Crypto Assets and Regulation

Regulation of Crypto Assets – BaFin License for Crypto Custody and Crypto Trading

The regulation of crypto assets and business models based thereon has evolved significantly over the past ten years, both at national and European level. While BaFin, as the competent supervisory authority in Germany, classified bitcoins and comparable crypto assets as units of account and thus as financial instruments shortly after their emergence in 2009, the German legislator followed suit not before 2020 when implementing the 5th Anti Money Laundering Directive and introduced a legal definition of the term crypto asset in the German Banking Act (KWG). Business models with or in relation to crypto assets, such as crypto custody or crypto trading for customers in particular have since been subject to a legal licensing requirement in Germany. Crypto asset service providers must therefore successfully undergo a licensing procedure to obtain a BaFin license before commencing business. Alternatively, in individual cases, cooperation with a financial service provider that has the required BaFin license may be considered.

MiCAR Regulation Creates Uniform Rules for Crypto Asset Service Providers in the EU

MiCAR stands for “Markets in Crypto Assets Regulation” and creates uniform rules for crypto asset service providers for the entire crypto market in the EU. Professional providers of crypto services such as crypto custody, crypto trading or other services in relation to crypto assets operating in the EU must undergo a licensing procedure in accordance with MiCAR before commencing their business operations. BaFin is the competent authority for the licensing procedure in Germany. In order to obtain a BaFin license under MiCAR, crypto asset service providers must have, among other things, sufficient minimum regulatory capital, fit and proper directors, a professional business organization and good compliance within the company. The MiCAR license also allows crypto asset service providers to passport their services. They can therefore offer their crypto services throughout the EU with a MiCAR license, not just in their home state. MiCAR is thus the regulatory foundation of the European crypto market.

Crypto Securities Registry Requires BaFin License According to German Law

With the introduction of crypto securities as a specific type of electronic securities in the German Electronic Securities Act (eWpG), the German legislator also created a new financial service that only providers with a corresponding BaFin license are allowed to offer. If crypto securities are issued, the issuer must engage a crypto securities registrar with a BaFin license to record the essential data on the issue in a crypto securities register. Crypto securities registrars are only regulated under German law and therefore must go through a licensing process under national law to obtain BaFin licensing. MiCAR, meanwhile, does not recognize crypto securities registry management as a regulated crypto service.

The competent lawyer for questions regarding Crypto Assets and Regulation in our law firm is Attorney Lutz Auffenberg, LL.M (London).