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Category: blog EN

Jul 10, 2023

Crowdfunding and ECSP License – Is the Tied Agent Model Reaching its Limits?

In Germany, BaFin is currently issuing the first licenses under Regulation (EU) 2020/1503 on European Crowdfunding Service Providers (ECSP Regulation). Via a crowdfunding service, issuers can issue securities with an issue value of no more than EUR 5 million over a period of twelve months in accordance with the ECSP Regulation when using a publicly accessible, internet-based electronic information system operated or managed by a regulated crowdfunding service provider (crowdfunding platform). Currently, there are various internet platform operators that act as tied agents to broker security tokens or crypto securities under the liability umbrella of a securities institution licensed for investment brokerage or contract brokerage. Most of the security tokens or crypto securities offered in this way are offered by means of a securities information sheet or basic information sheet, provided that the issue volume does not exceed the amount of EUR 8 million in individual cases. Now that the ECSP Regulation applies throughout the EU, the question arises as to whether internet platform operators acting as tied agents may continue to offer security tokens or crypto securities with issue volumes of up to EUR 5 million or whether a BaFin license as a crowdfunding service provider will be mandatory.

Public Offering of Security Tokens and Crypto Securities up to 5 million Euros in Case of Crowdfunding Only with ECSP License

In its scope of application, the ECSP Regulation takes precedence over the national regulations of the German Banking Act (KWG) and the German Investment Firm Act (WpIG). As a consequence, the German model of tied agents cannot apply to issues of security tokens or crypto securities within the scope of the ECSP Regulation. Only in the case of an issuance that leads to a total volume of more than 5 million euros calculated over a period of twelve months, the regulations of the KWG or WpIG apply. Only then is it possible for companies to broker the corresponding financial products as tied agents. This understanding of the ECSP Regulation with regard to the relationship to national regulations has already been confirmed by ESMA in its Q&A. However, according to EMSA, it is possible to use tied agents to promote the services of the swarm finance service provider. Such activity would then be subject to national law.

Tied Agents May Need to Adapt Their Business Model

Tied agents currently brokering security tokens or crypto securities via an internet platform face the risk that they will have to stop brokering small-volume offers and will not be able to offer them without an ECSP license in the future. In order to continue to be able to broker small-volume offerings in the future, tied agents operating via internet platforms must first apply for and obtain an ECSP license from BaFin. However, since the scope of the ECSP Regulation only applies to public offerings of up to EUR 5 million, tied agents operating via Internet platforms will still be able to support issues of more than EUR 5 million without an ECSP license from BaFin. Should the same issuer conduct another small-volume issue within twelve months, the brokerage of such an issue under the liability umbrella should also be possible, as the offer threshold of the ECSP Regulation is always based on a period of twelve months.

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    Jul 03, 2023

    Europe goes Crypto (Part XIII) – MiCAR License for Order Execution on Crypto Assets

    The Markets in Crypto Assets Regulation (MiCAR) will subject crypto service providers in the European Union to numerous licensing and compliance requirements. The regulations relevant to crypto service providers in this respect will take legal effect on 30 December 2024, following a transition period of 18 months after they have already been published in the Official Journal of the European Union. One of the crypto services regulated by MiCAR in the future is the execution of orders for crypto assets for clients. Without further explanation, the scope of the provision is conceivably broad. According to the definition of crypto services contained in MiCAR, the regulated execution of orders for crypto assets on behalf of clients shall be deemed to occur if the crypto service provider concludes agreements for the purchase or sale of one or more crypto assets on behalf of its client. Also to be included under MiCAR is the subscription of crypto assets for clients that are to be offered to the public for the first time or are to be authorized for regulated trading. It is not mandatory that the agreement to be concluded is merely brokered by the crypto service provider between the client and a third party. Rather, the crypto service provider executing the order may itself also be the counterparty of its customer, for example if it acquires crypto assets in its own name on a crypto exchange for the account of its customer.

    MiCAR License Requirements for Order Performing Crypto Service Providers

    Crypto service providers executing orders for crypto assets for clients must also meet the general minimum regulatory requirements under MiCAR in order to be able to obtain the required MiCAR license from BaFin. In addition to an appropriate and professional business organization and professionally suitable as well as reliable directors, which all crypto service providers must have according to MiCAR, a regulatory initial capital of at least 50,000 euros must be shown. However, MiCAR also imposes specific regulatory compliance requirements on order-executing crypto service providers. In particular, crypto service providers executing orders for crypto assets for clients are required by MiCAR regulations to implement and comply at all times with a best execution policy. In this respect, it is necessary that the crypto service providers, within the scope of their service provision, always try to achieve the best possible result for their clients in terms of price, costs and speed of order execution. The obligation to provide best execution also relates to the handling of the order execution itself as well as all other factors relevant in the individual case. Only in the case of specific instructions of the customer to the crypto service provider the duty of best execution exists only to a limited extent.

    Information Obligations of Order Executing Crypto Service Providers vis-à-vis Clients

    Crypto service providers executing orders for crypto assets on behalf of clients must, in accordance with MiCAR regulations, always inform their clients about the principles of order execution established in their business process. The information must be provided clearly, unambiguously and in a manner that is understandable to the client. In this respect, order executing crypto service providers must explain how they specifically execute client orders. Crypto service providers must also inform their customers accordingly in the event of significant changes to their execution policies. Under MiCAR, crypto service providers must continuously monitor the effectiveness of their internal order execution arrangements and their order execution policies in order to identify and, if necessary, remedy any deficiencies. Order-executing crypto service providers must obtain explicit consent to the execution policy from their customers prior to providing the service. Should the customer fail to give its consent, the crypto service provider may not execute orders for the customer.

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

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      Jun 26, 2023

      Artificial Intelligence in the Financial Industry (Part III) – AI in Risk Management

      In the first two parts of our blog series “Artificial Intelligence in the Financial Industry”, we discussed the topic of artificial intelligence (AI) or machine learning (ML) in securities trading and asset management. However, artificial intelligence can also be used in bank risk management. For example, the law requires banks to establish an appropriate and effective risk management system to ensure their risk-bearing capacity on an ongoing basis.  This essentially involves identifying market, credit, insolvency or fraud risks in connection with trading decisions or lending, for example, and minimizing these risks. It is here that AI or ML can help identify new patterns and thereby contribute to risk mitigation. However, financial regulators do not approve individual algorithms. Rather, they examine the individual processes on a risk-oriented basis and on an ad hoc basis in their specific application in individual cases. However, BaFin has defined overall principles for the use of AI, which must be taken into account by financial institutions.

      Management Remains Responsible for Artificial Intelligence and Its Deployment

      Regardless of how sophisticated artificial intelligence is, the management remains ultimately responsible for the use of AI. Among other things, this means that the management must have an adequate technical understanding. If algorithm-based decisions are made, then risk management must also be adapted to these circumstances. This means, among other things, that the probability of damage occurring due to incorrect decisions by the algorithm is analyzed and the results are documented. The same applies to the extent of potential damage. Furthermore, a superordinate framework is to be set up that specifically addresses the algorithm-based decision-making processes and takes their interdependence into account. If applications are sourced in from external parties, the management is also responsible for ensuring that effective outsourcing management is established.

      No Bias Shall Be Generated and Legal Requirements Shall Be Adhered to

      When using AI, the systematic distortion of results (bias) must be avoided. Business decisions must not be based on bias. This should also eliminate the risk of reputational damage if, for example, individual customer groups are disadvantaged due to the bias. Companies are therefore required to use data of sufficient quality and quantity. In the development phase, financial institutions must therefore develop a data strategy, for example, that ensures the permanent provision of data. In doing so, current data protection regulations must be observed. To ensure that the algorithms and models can be checked both internally and externally, there is a documentation obligation for financial institutions.

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        Jun 19, 2023

        Crypto Custody According to MiCAR and KWG – What Are the Differences for Crypto Asset Service Providers?

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

        Additional Regulatory Requirements for Crypto Custodians Imposed by MiCAR

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

        Crypto Custody of Security Token not Possible under MiCAR

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

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

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          Jun 12, 2023

          Artificial Intelligence in the Financial Industry (Part II) – AI in Asset Management

          In the first part of our blog series “Artificial Intelligence in the Financial Industry”, we discussed the topic of artificial intelligence (AI) or machine learning (ML) in securities trading. However, artificial intelligence is also used in asset management to varying degrees. Automated asset management is regularly referred to as robo advice. This is characterized by the fact that the investor makes his investment decision completely or predominantly based on an automatically generated suggestion, for example via a website or app. The solution proposed to the customer is based on an algorithmic analysis of the investor’s data, such as his investment goals, financial situation or financial knowledge. Unlike automated securities trading, there are no special legal regulations tailored to automated asset management. BaFin therefore examines on a case-by-case basis whether the robo advice provider provides regulated financial or securities services that are subject to a licensing requirement under the German Banking Act (KWG) or the German Investment Firms Act (WpIG) and thus require the prior obtaining of a BaFin license.

          No Universally Valid Qualification of Robo Advice Possible

          Should artificial intelligence be used in the context of asset management, it must be examined on a case-by-case basis whether an element of authorization under the KWG or the WpIG is fulfilled. The robo advice provider may, for example, provide investment advice or conduct financial portfolio management, depending on the specific nature of the design of its service. If the AI is used to make personal recommendations taking into account the investor’s personal circumstances, this may constitute investment advice requiring a BaFin license. This may be the case, for example, if the provider obtains information from the investor on his risk profile and financial background in order to recommend a specific investment in a financial instrument on this information basis via its algorithm. In contrast, a provider engages in financial portfolio management if he invests the investor’s assets in financial instruments and has his own scope for decision-making. This can also be automated if, for example, an algorithm designs an investment strategy or a model portfolio on the basis of a catalog of questions and then either an asset manager implements it or the trades are also automatically executed by algorithm. However, investment advice and financial portfolio management should only be mentioned here as examples. Depending on the specific use of the AI, other financial or securities services may be relevant in individual cases.

          BaFin License and Compliance with General and Specific Rules of Conduct Required

          Anyone who uses artificial intelligence as a service provider and thereby provides financial or securities services requires a BaFin license for these activities. In addition, the provider of the corresponding services must observe the general rules of conduct under the German Securities Trading Act. In the case of robo advice in the form of investment advice or financial portfolio management, BaFin has again defined specific rules of conduct. These include explaining to the customer to what extent persons are involved and whether and how contact can be established with an employee. It must be made clear to the investor that the information he provides has a direct impact on the suitability of the investment decisions. Furthermore, he must be informed in a comprehensible form on which sources of information the investment decisions proposed by the robo advisor are based. It must also be explained to the customer how and when the information provided by him must be updated.

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            Jun 05, 2023

            Crypto Assets and Money Laundering – New Version of the Travel of Crypto Assets Regulation Has Come into Force

            On its last days, the grand coalition gave the German crypto industry a parting gift in the fall of 2021 with the national Travel of Crypto Assets regulation. Since the ordinance came into force, crypto service providers regulated under the German Banking Act (KWG) or the German Investment Firms Act (WpIG) have been required to collect, store and transmit information on crypto transactions conducted by them or with their assistance to any crypto service provider involved on the counterparty side of the transaction in order to prevent money laundering. If crypto service providers are not involved on both sides of the transaction, involved crypto service providers must nevertheless obtain and store data on the transaction, such as names and addresses as well as blockchain addresses of the parties to the transaction, and also take risk-appropriate measures. In particular, they are obliged to check the plausibility of crypto transactions. However, the new regulation did not spark joy. Rather, vigorous criticism of the national Travel of Crypto Assets regulation was quickly voiced. The main points of criticism were that at the time of entry into force, there was already a proposal from the EU Commission to revise the EU Travel of Funds regulation, so that the national Travel of Crypto Assets regulation could only be a transitional regulation from the outset and, secondly, that the obligations arising from the regulation exclusively affect German market participants, which makes it considerably more difficult to fulfill the obligations, particularly in the case of international crypto asset transfers.

            New Version of the National Travel of Crypto Assets Regulation with New Deadlines for Exemptions for Crypto Service Providers

            The Federal Ministry of Finance has created a new version of the national Travel of Crypto Assets regulation with effect from May 27, 2023. The only relevant new provision here is to be found in the transitional provisions of the ordinance. There, it is now ordered that crypto service providers already active on May 27 2023 and prior to that who, through no fault of their own, are unable to fulfill the obligations arising from the ordinance, or are unable to do so completely, must notify BaFin of this by June 30, 2023. Corresponding notifications must then be substantiated to BaFin by July 31, 2023 at the latest. The justification must contain information on the reason for the impediment and describe what measures the crypto service provider will take to ensure that the obligations under the national Travel of Crypto Assets regulation are fulfilled as quickly as possible. In addition, it must be outlined what other risk-adequate measures will be taken during the non-compliance with the obligations under the regulation in order to minimize the risk of money laundering in crypto transactions. If the justification is sufficiently plausible, crypto service providers are initially exempt from the obligations of the national Travel of Crypto Assets regulation. If the justification is not sufficient, BaFin will notify the crypto service provider no later than two months after the receipt of the justification. For companies that do not offer regulated crypto services until after May 27, 2023, the notification, along with the justification, must be made upon commencement of business. Crypto service providers that already submitted a justified notification for exemption under the original national Travel of Crypto Assets regulation do not have to submit a new notification.

            EU Transfer of Funds Regulation to Directly Supersede National Crypto Securities Transfer Regulation

            The exemption from the obligations under the National Travel of Crypto Assets Regulation will apply for a maximum period of twelve months, which may, however, be extended by another twelve months if the crypto service provider can explain why, contrary to its original plans, it was unable to remove the impediment to fulfilling the obligations after all. In any case, however, the national Travel of Crypto Assets Regulation will cease to apply on the day on which the new version of the EU Travel of Funds Regulation enters into force. The national regulation will thus be immediately replaced by the new EU Travel of Funds Regulation. As the new version has already been adopted by the EU Parliament and is expected to enter into force soon, unlike initial applications for exemption, extensions of the exemption under the national Travel of Crypto Assets Regulation will in all likelihood be very rare. This will probably only come into consideration in cases where crypto service providers assumed in their justification to BaFin that they would be able to remove the impediment within a few weeks.

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

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              May 30, 2023

              Artificial Intelligence in the Financial Industry (Part I) – AI in Securities Trading

               has also already published several statements on the topics of AI and ML. In a series of blog posts, we intend to address currently known fields of application and briefly present the current state of regulation. The term artificial intelligence cannot be universally defined in this context. Rather, it encompasses a whole range of areas, from the simple further development of a program’s ability to analyze data and make it usable, to the partially or completely autonomous development of novel solutions. The potential fields of application are numerous. AI can be used, for example, for the compliance function of banks or other financial service providers. Artificial intelligence can also be used in asset management and lending. One of the best-known areas of application for algorithms and AI to date is probably securities trading.

              Algorithmic Trading

              Algorithmic trading is characterized by the fact that the inputs or changes of trading orders are based on AI. Depending on the design of the AI, it may be able to learn from the market and recognize patterns and then act accordingly and automatically. The decision-making process is generally much faster than that of a human trader. The increased trading speeds can in turn result in specific risks, such as for example flash crashes. German and European legislators have therefore issued specific regulations for algorithmic trading. Should an investment services company engage in trading in financial instruments in which a computer algorithm automatically determines the individual order parameters without merely forwarding orders, then the company must notify BaFin that it engages in algorithmic trading. Furthermore, in addition to the general regulatory obligations, the company is also subject to specific control and recording obligations.

              Specific Control and Recording Obligations for Algorithmic Trading

              Prior to the introduction or comprehensive update of an algorithmic trading system, it must be authorized on a trading venue. In order for this to occur, tests must be run to verify that the algorithm has no negative impact on market activity and behaves as intended. The securities trading firm must establish effective pre-trade controls such as price bands, maximum order values, maximum order volumes, notification limits, and market and credit risk limits. Real-time monitoring must be in place to prevent market disruptions and financial threats. A so-called “kill function” must also be provided. With this function, it should be possible to immediately cancel any order that has not yet been executed. The ex-post control to be established shall ensure that all trading activities are carried out in compliance with the legal requirements, in particular the Market Abuse Regulation.

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                May 22, 2023

                Europe goes Crypto (Part XII) – The Exchange of Crypto Assets Under MiCAR

                In the future, the Markets in Crypto Assets Regulation (MiCAR) will subject the exchange of crypto assets for fiat money as well as the exchange of crypto assets for other crypto assets to a licensing requirement. Crypto service providers who want to offer exchange services in connection with crypto assets must then first obtain a corresponding MiCAR license. In order to obtain such a license, crypto service providers must, in particular, have professionally suitable directors, a proper business organization, and be able to provide an initial regulatory capital of at least 125,000 euros. In addition to these basic requirements for a license, MiCAR also requires crypto exchange providers to meet even more minimum requirements and obligations. For example, crypto service providers offering exchange services will be required to clearly define what type of clients they accept. In addition, they will be required to publish their exchange prices and execute orders from their customers at the prices published at the time the order is finally placed. Crypto exchange providers will also be required to publish information about the transactions they conclude on an ongoing basis.

                Who Qualifies as a Crypto Exchange Provider Under MiCAR?

                According to MiCAR, an exchange of crypto assets for other crypto assets or for fiat money is only a crypto exchange subject to authorization if it is carried out using the provider’s own capital. Thus, it does not include commission agents or portfolio managers who use their clients’ capital to conduct exchanges. The use of the provider’s own capital is an unwritten characteristic of crypto exchange, which does not result from the actual text of the regulation, but from the recitals preceding it. In this context, the provider’s own capital must be used either in the form of crypto assets or fiat money. Therefore, if, for example, a token that does not qualify under MiCAR’s definition of crypto assets, such as a Non Fungible Token (NFT) or a tokenized transferable security covered by MiFID regulation, is exchanged for fiat money, this exchange transaction cannot be classified as a crypto exchange under MiCAR. Nevertheless, it is of course possible that the transaction is subject to authorization for other reasons. In Germany, for example, the exchange of tokenized securities may be regulated as proprietary trading under the German Banking Act (KWG) or the German Investment Firm Act (WpIG).

                Specific Compliance Obligations of Crypto Exchange Providers

                Crypto service providers that want to offer the exchange of crypto assets for other crypto assets or for fiat money must decide, as part of a non-discriminatory business policy, what type of customers they accept and what conditions these customers must fulfill. Accordingly, they must make a binding decision as to whether they want to provide services to consumers, commercial customers, or both types of customers, for example. In addition, it must be specified which additional conditions the customers must fulfill in order to be onboarded as customers. It is possible, for example, to specify only regulated companies as customers. On the other hand, it is not possible to impose discriminatory restrictions on potential new customers on the basis of their nationality, age or political orientation, for example. In the settlement of exchange transactions, it must also be comprehensible to customers at all times at which specific price crypto assets are offered. Order execution may only take place at the price published at the time of the final exchange order, whereby the crypto service provider must inform its customers when an exchange order is considered final within the framework of its business model. Any caps in terms of a maximum value that can be exchanged must also be disclosed by crypto exchange providers. Finally, crypto exchange providers are required to provide post-trade transparency under MiCAR. They must constantly publish information about the trades they have concluded, the transaction volumes and the transaction prices.

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

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                  May 15, 2023

                  Crowdfunding According to ECSP Regulation – Is a Securities Prospectus required?

                  The restriction of issuer liability proposed in the draft bill of the Future Financing Act could boost the issuance of securities using a crowdfunding platform in accordance with the European Crowdfunding Service Provider Regulation (ECSP). In its scope, the ECSP Regulation offers new possibilities when it comes to the content design of securities. For example, the regulation takes precedence over the national regulations regarding deposit-taking in the German Banking Act (KWG). This opens up the possibility for issuers to issue more attractive, non-subordinated financial instruments to investors. Especially in the case of security token offerings, this can lead to higher economical attractivity of the investment products offered. Investment products to be offered on crowdfunding platforms regulated by the ECSP Regulation may furthermore be marketed cross-border. The required sales documentation must then comply exclusively with the legal requirements of the ECSP Regulation. It can, in principle, be used for the public offering in all Member States of the European Union if the requirements of the ECSP for cross-border offerings are met.

                  Key Investment Information Sheet (KIIS) Instead of Securities Prospectus – No Approval by BaFin Required

                  Instead of a securities information sheet (WIB) or securities prospectus, the issuer must prepare a key investment information sheet (KIIS) when issuing securities under the ECSP Regulation. In terms of timing, this provides the advantage that the KIIS does not require approval by BaFin. The crowdfunding service provider operating the crowdfunding platform must provide investors with the KIIS prepared by the issuer. The ECSP Regulation therefore stipulates the obligation for the crowdfunding service provider to establish and apply adequate procedures to verify the completeness, accuracy and clarity of the information contained in the key investment information sheet. Should the crowdfunding service provider identify omissions, errors or inaccuracies in the key investment information sheet that may have a material impact on the expected return on investment, it must notify the issuer. It is then the issuer’s responsibility to revise and amend the KIIS accordingly. Should the issuer not comply with his obligation to adjust the KIIS, the crowdfunding service provider may cancel the offering.

                  Guidance on Precise Requirements Supports Issuers and Crowdfunding Service Providers

                  In order to enable issuers and crowdfunding service providers to fulfill their obligations with regard to the key investment information document, the European legislator provided detailed requirements for the structure and content of a key investment information document. This must be provided on a separate, permanent data carrier that is clearly distinguishable from marketing communications. In addition, it may not exceed six DIN A4 pages in printed form. In an accompanying ordinance, precise specifications were included as to how a key investment information sheet is to be structured. According to this, standard warnings must first be provided before an overview of the crowdfunding offer is given. This must be followed by information on the issuer and the main features of the crowdfunding process. This in turn must be followed by explanations on the conditions for the capital procurement. Subsequently, issuer-related and project-related risk factors must be included in the key investment information sheet. Here the European legislator again specifies which risk factors are to be taken into consideration. According to this, information relevant to investment decisions must be provided about the securities offered. The clear specifications help the parties involved to include all legally required information in the KIIS and thus make a valuable contribution to minimizing liability risks.

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                    May 08, 2023

                    E-Money Token as Stablecoin on Crypto Exchanges – MiCAR Creates New Regulatory Framework

                    The final version of MiCAR was adopted by the European Parliament on April 20, 2023. Compared to the supposedly final text version, which was leaked in October 2022, there were still considerable changes. The final text must now be formally approved by the Council of the European Union before it can ultimately be published in the official journal of the EU. MiCAR will then enter into force twenty days after publication. However, initially only provisions will have direct legal effect which are directed at ESMA, EBA and the ECB, requiring them to develop regulatory technical standards and guidelines. The provisions addressed to market participants will only gradually take legal effect. Titles III and IV of MiCAR, which set rules for asset-referenced tokens and for e-money tokens, will apply already twelve months after MiCAR is promulgated in the official journal of the EU. Providers that operate or want to implement business models with asset-referenced tokens or e-money tokens therefore have only one year to prepare for the new regulatory framework. Specifically affected are, among others, providers of stablecoins and crypto exchanges on which stablecoins can be traded.

                    Strong Need for Stablecoins in Professional Crypto Trading on the Markets

                    For professional crypto traders, the use of Stablecoins is associated with significant advantages. Stablecoins allow a quick and straightforward way to hedge against crypto asset price risks. For example, by investing in an e-money token pegged to the value of the euro or U.S. dollar, traders can secure value directly on a crypto exchange in the short term without having to exchange for it in fiat currency. Pooling of crypto investments can also be done without having to exchange into legal tender. However, according to MiCAR, e-money tokens will only be allowed to be publicly offered by a supervised credit institution or e-money institution in about a year. The trading authorization for e-money tokens on a crypto exchange may then also only be applied for by a credit institution, an e-money institution or a person appointed by such an institution. In this regard, under MiCAR, all crypto tokens meeting the definition of e-money tokens will generally be required to be treated as e-money within the meaning of the Second E-Money Directive (EMD2), regardless of whether the token fully meets the EMD2 definition of e-money.

                    What Should Be Considered When Issuing E-Money Tokens According to MiCAR?

                    E-money tokens may only be issued at face value against payment of the equivalent in fiat money under MiCAR. In addition, e-money issuers may not offer interest in connection with e-money tokens. E-money token bearers must be entitled to a re-exchange right against the e-money token issuer at any time. If they make use of their re-exchange right, the e-money token issuer may not charge a fee for the re-exchange. Money can be earned from the issuance of e-money tokens to the extent that e-money issuers may invest a maximum of 70% of the funds received in exchange for e-money tokens in secure, low-risk and liquid financial instruments. In contrast, at least 30% must be held in segregated bank accounts. In any case, issuers of e-money tokens must inform the supervisory authority responsible for them – i.e. BaFin in Germany – 40 days in advance of the public offering or the application for admission to trading. Furthermore, issuers must prepare and publish a MiCAR whitepaper prior to the launch of their e-money tokens and make it available to BaFin. BaFin aaproval is not required. Nevertheless, the content requirements for the MiCAR whitepaper must be strictly adhered to, as issuers of e-money tokens will be liable to token holders without fault in the event of a non-published or incorrect whitepaper.

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

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                      Apr 24, 2023

                      Crowdfunding under ECSP Regulation – Liability Limitations for Issuers in Sight

                      Issuers of transferable securities with an aggregate consideration of not more than 5 million euros over a 12-month period may issue securities under the European Crowdfunding Service Provider Regulation (ECSP) using a publicly accessible, internet-based electronic information system operated or managed by a crowdfunding service provider (crowdfunding platform). Tokenized financial instruments, if they qualify as securities, may also be issued through a crowdfunding platform. Securitization in the form of a certificate, which ensures the marketability of financial instruments in the case of traditional securities, is not required for the classification of a token as a security. For a financial instrument to be classified as a security, it only needs to be transferable, tradable on the financial market and be associated with rights similar to securities. In its scope of application, the ECSP Regulation takes precedence over the provisions of the German Securities Prospectus Act (WpPG), which is why a securities information sheet (WIB) or securities prospectus does not have to be prepared for a public offering of securities made via a swarm financing platform.

                      Investment Information Document According to ECSP Regulation Required for Issuance via Crowdfunding Platform

                      The primary obligation of an issuer when issuing securities via a crowdfunding platform is to prepare an investment information document. This must be provided on a separate, permanent data carrier that is clearly distinguishable from marketing communications. In addition, it must not exceed six pages in DIN A4 format in printed form. Approval by BaFin is not required. The ECSP Regulation imposes an obligation on the swarm finance service provider to establish and apply adequate procedures to verify the completeness, accuracy and clarity of the information contained in the basic investment information document. If the crowdfunding service provider also offers its services in member states other than Germany, securities may be offered on the basis of the investment information document in all member states of the EU. The prerequisite for this is that the basic investment information document is made available to investors in the official language of the respective Member State or in a language accepted by the competent authorities of that Member State.

                      Issuer’s Liability for Basic Investment Information Document to be Limited

                      According to the current liability regime of the German Securities Trading Act (WpHG), the issuer and the members of its management bodies responsible for the basic investment information document are liable for misleading or inaccurate information in the basic investment information document or for important information that is not provided but is necessary to support investors in their decision whether to invest in a crowdfunding project. Under current law, even simple negligence is sufficient. Anyone who fails to exercise due care in the preparation of the basic investment information document and its contents is deemed to have acted negligently. However, the recently published draft bill on the Future Financing Act of the Federal Ministry of Finance now provides for the standard of liability to be raised to gross negligence. It is also envisaged that the direct liability of management bodies for a basic investment information document will be removed from the WpHG. Essentially, only the issuer itself would then be liable for incorrect or missing investment information documents. This should make the possibility of crowdfunding much more attractive for providers of investment products in the future.

                      FIN LAW

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                        Apr 17, 2023

                        Europe goes Crypto (Part XI) – The Investment Advice on Crypto Assets According to MiCAR

                        In Germany, investment advice on crypto assets has already been regulated for many years and may only be provided on the basis of a BaFin license under the German Banking Act (KWG) or the German Investment Firm Act (WpIG). Once the new EU Regulation on Markets in Crypto Assets (MiCAR) comes into force, a permit for advisory services relating to crypto assets will eventually be required throughout the European Union. Crypto asset service providers intending to advise their clients on investment opportunities in crypto assets will then have to comply with the general regulatory requirements of MiCAR and – to the extent they operate in Germany – possess a corresponding BaFin license. In addition to professionally suitable and reliable business managers, a proper business organization and a regulatory minimum capital of 50,000 euros, crypto investment advisors must fulfill numerous specific obligations when providing their advisory services. Specifically, these are far-reaching duties to provide information and clarification to the client. Additionally, crypto investment advisors will have to collect detailed information on the investor profile of their clients prior to providing advice.

                        Strict Transparency Obligations and Kickback Prohibition for Investment Advice under MiCAR

                        In the future, investment advice on crypto assets is to be provided in Europe only in compliance with strict transparency standards. Specifically crypto asset service providers must disclose to their clients whether they provide their advice independently. In this context, MiCAR provides for a general ban on provider commissions (so-called kickbacks). Crypto investment advisors will thus be prohibited from receiving commissions or other payments or valuable benefits from providers of crypto assets or third actors other than the client for the provision of their advisory services. Crypto asset service providers must also disclose whether they provide advice based on a general analysis or only on selected crypto assets of specific issuers or providers. They must also declare whether they have any economic relations with issuers or providers of crypto assets. Crypto investment advisors will also have to explain to their clients what costs and fees, including advisory fees, will be incurred by the client in the event of an investment. With respect to risk disclosure, MiCAR requires advising crypto asset service providers to explicitly disclose to clients certain risks associated with crypto assets. These include risks of value fluctuation and loss, liquidity risks, and where relevant, risks related to the transferability of crypto assets. They shall also point out to clients that – if applicable as a matter of principle, no deposit protection schemes exist for crypto assets.

                        Investment Advice by Crypto Asset Service Providers Only with Detailed Customer Profile

                        Prior to providing advisory services related to investments in crypto assets, crypto asset service providers under MiCAR will have to thoroughly screen their clients and create investor profiles. They are required to inquire about the client’s specific situation and, in particular, their financial circumstances. In addition, they must determine the customer’s risk propensity and determine how high the customer’s risk tolerance and loss-bearing capacity are. Only on basis of this information are crypto investment advisors able to assess which specific crypto assets might be suitable for the specific customer and may fit into his portfolio. According to MiCAR, the information collected in the course of the client review must be reviewed and, if necessary, updated at the latest after two years in the case of advisory contracts that are intended to last for a longer period of time – especially in the context of portfolio management. Crypto asset service providers advising clients on investments in crypto assets must also, under MiCAR, provide a detailed advisory record on a permanent data carrier after each advisory service provided. The advisory protocol must, on the one hand, present the expectations and needs of the client prior to the advice and, on the other hand, the specific recommendation given.

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

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