Author: Dr. Frederic Peine
BaFin Declines to Act Against PFOFs (For Now)
By Dr. Frederic Peine | Renate Prinz on 18. April, 2024
Posted In Banking Law
The Federal Financial Supervisory Authority (BaFin) will, for now, not take action against payments by third parties to investment firms (Wertpapierfirmen) for forwarding client orders (known as payment for order flow, or PFOF).
In an announcement dated 22 March 2024 BaFin stated that, should investment firms violate the PFOF prohibition with domestic clients, it will refrain from taking measures or imposing sanctions until the completion of the national legislative process in Germany. The PFOF prohibition, as contained in the amended version of the Regulation (EU) No. 600/2014 of the European Parliament and of the Council (MiFIR), stipulates that investment firms acting on behalf of retail clients and professional clients may not receive any fees, commissions or non-monetary benefits from third parties for the execution of orders from these clients at a particular execution venue (Article 39a(1)(1) MiFIR).
This ban on kickbacks is based on the principle that investment firms working for their clients should strive to obtain the best possible price and the greatest chance of execution for the transactions they carry out. Therefore, investment firms should select the execution venue or counterparty for the execution of their clients’ transactions exclusively from the perspective of achieving the best possible result for their clients. In the case of receiving kickbacks, there is a risk that these client interests are at least not fully taken into account.
EU member states can deviate from the PFOF prohibition until 30 June 2026 (Article 39a(2) MiFIR). Germany, following the announcement by the German Federal Ministry of Finance (Bundesministerium der Finanzen), intends to make use of this option as it pertains to securities orders from clients residing or established in Germany. The corresponding exemption provision is expected to be included in Section 138a of the German Securities Trading Act (WpHG) and is currently in the legislative process (BT-Drucksache 20/10280).
Nevertheless, supervised investment firms must continue to adhere to the PFOF prohibition. However, until the new regulation in Section 138a WpHG comes into effect, BaFin will not penalize any violations, provided that the requirements of the new Section 138a WpHG are met.
BaFin’s supervisory communication is available at this link.
Bitcoin Halving Is Just Around the Corner
By Dr. Frederic Peine on 18. April, 2024
Posted In Crypto Regulation
After the approval of cryptocurrency exchange-traded funds (ETFs) in the United States, another fundamental event for the crypto industry is on the horizon: the expected bitcoin halving in mid-April 2024.
The approval of so-called bitcoin spot ETFs by the US Securities and Exchange Commission (SEC) in early January 2024 led to significant cash inflows into the crypto market, specifically targeting the market for bitcoin spot ETFs. Between March 4 and March 13, 2024, approximately US$3.8 billion was invested into the newly approved bitcoin ETFs, resulting in bitcoin reaching a new record high of around US$ 73,750.
Now, the industry eagerly awaits the so-called bitcoin halving. This is a halving, i.e. a reduction, in the reward that bitcoin miners receive for creating a new block. The halving is an inherent feature programmed into the underlying blockchain of bitcoins, intentionally designed to create shortage. In simple terms, each block in the blockchain contains a summary of all bitcoin transactions. Miners continuously verify the accuracy and completeness of these blocks. Once all transactions within a block are verified, the miner receives a specific number of bitcoins as a block reward. Currently, the block reward is 6.25 bitcoins per validated block. After the halving, this reward will decrease to 3.125 bitcoins per validated block.
Bitcoins are programmed to have a maximum limit of approximately 21 million coins. Every 210,000 blocks – i.e., after verification and creation of 210,000 blocks – a new halving event is automatically and immutably triggered in the source code. On average, a new block is created (mined) approximately every 10 minutes, resulting in a halving event roughly every four years.
The three previous bitcoin halvings, in 2012, 2016 and 2020, have consistently been accompanied by significant price increases for bitcoin. It is widely expected that the upcoming halving will follow a similar pattern. History has shown that the cryptocurrency market in general, and the bitcoin market in particular, is exceptionally volatile – similar to the rapid price movements following SEC approval – often driven by irrational herd behavior. Ultimately, all signs point to the upcoming halving being no exception.
From a regulatory perspective, there is currently no legal framework at either the European or national level to prevent such substantial price fluctuations. In the EU (including Germany), the crypto market is regulated by the European MiCAR (Markets in Crypto Assets Regulation – Regulation (EU) 2023/1114 of the European Parliament and of the Council of May 31, 2023) and, selectively for crypto assets such as security tokens, by MiFID II. MiCAR, which also applies to currency tokens such as bitcoin, will come into full effect on December 31, 2024. For issuers and providers of crypto assets, MiCAR imposes disclosure and business organization requirements, as well as specific licensing and ongoing government supervision. Similarly, crypto service providers offering services such as operating trading platforms, managing crypto portfolios, providing advice on crypto assets and placing crypto assets are also subject to licensing requirements under MiCAR.
The upcoming halving is not affected by this newly established legal framework, and the price fluctuations in the crypto market will not be prevented by the stricter and – at least EU-wide – uniform regulation of crypto assets.
SEC approval for crypto ETF
By Dr. Frederic Peine on 11. January, 2024
Posted In Crypto Regulation
Yesterday, on January 10, 2024, the US Securities and Exchange Commission (“SEC”) made the long-awaited decision by the crypto scene to allow the listing and distribution of exchange-traded funds (“ETFs”) that track the price of the cryptocurrency Bitcoin, so-called Bitcoin spot ETFs. Specifically, 11 of these Bitcoin spot ETFs were approved by SEC, including those from major market players such as BlackRock, Ark Investments and Fidelity. The approval decision was preceded by a false report shortly before the SEC decision, which once again led to considerable market distortions. The approval took a year-long coordination process between the parties involved and the SEC, including a legal dispute in the USA last year regarding the approval of a Bitcoin spot ETF, in which the SEC was ordered by the court to review its legal assessment of Bitcoin spot ETFs. With the approval decision, the SEC has now complied with this, but has also pointed out, that Bitcoin is speculative and volatile and that Bitcoin has already been used to finance illegal activities in the past. The SEC is still not a supporter of Bitcoin. Nevertheless, the general expectation in the market is now a significant increase in crypto investments and a correspondingly strong rise in market capitalization, as institutional investors are now also more likely to have access to crypto investments (via ETFs).
The Bitcoin Spot ETFs approved by the SEC are not initially available in Germany. The approval only applies to the USA. It remains to be seen what impact the SEC decision will have on the German regulatory practice of the German supervisory authority (BaFin) in the future. Under the current legal situation, a comparable structure is not possible for ETFs launched and domiciled in Germany, as here in Germany ETFs are prohibited from investing in just one asset.
You can find the link here.
