGB” for bonds offered in the Union. In order for a bond to qualify as a European Green Bond, the proceeds of the issue must, subject to certain flexibilities, be used in full for specific investment categories in accordance with the criteria for environmentally sustainable economic activities set out in the European Taxonomy Regulation (Regulation (EU) 2020/852). In addition, as with other Green Bond standards, external auditors must be involved and documentary requirements must be met.

The European Green Bond Standard Requires Prospectus Transparency and External Audit

The EU Green Bond Regulation stipulates that only bonds for which the issuers have published a securities prospectus in accordance with the Prospectus Regulation (Regulation (EU) 2017/1129) can qualify as a European Green Bond. In addition, the issuer must complete an information sheet provided for in the EU Green Bond Regulation prior to issuance and ensure that the completed information sheet is subject to a pre-issuance review and that an external auditor issues a favorable opinion on it. In order to ensure that the proceeds have been invested in accordance with the EU Green Bond Regulation, issuers must prepare an allocation report for each 12-month period until the date of full utilization of the proceeds of their bonds and indicate that the proceeds of the bonds have been used in accordance with the EU Green Bond Regulation since their issuance and until the end of the period specified in the report. If the allocation report has been prepared after the proceeds of the bond have been fully utilized, the report must be subject to a post-issuance audit by an external auditor. Issuers should also provide information on the environmental impact of their bonds by publishing an impact report at least once during the duration of the bonds after the proceeds have been fully utilized.

Security tokens and Crypto Securities May Also Meet the Green Bond Standard

The EU Green Bond Regulation does not regulate that blockchain-based security tokens or crypto securities under the Electronic Securities Act (eWpG) cannot fulfill the requirements of the European Green Bond Standard . Therefore, bonds for which a securities prospectus must be prepared can be issued both as security tokens and as crypto securities under the eWpG. The funds raised from such an issue can be used for the environmental objectives of the European Taxonomy Regulation. The information to be provided in the individual reports on the form of the bonds also does not suggest that blockchain-based bonds cannot be issued under the EU Green Bond Regulation. There are therefore valid reasons to believe that blockchain-based bonds can also be issued as European Green Bonds. It remains to be seen whether a market for European Green Bonds based on blockchain technology will develop.

Attorney Dr. Konrad Uhink

I.  https://fin-law.de

E. info@fin-law.de

The lawyer responsible for providing advice on the issuance of electronic securities and security tokens in our law firm is attorney Dr. Konrad Uhink.

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    Dec 11, 2023

    Qualified Crypto Custody After MiCAR Go-live – What are Cryptographic Instruments?

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

    I.  https://fin-law.de

    E. info@fin-law.de

    The competent lawyer for questions regarding tokenization and applying for a BaFin license under MiCAR and the KWG in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

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      Dec 04, 2023

      BaFin Publishes Guidance on Register Management for Crypto Securities

      On 23 November 2023, BaFin published a guidance sheet with information on the facts of crypto securities register management. The crypto securities register is closely related to the German Electronic Securities Act (eWpG). Under the eWpG, bearer bonds can be issued in the form of an electronic security. The same applies to crypto fund units in accordance with the Regulation on crypto fund units. An electronic security is issued by the issuer making an entry in an electronic securities register instead of issuing a securities certificate, e.g. in the form of a global certificate. The eWpG includes a central register and a crypto securities register among these electronic securities registers. The crypto securities register only applies to the latter. A crypto security is an electronic security that is entered in a crypto securities register. In addition to statements on the licensing requirement, the information sheet also contains general statements on the system of the eWpG.

      Existing DLT-Based Security Tokens are not Automatically Crypto Securities

      Traditional securities always require a certificate for a right, the utilization of which is governed by private law through the possession of the certificate. With the introduction of global certificates, it is no longer necessary to create a large number of securities certificates, but several rights can also be securitized in one certificate. In order for one of the rights securitized in the securities certificate to come into existence, an effective act of scripting and an effective contract of issuance are required. The effective scripting act requires the issuer to draft a certificate. In the case of a crypto security, the scripting of a certificate is waived. In BaFin’s opinion, the scrip is instead entered in the crypto securities register by entering the crypto security in the register. It is precisely this act of registration in a crypto securities register in accordance with the eWpG that is regularly missing for security tokens issued prior to the introduction of the eWpG. In this respect, BaFin therefore is of the opinion that these cannot qualify as crypto securities without further ado.

      Operation of Crypto Securities Register Regularly Subject to Authorization and Additional Licenses May Be Required

      The registry operator shall maintain a crypto securities register in such a way that the confidentiality, integrity and authenticity of the data are guaranteed. The entity operating the register must take the necessary technical and organizational measures to prevent data loss or unauthorized data modification for the entire duration for which the electronic security is registered. In order to comply with these obligations, BaFin assumes that it is always required that business operations are set up in a commercial manner. Accordingly, anyone operating an eWpG-compliant crypto securities register must always obtain a license from BaFin. Since crypto securities are ultimately securities, their safekeeping and/or management is also subject to the custody business requiring a license. However, according to the administrative practice now published by BaFin, a crypto securities registrar who is also licensed for custody business does not necessarily require a separate license for crypto custody business in order to secure any cryptographic keys. Nevertheless, crypto securities can also be held in custody by BaFin-approved crypto custodians in accordance with the eWpG.

      Rechtsanwalt Dr. Konrad Uhink

      I.  https://fin-law.de

      E. info@fin-law.de

      The lawyer responsible for providing advice on the issuance of electronic securities in our law firm is Attorney Dr. Konrad Uhink.

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        Nov 13, 2023

        From KWG to MiCAR – How Does the Legislator Intend to Shape the Regime Change for Crypto Asset Service Providers?

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

        I.  https://fin-law.de

        E. info@fin-law.de

        The competent lawyer for questions regarding crypto asset services and BaFin license under MiCAR in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

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          Nov 06, 2023

          The MiCAR Whitepaper (Part VII) – How Does the German Legislator Intend to Implement the Draft Financial Market Digitization Act?

          The Markets in Crypto Assets Regulation (MiCAR) will gradually take effect in the member states of the European Union from June 30, 2024. Accordingly, national legislators must prepare for this and adapt their laws to the requirements of MiCAR. As MiCAR is a regulation that is directly applicable in all member states, the member states only have very limited scope for influence. Essentially, the national adjustments are likely to relate to the administrative procedure within the relevant member state. Accordingly, the recently published draft legislation on the Financial Market Digitization Act of the Federal Ministry of Finance primarily provides for provisions on the administrative procedure with regard to MiCAR whitepapers, as well as regulations on violations of the MiCAR provisions. While the first parts of the blog series analyzed the requirements for a whitepaper resulting directly from MiCAR, the following section examines how the national legislator plans to implement the MiCAR requirements with regard to MiCAR whitepapers with the draft legislation.

          MiCAR Whitepaper to Be Regulated in the New Crypto Markets Supervision Act (KMAG)

          The draft legislation for the Financial Market Digitization Act provides for the introduction of an act on the supervision of markets for crypto assets (Crypto Markets Supervision Act – KMAG). This legislation serves to implement MiCAR and also regulates the supervision of markets for crypto assets within the meaning of MiCAR. BaFin is designated as the competent supervisory authority for the provisions of MiCAR. The Crypto Markets Supervision Act expressly clarifies once again that the KMAG does not apply to financial instruments that are not covered by MiCAR. Companies that plan to offer asset-backed tokens to the public or wish to apply for their admission to trading must submit an application to BaFin in accordance with MiCAR. In addition, a MiCAR whitepaper must be prepared and published. In this context, the KMAG specifies that BaFin may require providers and applicants to amend their MiCAR whitepaper if it does not comply with the content or formal requirements of MiCAR. BaFin may also require providers and applicants to include additional information in their MiCAR whitepaper if this appears necessary for reasons of the stability of the financial market or for the protection of the public. The aforementioned also applies to e-money tokens and marketing communications.

          Violation of MiCAR Whitepaper Regulations May Lead to Prohibition of Public Offering and Fines

          The KMAG also provides for regulations in the event that a provider violates the crypto whitepaper provisions set out in MiCAR. BaFin can issue an order to suspend a public offer or admission to trading for up to 30 days if there is reasonable suspicion that MiCAR has been breached. It may also prohibit a public offer or admission to trading if the requirements set out in MiCAR are violated. This is particularly the case if asset referenced tokens are offered to the public without an approved MiCAR whitepaper. Should a MiCAR Whitepaper not be kept available or not be kept available for the prescribed duration or should supplements to a MiCAR Whitepaper not have been submitted or published, or not have been submitted or published correctly or in full, this also constitutes an administrative offense subject to a fine. The same applies in the event that the MiCAR whitepaper is not updated if a material new factor, material error or material inaccuracy has occurred or the MiCAR whitepaper is not published on the website or is not published for at least ten years.

          Rechtsanwalt Dr. Konrad Uhink

          I.  https://fin-law.de

          E. info@fin-law.de

          The lawyer responsible for providing advice on MiCAR whitepaper creation in our law firm is attorney Dr. Konrad Uhink.

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            Oct 30, 2023

            Tokenization in the Gaming Industry – How to Tokenize an In-Game Currency?

            Video games have long since become a mainstream alternative for leisure activities. Massive multiplayer online games (MMOs), in which players from all over the world can play together or against each other, are particularly popular. In many of these MMOs, so-called in-game currencies exist. These are digital payment units that can be purchased and used exclusively within the relevant game environment and can be used, for example, to purchase digital items within the respective computer game. Providers of such MMOs are increasingly considering the possibility of the tokenization of their in-game currencies. Tokenized in-game money could also be stored and transferred outside the relevant game environment in cryptowallets by the respective holders, entirely without contribution of the MMO operator. However, it must be clarified on a case-by-case basis, especially against the background of increasing crypto-regulation, whether the tokenization of an in-game currency is possible under regulatory law. Should the tokenized in-game tokens ultimately qualify as regulated instruments, the commercial handling of them may in individual cases require the prior obtaining of a BaFin license or the publication of documentation required by regulatory law.

            Does the Issuance of In-Game Tokens Require a BaFin License?

            Whether an MMO operator must obtain a BaFin license prior to issuing a tokenized in-game currency created through tokenization depends on the regulatory classification of both the tokenized in-game currency and the specific activities the MMO operator intends to offer in this context. A door opener for regulated activities and thus for the requirement of a BaFin license is regularly given if the crypto tokens in question are to be classified as financial instruments within the meaning of the German Banking Act (KWG) or the German Investment Firms Act (WpIG). In this respect, a classification as a unit of account or as a crypto asset can be considered in particular. However, according to its established administrative practice, BaFin only considers units of account to be instruments that are used as substitute or complementary currencies. In this respect, the classification of an in-game token as a unit of account always depends on whether it is at least also intended to be used as a means of payment. Should this characteristic be missing, the units of the tokenized computer game currency cannot be classified as a unit of account. To qualify as a crypto asset, an in-game token must either be used as a means of exchange or payment or serve investment purposes. However, the latter is not already the case if a player acquires in-game tokens in the expectation of an increase in value. Rather, it is necessary that the provider or third parties associated with it raise the possibility of suitability for investment purposes by means of advertising statements. With respect to regulated activities, it is necessary to examine which specific services the provider plans to provide with respect to the tokenized computer game currency. If, for example, a marketplace is to be operated on which in-game tokens can be purchased, a BaFin license may be required, depending on the design, e.g. for investment brokerage, proprietary trading, financial commission business or the operation of a multilateral trading system. Should the provider wish to offer a custody option for players via cryptowallets, he may operate the crypto custody business by doing so and therefore he may require a corresponding BaFin license.

            What are the Obligations for Tokenizing a Computer Game Currency under MiCAR?

            The question of the necessity of a BaFin license must also be examined from the perspective of the Markets in Crypto Assets Regulation (MiCAR), which will be applicable as of summer 2024. The new MiCAR supervisory regime also results in an obligation for issuers of crypto assets to prepare and publish a crypto whitepaper in many constellations. This must contain the essential information that may be relevant for acquirers of the crypto assets to be offered within the meaning of MiCAR. In particular, this concerns information on the issuer itself as well as on the technical and legal design of the crypto asset in question. The crypto whitepaper must also comment on the risks associated with the acquisition. For the issuance of in-game tokens created through tokenization, the preparation and publication of a corresponding crypto whitepaper may also be required. An exception relevant in the case of in-game tokens applies to cases where the units of tokenized in-game currency qualify as utility tokens within the meaning of MiCAR, granting access to an already existing good or already offered service. For example, if the in-game token in question, in addition to the possibility of safekeeping and transfer inherent in all tokens, can be used solely to be transferred back to the MMO to be then used as an untokenized in-game currency for the acquisition of digital items in the game environment, the exception could apply in the individual case.

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

            I.  https://fin-law.de

            E. info@fin-law.de

            The competent lawyer for questions regarding tokenization and applying for a BaFin license under MiCAR in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

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              Oct 23, 2023

              The MiCAR Whitepaper (Part VI) – When Does an Investor Have a Right of Revocation Under MiCAR?

              The Markets in Crypto Assets Regulation (MiCAR) will gradually take legal effect in the European Union from June 30, 2024. According to the regulation, a crypto whitepaper must be prepared when crypto assets are offered to the public and when they apply for admission to trading on a trading platform. In the first parts of the series, we addressed the content requirements of a MiCAR whitepaper, the marketing of tokens, and the publication requirements of a MiCAR whitepaper. In this sixth part of the series, we will analyse under which circumstances an investor is entitled to a right of revocation when purchasing crypto assets other than asset-referenced tokens or e-money tokens. According to the recitals of the regulation, a 14-day right of revocation should exist to protect retail investors in crypto assets.

              Under Which Conditions Does the MiCAR Right of Revocation Apply?

              Retail investors who purchase crypto assets other than asset-referenced tokens and e-money tokens either directly from the issuer of the crypto asset or from a crypto service provider enjoy a right of revocation. To this extent, MiCAR defines a retail investor as any natural person acting for purposes that are outside his or her trade, business, craft or profession. Similar to the right of revocation for consumers, only non-commercial investors can invoke a potential MiCAR right of revocation. Furthermore, it is a prerequisite that the retail investor purchases crypto securities directly from an issuer or from a crypto asset service provider that places crypto assets on behalf of that issuer. Retail investors entitled to a MiCAR right of revocation have a period of 14 calendar days to revoke their consent to purchase the relevant crypto assets free of charge and without giving any reason. The revocation period starts from the date of the retail investor’s agreement to purchase. In cases where the crypto assets were already admitted to trading prior to their purchase by the retail investor, the MiCAR right of revocation does not apply. If the provider of the crypto assets has set a time limit for its offer, the right of revocation cannot be exercised after that period.

              Offeror Must Provide Information About the Right of Revocation and the Legal Consequences in the MiCAR Whitepaper

              Offerors of crypto assets other than asset-referenced tokens or e-money tokens must provide information about the MiCAR revocation right in their MiCAR whitepaper. If the offeror fails to comply with this information requirement, the right of revocation is unlikely to be extended. However, in these cases, the MiCAR whitepaper is likely to be incomplete with the consequence that there is a risk of liability for the offeror. All payments received from a retail investor, including any fees, must be refunded within 14 days in the event of revocation. The period begins after the offeror has been notified of the Retail Investor’s decision to revoke the purchase of the crypto assets. For the refund, the provider must use the same means of payment that the retail investor used for the original purchase. This may be deviated from if this is expressly agreed with the retail investor and no fees or costs are incurred by the retail investor as a result of such alternative repayment.

              Attorney Dr. Konrad Uhink

              I.  https://fin-law.de

              E. info@fin-law.de

              The lawyer responsible for providing advice on MiCAR whitepaper creation in our law firm is attorney Dr. Konrad Uhink.

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                Oct 09, 2023

                BaFin License in NFT Business – Which Activities are Regulated in Times of MiCAR?

                Non-fungible tokens (NFTs) have been a controversial topic in the legislative process of the European Union on the way to the final version of the EU Regulation on Markets in Crypto Assets (MiCAR). In the regulation that was ultimately adopted, NFT were excluded from the scope of the regulation. Crypto assets that are unique and not fungible with other crypto assets shall not be subject to MiCAR. However, the legislator left a loophole open and formulated a re-exception for crypto assets to be classified as NFT in the recitals preceding the text of the regulation. According to the intention of the MiCAR legislator, an NFT that is part of a series should neither be considered unique nor non-fungible. The mere assignment of a unique identifier, such as a serial number, should not be sufficient to assume uniqueness in the required sense. Rather, it is required that the uniqueness results from the value represented via the NFT or the tokenized right. But is the commercial handling of NFT in such cases then indeed unregulated, so that crypto service providers, for example, do not need a BaFin license for crypto custody or crypto trading in relation to NFT under the scope of MiCAR?

                MiCAR is Not the Only Relevant Regulatory Framework in the Commercial Handling of NFTs

                An obligation to obtain a BaFin license may arise for providers of crypto custody, crypto trading or other crypto services not only from MiCAR. Under the current legal situation, the provisions of MiCAR regarding the provision of crypto services and the public offering of crypto assets on the market do not yet apply, so that the relevant obligations for providers with regard to the need for a BaFin license arise from national law. In Germany, crypto custody and crypto trading are therefore still subject to the provisions of the German Banking Act (KWG) and the German Investment Firm Act (WpIG). However, even under national law, business models relating to NFT are not necessarily subject to BaFin approval. This is only the case if the NFT can be classified as a regulated financial instrument in the specific case. In many cases, this classification fails in the case of NFT due to the KWG’s definition of crypto assets, which also applies to the WpIG. This is because according to this definition, a crypto asset must be used as a means of exchange or payment or serve investment purposes on the basis of an agreement or actual practice. BaFin considers the suitability of NFT as a means of exchange or payment to be fundamentally non-existent because of the individuality that constitutes them. It is true that, in the opinion of BaFin, NFTs can serve investment purposes under certain circumstances. However, according to its administrative practice, it is not sufficient in this respect that token holders acquire the Token in the hope that an increase in value will happen in the future. Rather, according to BaFin, an NFT may only qualify as a financial instrument in the form of a crypto asset if the creator or offeror makes promotional statements about the Token that focus on its suitability as an investment vehicle.

                German Legislator is Working on MiCAR Implementation Law

                The first provisions of MiCAR relevant to market participants will become legally effective on June 30, 2024. At that time, issuers of asset-referenced tokens (ART) and e-money tokens (EMT) will have to obtain a BaFin permission prior to offering their crypto assets to the public. The MiCAR regulations apply directly to market participants. Nevertheless, the German legislator will have to ensure that the new regulations do not conflict with existing regulations under national law. For this reason, a national implementation law is currently being drafted in Berlin. For the NFT subject, it can be assumed that existing differences between MiCAR and the national legal situation with regard to the question for which activities with NFT a BaFin license is required will be eliminated as far as possible. This would be possible either by adjusting the definition of crypto assets in the KWG or even by abolishing it. However, until a corresponding implementation law is passed, crypto service providers with NFT-related business models will have to keep both MiCAR and national law in mind when implementing their business model.

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

                     I.  https://fin-law.de

                     E. info@fin-law.de

                The lawyer responsible for questions relating to advice on the regulatory handling of NFT and on obtaining a BaFin license in our law firm is Dr. Lutz Auffenberg, LL.M. (London).

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                  Oct 02, 2023

                  The MiCAR Whitepaper (Part V) – Which Publication Obligations and Subsequent Obligations Apply to the Crypto Whitepaper?

                  Under the Markets in Crypto Assets Regulation (MiCAR), which will gradually take legal effect in the European Union from June 30, 2024, a crypto whitepaper must be prepared in the event of a public offering of crypto assets as well as when applying for their admission to trading on a trading platform. The first three parts of this series dealt with the content requirements for a whitepaper in the case of an offering or admission in general of crypto assets as defined by MiCAR, as well as of asset-referenced tokens and e-money tokens. The fourth part dealt with marketing communications in the event of the sale of tokens and their consistency in content with the MiCAR whitepaper to be published. This fifth part analyzes how and where to publish a MiCAR whitepaper after it has been created and how to deal with important information that occurs after the whitepaper has been published. All crypto assets relevant under MiCAR for which a whitepaper is to be prepared are addressed.

                  MiCAR Whitepaper is to be Published on the Provider’s Website

                  Providers of crypto assets other than asset-referenced tokens or e-money tokens and persons applying for admission of such crypto assets to trading must publish the MiCAR whitepaper on their publicly accessible website. In terms of timing, this must in any case be done prior to the start date of the public offering of the relevant crypto assets or on the start date of the admission. The MiCAR whitepaper must remain available on the website of the providers or persons seeking admission to trading for as long as the crypto assets are held by the public. The published whitepaper for crypto assets other than asset-referenced tokens or e-money tokens must be consistent with the version submitted to the competent authority and any amended version. An issuer of an asset-referenced token must also publish on its website the MiCAR whitepaper and any amended version. The whitepaper must be made publicly available by the start date of the public offering of the asset-referenced token or the start date of the admission of these tokens to trading. This whitepaper must remain published as long as the asset-referenced tokens are held by the public. Prior to the public offering of an e-money token in the European Union or the application for admission of the e-money token to trading, the issuer of the e-money token must also publish the whitepaper on its website.

                  Supplementary Obligation and Other Publication Obligations in Addition to the MiCAR Whitepaper

                  Also to be published on the provider’s website is the result of the public offering in the case of an offering of crypto assets other than asset-referenced tokens or e-money tokens. If there is a subscription period, the result must be published within 20 working days after the end of the subscription period. In the case that the offer is open-ended, the number of crypto asset units in circulation must be published on the website on an ongoing basis, at least monthly. Issuers of asset-referenced tokens must publish on their website, in addition to the relevant MiCAR whitepaper, in a publicly and easily accessible place, as soon as possible, a brief, clear, precise and transparent summary of the audit report and the complete and unedited audit report relating to the asset reserve. For the duration of the public offering or for the duration of the admission of the crypto asset to trading, providers of crypto assets other than asset-referenced tokens or e-money tokens, persons applying for admission of such crypto assets to trading, or operators of a trading platform for crypto assets must keep the MiCAR whitepaper up to date. This means that the whitepaper must be amended whenever a new material factor, material error, or material inaccuracy has occurred that may affect the valuation of the crypto assets. The same applies to an e-money token whitepaper. Exactly what constitutes a circumstance that affects the value of the token is not specified in MiCAR and is therefore likely to be a matter of case-by-case determination. Issuers of asset-referenced tokens must notify the competent authority of any intended change to their business model that occurs after the granting of approval or after the approval of the MiCAR whitepaper and is likely to significantly influence the purchase decision of a holder or a potential holder of asset-referenced tokens. In this case, the whitepaper must be updated accordingly.

                  Attorney Dr. Konrad Uhink

                  I.  https://fin-law.de

                  E. info@fin-law.de

                  The lawyer responsible for providing advice on MiCAR whitepaper creation in our law firm is Attorney Dr. Konrad Uhink.

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                    Sep 25, 2023

                    Europe goes Crypto (Part XIX) – Crypto Portfolio Management via DeFi Protocols under MiCAR

                    The European Markets in Crypto Assets Regulation (MiCAR) will require crypto asset service providers (CASP) to obtain a MiCAR license from their competent authority prior to operating their business from December 30, 2024. CASP based in Germany will then require a BaFin license. One of the crypto services regulated by MiCAR is portfolio management of crypto assets. It occurs when a crypto asset service provider manages portfolios of its clients on a client-by-client basis in the sense that it is allowed to make investment decisions regarding crypto assets with its own discretion according to guidelines agreed upon with the clients. In order to obtain the required BaFin license, the crypto portfolio management provider will have to fulfill the general requirements for the issuance of a MiCAR license. In this respect, it will be required to possess a proper business organization, to have professionally suitable and reliable business managers, and to be able to demonstrate the regulatory initial capital of at least 50,000 euros. Additionally, however, it will also be required to meet specific conditions with regard to the way in which it conducts its business. This includes, in particular, a careful examination of the suitability of recommended crypto assets for the respective customer. In doing so, the crypto portfolio manager must take into account the clients’ investment objectives as well as their risk tolerance, financial circumstances and ability to bear losses. In addition, crypto portfolio managers must not accept monetary benefits from third parties in the course of crypto portfolio management that could influence the investment decisions to be made for the client. Furthermore, crypto portfolio managers for crypto assets are obliged to inform their clients in detail about all crypto-specific risks.

                    Interaction with DeFi Protocols and Smart Contracts by Crypto Portfolio Managers

                    In connection with the regulatory requirements to be fulfilled by crypto portfolio managers, it is interesting to see to what extent they are allowed by regulatory law to interact with protocols that actually function in a decentralized manner. For example, if a crypto portfolio manager were to implement investment decisions for its client in each case in an automated manner via decentralized smart contracts from the DeFi sector, it would first have to be clarified whether this activity could still be classified as a “managing activity” or whether it would require, as an execution activity, that the MiCAR license granted to the crypto portfolio manager additionally covers executions for clients. Crypto portfolio management is, for all intents and purposes, advisory business. This is already evident from the fact that the specific regulatory obligations of crypto service providers for crypto advisory and crypto portfolio management are jointly regulated in Article 81 MiCAR. Traditionally, and apparently also according to the idea of the MiCAR drafter, a procurement of crypto assets as part of the management activity should regularly be carried out through third-party providers licensed to exchange crypto assets for other crypto assets. These are contracted by the crypto portfolio manager to deliver or take delivery of certain crypto assets with effect for its client’s wallet. However, such third-party providers would not exist in DeFi. In the absence of European interpretative guidance currently being prepared by EBA and ESMA, BaFin has not yet commented on how broadly the definition of crypto portfolio management should be interpreted. In the spirit of a cautious approach, crypto portfolio managers should therefore assume for the time being that execution activities are not covered. Crypto portfolio managers would therefore be on the safe side if they involve an intermediary crypto service provider authorized to execute crypto transactions for the client.

                    Execution Service Providers with MiCAR License Also Face Problems with DeFi Trades via Liquidity Pools

                    While the regulatory problems may be solved for the crypto portfolio manager by involving an execution service provider with a MiCAR license to swap crypto assets for other crypto assets, they arise again in a different guise for the execution service provider. This is because the latter is also subject to numerous regulatory obligations in the performance of its activities. Insofar as a crypto asset service provider acquires crypto assets for a customer via an interaction with a DeFi protocol, it will also be required to fulfill obligations related to money laundering law. Since clarification of the transaction partner is regularly impossible in the case of an automated liquidity pool without a tangible operator, this may result in the executing crypto asset service provider being unable to execute a corresponding transaction. Particularly problematic are cases in which the procurement of crypto assets is to be carried out systematically via DeFi protocols and decentralized liquidity pools. In these cases, the execution service provider will usually never be able to clarify the origin of the crypto assets he receives from the liquidity pool. The development of an adequate and appropriate administrative practice on this topic should therefore be carried out as soon as possible by the responsible ESMA and EBA, as well as on a national level by BaFin. Crypto asset service providers can accelerate this process by clarifying corresponding business models with BaFin in advance.

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

                    I.  https://fin-law.de

                    E. info@fin-law.de

                    The competent lawyer for questions regarding crypto asset services and BaFin license under MiCAR in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

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                      Sep 18, 2023

                      The MiCAR Whitepaper (Part IV) – How to market a Crypto Whitepaper?

                      The Markets in Crypto Assets Regulation (MiCAR), which will gradually take legal effect in the European Union from June 30, 2024, stipulates that a crypto whitepaper must be prepared in the event of a public offering of crypto assets or in order to apply for their admission to trading on a trading platform. In the first three parts of the series, we looked at the content requirements for a whitepaper in the case of an offering or admission of crypto assets other than asset-referenced tokens or e-money tokens, as well as asset-referenced tokens and e-money tokens. In this part, we analyze the impact of a MiCAR whitepaper on the marketing of the corresponding crypto assets. MiCAR uses the term marketing communications in this context. However, MiCAR unfortunately does not provide an official definition of the term. The recitals indicate that marketing messages and marketing materials that are also broadcast via new channels such as social media platforms are to be covered. The information contained in marketing messages must be fair, clear and not misleading. The principle applies that the information in promotional messages and marketing materials should be consistent with the information provided in a crypto whitepaper.

                      Marketing Communications Must Comply with MiCAR Requirements

                      The principle that marketing communications must be consistent with the information in the MiCAR whitepaper can, of course, only apply if such a whitepaper must be prepared. But regardless of the existence of a crypto whitepaper, marketing communications must be clearly recognizable as such. If a MiCAR whitepaper has been created, the marketing materials must refer to it and provide further information on the provider or the person applying for admission of the crypto assets to trading or the operator of the trading platform for the crypto assets in question. In particular, an Internet address, a telephone number and an e-mail address for contacting must be provided. For crypto assets other than asset-referenced tokens or e-money tokens, a note shall be included stating that the marketing communications have not been approved by any authority. Where the preparation of a crypto whitepaper is required, marketing communications shall not be disseminated prior to the publication of the crypto whitepaper. Market soundings, however, are permitted even before that. Regulators in the member states where the marketing communications are distributed have the authority to verify that the communications comply with MiCAR. If a significant new factor, significant error or significant inaccuracy has occurred that may affect the valuation of crypto assets, the marketing communications must be updated, as must the MiCAR whitepaper.

                      The Transmission and Publication of Marketing Communications

                      The provider of crypto assets, persons applying for admission of such crypto assets to trading or operators of trading platforms for such crypto assets must provide the MiCAR whitepaper to the competent authority of their home Member State. In the case of marketing communications, this shall only be done upon request of the supervisory authorities. The providers of the crypto assets and persons applying for admission to trading must publish their marketing communications on their publicly accessible website in a timely manner and in any event prior to the start date of the public offering of the crypto assets or the start date of the admission. The marketing communications must remain available on the website of the providers or persons applying for admission to trading for as long as the crypto assets are held by the public. If marketing communications have been submitted to regulators, the marketing communications must be consistent with the version submitted to the competent authority and any amended version.

                      Attorney Dr. Konrad Uhink

                      I.  https://fin-law.de

                      E. info@fin-law.de

                      The lawyer responsible for providing advice on MiCAR whitepaper creation in our law firm is Attorney Dr. Konrad Uhink.

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                        Sep 11, 2023

                        Europe goes Crypto (Part XVII) – The MiCAR Acquisition Approval Procedure

                        The crypto industry is currently in a consolidation phase. With increasing regulation and an increasingly harsh general economic environment, some market leaders of the past are running into difficulties, while new players and institutions from the traditional financial world are positioning themselves for succession. Established financial institutions in particular are currently looking for ways to position themselves for the crypto market and the field of tokenization. One obvious opportunity here is the acquisition of an existing crypto asset service provider. The acquisition of a crypto asset service provider is regulated in Germany under the German Banking Act (KWG) and the German Investment Firm Act (WpIG) and is subject to a mandatory and successful acquisition approval procedure at BaFin, in which the authority must approve the acquisition by the interested acquirer. Also in case of an increase of a shareholding in a crypto asset service provider resulting in a shareholding of more than 20% or 50%, an acquisition approval procedure at BaFin has to be conducted. In the future, there will be EU-wide regulations in the Markets in CryptoAssets Regulation (MiCAR) for shareholdings in a crypto asset service provider. But how will the acquisition approval procedure work under MiCAR?

                        BaFin Must Evaluate Planned Acquisition in MiCAR Acquisition Approval Proceedings

                        The regulations on the takeover of a crypto asset service provider regulated under MiCAR will come into force on December 30, 2024. At that point, the competent supervisory authority – in Germany, BaFin – will have to assess whether there are any reasons opposing the takeover in an acquisition approval procedure prior to any planned takeover. The acquisition approval procedure under MiCAR will have to be conducted if the interested acquirer would hold a stake of more than 20, 30 or 50% of the capital or voting rights in the crypto asset service provider after a planned takeover. The acquisition approval procedure is initiated by the interested acquirer, who is obliged to notify BaFin in writing. However, the seller of shares is also subject to a notification obligation if his shareholding in the capital or voting rights would fall below the threshold of 10, 20, 30 or 50% as a result of the planned sale. BaFin will have 60 working days from receipt of acknowledgement to assess the planned acquisition. In the MiCAR acquisition approval procedure, BaFin may consult the Financial Intelligence Unit (FIU) responsible for processing suspicious money laundering reports to verify whether the planned acquisition could raise concerns under money laundering prevention law.

                        What Information Must be Submitted to BaFin for an Acquisition Approval Procedure Pursuant to MiCAR?

                        MiCAR does not explicitly regulate which specific information and documentation have to be submitted to BaFin within the scope of the acquisition approval procedure under MiCAR. Rather, MiCAR obliges ESMA to develop regulatory technical standards in which the documents and evidence to be submitted are to be specified. It can be assumed that, in addition to the requirement for CVs, certificates of good conduct and other evidence documenting the reliability of the acquirer and the persons behind it, descriptions of the acquirer’s current and future business activities and information on its financial situation will also have to be submitted. In any case, however, in accordance with the provisions of MiCAR, it will be necessary for the competent authority to verify in the aquisition approval procedure whether the interested acquirer is reliable and whether the persons actually managing the crypto asset service provider’s business are professionally suitable. The subject of the examination will be, in particular, whether the crypto asset service provider is likely to be able to fulfill all regulatory obligations under MiCAR even after the proposed acquisition. In cases where there is sufficient suspicion that the planned takeover is for money laundering or terrorist financing purposes, the competent authority will not be able to approve the takeover.

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

                        I.  https://fin-law.de

                        E. info@fin-law.de

                        The competent lawyer for questions regarding crypto asset services and BaFin license under MiCAR in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

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