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Category: blog EN

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.

Attorney Dr. Konrad Uhink

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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.

      Attorney Dr. Konrad Uhink

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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.

              Attorney Dr. Konrad Uhink

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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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                  Apr 03, 2023

                  Europe goes Crypto (Part X) – The Crypto Exchange Under MiCAR

                  Operators of crypto exchanges will be defined as crypto asset service providers in the European Union as of the Markets in Crypto Assets Regulation (MiCAR) coming into effect and must obtain a license for their business operations from the competent supervisory authority. In Germany, applications for MiCAR licenses will have to be submitted to BaFin. As crypto asset service providers, the operators will be required to have a minimum capital of 150,000 euros and well-qualified and reliable directors. They will also have to provide a professional business organization that is adequate in relation to the size of their company. This includes, among other things, the establishment of functioning business processes, internal procedures and control mechanisms, especially in the areas of risk management and IT security, money laundering prevention and emergency planning. But beyond these minimum requirements applicable to all crypto asset service providers, crypto exchange operators will have to comply with additional regulatory obligations specifically tailored to the operation of a crypto exchange platform.

                  What Are the Specific Obligations of Crypto Exchanges under MiCAR?

                  MiCAR requires crypto asset exchange operators to comply with specific regulatory obligations. In particular, MiCAR provides strict requirements for the authorization of crypto assets for trading on crypto exchanges. In this context, crypto asset service providers will have to establish operating rules in a clear and understandable manner, which will have to be updated constantly. Operators of crypto exchanges will furthermore not be allowed to trade on their platforms for their own account. Matched principle trading on the other hand will only be permitted if the operator does so with the knowledge and consent of the customers concerned. To the extent that crypto exchange operators identify cases or attempts of market abuse on their trading venues, they must inform the competent authorities. MiCAR will also introduce strict obligations for crypto exchange operators in terms of trading transparency. For example, the prices, volumes and timing of transactions that have taken place must be published in real time. Operators must also ensure that this data is publicly available free of charge and without barriers for two years. Finally, MiCAR imposes deadlines on crypto exchange operators in the field of final settlement of crypto transactions. On-chain transactions must be settled no later than 24 hours after execution on the crypto exchange, while off-chain transactions are subject to a deadline of the closing of the relevant trading day.

                  Listing on a Crypto Exchange Available Only for MiCAR Compliant Crypto Assets

                  Crypto exchange operators will not have unrestricted discretion as to which crypto assets can be authorized for trading under MiCAR. For example, the regulation prohibits the listing of crypto assets for which no white paper has been prepared and published, where this would have been required under MiCAR. Further, operators of crypto exchanges will be required to conduct successful due diligence before authorizing a crypto asset for trading. In this respect, they must ensure that the crypto asset is compatible with the crypto exchange’s operating rules and also clarify the crypto asset’s suitability. As part of this review, platform operators must also investigate whether there could be links to illegal or fraudulent activities. In doing so, they are to include the technical design as well as the experience, references and reputation of the issuer and the development team. Crypto assets that have a built-in anonymization feature may not be authorized for trading on crypto exchanges under MiCAR. An exception applies to those crypto assets that increase the degree of anonymity, where the crypto exchange operator can identify the bearers as well as the transaction history. In this respect, only privacy coins that are acquired and traded on the crypto exchange itself by identified customers should be eligible.

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

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                    Mar 27, 2023

                    MAR and Insider Information – EU Intends to Provide More Legal Clarity

                    In its proposal for a regulation to increase the attractiveness of public capital markets in the EU for companies and to facilitate access to funds for small and medium-sized enterprises, the EU-Commission intends to make it easier for issuers to publish insider information. The proposed amendments to the Market Abuse Regulation (MAR) will not restrict the fundamentally broad definition of insider information itself. However, the scope of the obligation to disclose insider information is to be limited and more legal transparency is to be achieved as to which information must be disclosed. The planned amendments are intended to create legal clarity as to which information must be disclosed in the case of processes, which occur in stages. A process is considered to occur in stages if it has to pass through several decision-making stages. The question then arises as to how these individual intermediate steps are to be treated under insider law.

                    Facilitation of the Publication Requirement for Processes which Occur in Stages

                    According to the current version of the MAR, an issuer must immediately disclose to the public insider information directly concerning the issuer. The concept of inside information also covers intermediate steps in processes that occur in stages. An intermediate step in such a process is considered to be insider information if it in itself meets the criteria for inside information. The proposed amendments do not affect the basic approach that intermediate steps can also be considered insider information. Rather, the obligation to publish an interim step is to be restricted. The intended amendments are to stipulate that in the case of a prolonged transaction, the duty to disclose does not apply specifically to the intermediate steps of this transaction. Issuers are to be required to disclose only the information that relates to the event with which a process that occured in stages is to be completed. Since the principle remains that intermediate steps can also constitute independent information, the prohibition of insider trading with such information remains in place.

                    Tokenized Financial Instruments May Entail Disclosure Obligations Under MAR

                    MAR’s publication obligation applies to issuers who have applied for or been authorized to have their financial instruments admitted to trading on a regulated market. Financial instruments listed on a multilateral trading facility (MTF) or organized trading facility (OTF) may also give grounds for publication obligations for an issuer. This is the case if the issuer has received a license to trade on the MTF or OTF or has applied for an admission to trading on such a trading system for its financial instruments.  The term “financial instrument” is defined by the MiFID2 Directive. This lists in its annex which instruments are considered financial instruments within the meaning of MiFID2. Transferable securities can be named as the most important MiFID2 financial instrument. The DLT Pilot Regime Regulation explicitly clarified in the MiFID2 Directive that instruments issued by means of distributed ledger technology can also qualify as financial instruments. Accordingly, securitization in a certificate is not necessary. Therefore, if instruments issued by means of distributed ledger technology are listed on a regulated market or on an MTF at the issuer’s initiative, e.g. within the scope of the DLT pilot regime, the issuer may be subject to the corresponding disclosure obligations under MAR.

                    Atty. Dr. Konrad Uhink

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                      Mar 20, 2023

                      Europe goes Crypto (Part (IX) – Crypto Custody Under MiCAR

                      In Germany, crypto custody is already an activity requiring a license under the German Banking Act (KWG). With the Markets in Crypto Assets Regulation (MiCAR) coming into effect, it will also constitute a regulated crypto asset service at the European level in close future, which may only be provided with a previously obtained BaFin license. However, the licensing requirement itself is not the only regulatory obligation of future crypto custodians under MiCAR. Rather, the new regulation provides for a number of special obligations for crypto custodians that they will have to fulfill both as part of the MiCAR licensing process to be completed and in their subsequent ongoing business operations. Specifically, MiCAR imposes legal requirements on the content of crypto custody agreements, the segregation of client crypto assets from the crypto asset service provider’s own holdings, sub-custody relationships and internal procedures to ensure the proper business organization of crypto custodians.

                      Requirements Regarding the Content of Crypto Custody Agreements

                      MiCAR also strengthens the private rights of crypto custody clients vis-à-vis crypto custodians. Thus, MiCAR establishes some minimum requirements that must be regulated in crypto custody contracts. In addition to the identities of the contracting parties, a description of the custody services, the definition of the means of communication for the contractual relationship, the regulation regarding fees as well as the applicable law, custody contracts according to MiCAR must in the future also contain explanations regarding the security systems and the custody policy of the provider. Every crypto custodian must have a custody policy. It is intended to outline the internal procedures and processes to secure clients’ crypto assets to minimize risks resulting from fraud, cyberattacks, or negligence. Crypto custody agreements will be required by MiCAR to include a summary of the custody policy. With respect to the liability of crypto custodians, MiCAR does allow for an aggregate limitation of liability to the equivalent value of lost crypto assets at the time of loss. However, it will not be possible to exclude liability for acts of ordinary negligence. Furthermore, crypto custodians will be obliged to keep a constantly updated inventory register of the crypto assets held in custody for each customer. In the event of, for example, airdrops or fork events, the customers will also be legally entitled to any new crypto assets created as a result. Crypto custodians will also have to inform their customers in advance about such events and, if necessary, obtain instructions.

                      Strict Requirements for Sub-Custody

                      MiCAR imposes particularly strict obligations on crypto custodians with regard to the use of sub-custodians. If crypto custodians wish to have crypto assets entrusted to them by clients held in custody by a third-party provider, they must disclose this to their client in any case. Sub-custody without prior information of the customer will therefore always be inadmissible. Furthermore, crypto custodians shall only be allowed to use crypto custodians as sub-custodians under MiCAR who themselves hold a license under MiCAR to provide crypto custody services. The use of sub-custodians that either do not possess a license at all or only possess a license from an authority outside the European Economic Area (EEA) for crypto custody is therefore not possible under MiCAR. In this respect, MiCAR will ensure that third-party custody of crypto assets for clients in Europe will only be possible under the application of MiCAR regulations.

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

                      I.  https://fin-law.de

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