Crypto Custody

Crypto Custody as Regulated Financial Service with MiCAR and KWG License Requirement

Crypto custody is one of the most important services offered by service providers in the crypto market. From a technical point of view, crypto assets can in principle be held in custody by users themselves, so that the involvement of a service provider for crypto custody is not absolutely necessary. However, there are numerous constellations, particularly in the professional handling of crypto assets, in which third-party custody can make sense. For example, many crypto exchange platforms offer their customers custody of the crypto assets tradable on the platform in addition to crypto trading. In Germany, crypto custody has already been regulated as a financial service in the KWG since the implementation of the fifth Money Laundering Directive in January 2020. Since the end of 2024, the Markets in Crypto Assets Regulation (MiCAR) applies at the European level and thus also for the German legal area. This provides for the regulation of crypto custody as a crypto asset service. Crypto custodians therefore require a MiCAR license for their business operations throughout the EU.

Qualified Crypto Custody in Accordance with the KWG

Since crypto custody has been uniformly regulated in the European Union in the form of a European regulation since MiCAR came into force, there remained no room for crypto custody as a financial service in the KWG in its version applicable until then. However, the German legislature decided not to completely abolish crypto custody under German supervisory law, but instead transferred that part of the former crypto custody under the KWG to the new financial service of qualified crypto custody. Since then, pursuant to Section 1 (1a) sentence 2 no. 6 KWG, this has been deemed to include the custody and administration of cryptographic instruments for others or the safeguarding of private cryptographic keys for others that serve to access cryptographic instruments or crypto securities, crypto fund shares, or domestic and foreign securities that can be transferred and stored using distributed ledger technology or similar technology. The new financial service of qualified crypto custody was intended to ensure that crypto custodians already licensed under the German KWG would be able to continue to perform the activities permitted to them on the basis of the scope of their license valid until MiCAR came into force.

Content and Duration of the Licensing Procedures

In the authorization procedures for crypto custodians BaFin attaches great importance to the best possible IT security. BaFin’s focus is understandable, especially since crypto custody is usually a purely digitally offered financial service and if the private keys to the customers’ crypto assets are lost, they are irretrievably lost. In addition to flawless IT security, BaFin expects crypto custodians, like all supervised institutions, to have, among other things, a proper business organization, professionally fit and proper business directors, and sufficient capital resources to operate a functioning business model. As a general rule, diligent application preparation by a specialist lawyer can significantly shorten the duration of the licensing procedure. Licensing procedures for the acquisition of a BaFin license for crypto custody business should therefore be professionally planned and prepared under assistance of a law firm with sufficient experience in this field.

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