Crypto Regulation

Crypto funds in Germany – What depositaries and asset management companies (probably) will need to consider

By Dr. Cornelius Hille on 28. March, 2025

The entry into force of the Future Financing Act (Zukunftsfinanzierungsgesetz) already marked the birth of “crypto funds” in Germany in 2023 by enabling direct investment in crypto-assets for mutual funds (within the meaning of Sections 221 and 261 KAGB). With the Financial Market Digitisation Act (Finanzmarktdigitalisierungsgesetz), which entered into force at the end of 2024, this idea has now been completed considering the background of MiCAR with a reference to its concept of crypto-assets.

Since an investment in crypto-assets is associated with new, specific risks, BaFin has put the first draft of a circular on the Obligations of depositaries and capital management companies for investment funds investing in crypto-assets (the “Circular“) for consultation (06/25). It is intended to set a basic framework of minimum regulatory requirements for direct investments in crypto-assets by funds and is therefore highly relevant in practice. As a circular, it does not have the quality of a real legal norm, but it reflects the administrative practice applied by BaFin.

Obligations of the depositary

In principle, the obligations of the depositary that already result from formal black-letter law and the Depositary Circular (Verwahrstellenrundschreiben) continue to apply and are to be supplemented by the Circular as a matter of priority, if necessary.

In addition, according to the Circular, BaFin also requires:

Obligations prior to taking on a mandate. In this respect – in view of the high volatility of crypto-assets – processes must be created in advance that enable the depositary to record and continuously assess the market risk in an informed manner.
Sufficient material and human resources. In principle, this affects all levels and in particular the professional qualifications of the managing directors. Here, BaFin recognises that previous practical experience in particular with regard to such a young asset class is usually only available to a limited extent. It therefore enables a build-up based on theoretical knowledge over a period of 6 months.
Appropriate organizational precautions and mandatory technical precautions. This includes IT systems and processes and is particularly true if the depositary holds private keys to the crypto-assets. Then a special “crypto concept” is needed.

In addition, as with other assets, a distinction must be made depending on whether the crypto-assets are depositable within the meaning of Sections 72 or 81 KAGB. Decisive in this regard will be the individual case. In this respect, it is astonishing that BaFin applies a broad term “crypto-asset” in its Circular and does not exclude MiFID financial instruments within the meaning of Article 2 (4) MiCAR. MiCAR consistently distinguishes between “crypto-assets” and (possibly also issued on a DLT basis MiFID-) “financial instruments”, to which MiCAR does not apply accordingly. BaFin’s statements on its understanding of “crypto tokens”, referred to in the Circular and most of which date from 2022 and have long since become obsolete, are unhelpful.

The same applies with regard to the remarks on the custody of (BaFin) crypto-assets, because a clear distinction would clarify that DLT-based MiFID financial instruments are MiFID financial instruments and not MiCAR crypto-assets. Where the KAGB and the AIFMD refer to the concept of MiFID financial instruments for the assumption of custody, there would have been no need to discuss this.

Finally, BaFin points out that additional authorisations may be required, in particular for any provision of the crypto custody business in relation to MiCAR crypto-assets.

If the result of the individual case examination is that the (MiCAR) crypto-assets are not depositable, the depositary would accordingly be subject to the obligations for non-depositable assets under section 81 (1) no. 2 KAGB (or section 72 (1) no. 2 KAGB). These include an obligation to determine ownership or a corresponding legal position, the examination and assurance of the allocation and access possibilities of the crypto-asset (including any rights of third parties), the recording in a continuously maintained inventory. In addition, it may be contractually necessary to ensure that the depositary has access to the crypto custodian’s systems.

In addition, the general control obligations of the depositary (cf. §§ 76 and 83 KAGB) would apply. In particular, it must examine whether the acquisition of crypto-assets is compatible with the investment strategy and restrictions and whether the acquisition transactions are in line with the market.

Obligations of the capital management company

The capital management company (“KVG“) must take into account the same risks as the depositary, so that similar consequences follow with regard to a direct acquisition of crypto-assets.

First, an extension of the license, which includes the direct acquisition of crypto-assets, should be applied for, if necessary, because previous licenses may be limited to other assets. In this respect, BaFin clarifies here that the catalogue of assets is static in its understanding and that changes are not covered by a previous license. In this respect, it should also be noted that custody by the KVG itself would not be possible.

In the KVG, too, sufficient resources and knowledge and experience of the staff must be ensured, if necessary by employing experienced external experts. The managing directors must also have sufficient professional qualifications, whereby the same period of six months applies as for managing directors of the depositary.

In addition, the processes of the KVG must be adapted accordingly and a New Product Process must be carried out prior to the first investment in crypto-assets. Above all, this would have to map the associated possibly increased risks and their sound management, as well as provide specifications for best execution and market fairness control and valuation.

Circular as a guardrail

Both depositaries and asset management companies, especially if they already have established processes for other financial instruments, should be able to create functioning and supervisory structures for direct investments based on the requirements of the Circular as a guideline and taking into account the specific risks of crypto-assets.

If you want to offer crypto funds in Germany, you should first check whether the license to do so is sufficient. Particular attention should then be paid to the (technical) resources and know-how of the employees – and to the final version in which the draft will be published after the consultation has been concluded.

MiCAR in Practice: BaFin Issues Guidance on Crypto Services

By Annabelle Rau | Renate Prinz on 10. January, 2025

Posted In Crypto Regulation

At the beginning of the year, the German Federal Financial Supervisory Authority (“BaFin“) released a guidance document on crypto-asset services under the new EU Regulation on Markets in Crypto-Assets (“MiCAR“). This regulation has been directly applicable to crypto service providers in the EU since December 30, 2024.

The guidance provides clarifications on the licensing requirements for crypto services and the obligations for providers. Key points include:

Definitions of Crypto Services: BaFin specifies which crypto services are subject to licensing and connects these to the well-established investment services under MiFID II.
Licensing of Crypto-Asset Service Providers: The guidance includes detailed information on when licensing requirements apply, and which entities are eligible for authorization.
Notification Requirement: Entities with existing licenses (e.g., credit or investment institutions) may provide certain crypto services without obtaining additional authorization but must notify BaFin in accordance with MiCAR requirements. The guidance outlines the specific requirements for this notification procedure.

The guidance serves as a practical tool for crypto businesses to navigate and comply with the new regulatory framework established under MiCAR securely and efficiently.

ZuFinG II – The Next Step Towards Strengthening Germany as a Financial Hub?

By Annabelle Rau on 10. October, 2024

Posted In Banking Law, Crypto Regulation, Financial Services, Payment Services

Following the initial steps with the Future Financing Act (“ZuFinG I“), the Federal Ministry of Finance presented the draft of the Second Future Financing Act (“ZuFinG II-E” and “Draft Bill“) on 27 August 2024. The Draft Bill aims to further develop the German financial market and revise some of the existing regulations. The primary focus is on facilitating access to the capital markets and relieving financial actors from excessive bureaucracy.

New Regulations for Payment Service Providers Regarding Customer Funds

Payment service providers are required to safeguard customer funds they receive according to the methods outlined in the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG). This can be done, for example, through an escrow account with a credit institution, as well as through insurance or a guarantee. ZuFinG II-E now introduces an additional provision, allowing customer funds to be deposited with the Deutsche Bundesbank or any other central bank of an EU member state. This gives payment service providers another option for safeguarding customer funds compliant with insolvency law.

To protect customers, the Draft Bill further proposes explicit regulations, whereby the received funds will be legally protected if they are held in a segregated account. Until now, this protection was based only on general, non-codified rules for escrow accounts. Payment service providers will likely need to review and potentially adapt their processes in light of the new regulations. However, these amendments also provide greater flexibility by offering an additional method for safeguarding funds. Furthermore, customer protection is enhanced through the explicit provisions, leading to increased legal certainty for payment service providers as well.

Loosening Employment Protection for High Earners in the Financial Sector

The conditions for high earners in the financial sector are set to become more flexible. ZuFinG II-E proposes loosening employment protection for individuals with very high incomes in the financial sector. This includes employees whose annual fixed remuneration exceeds three times the contribution assessment threshold for general pension insurance (Section 159 of the German Social Code VI) and who are not managing directors, plant managers or similar senior executives.

Specifically, high earners who are risk-takers will be treated similarly to executive employees in terms of employment protection. This means, for example, that the employer may submit an application for termination of the employment agreement in return for severance pay, which does not require any substantiation.

Such a regulation already exists under current rules for risk-takers at significant credit institutions. The limitation to significant institutions will now be lifted and extended to include securities institutions, asset management companies, and insurance companies, among others.

Further Measures to Reduce Bureaucracy: Less Effort, More Efficiency

Additionally, ZuFinG II-E seeks to further promote the reduction of bureaucracy in financial supervision through the following measures:

Simplifying cross-border services: The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – “BaFin“) will no longer be required to substantively review the notification of cross-border services provided by German investment firms. Instead, BaFin will simply forward the notifications to the competent authority in the host member state without a detailed examination.
Higher threshold for large exposures: The reporting threshold for large exposures and loans will be raised from EUR 1 million to EUR 2 million.
Facilitations for crowdfunding: An amendment to the German Asset Investment Act (Vermögensanlagegesetz – VermAnlG) will extend the prospectus exemption for crowdfunding offerings to also cover offers of cooperative shares.
Removal of the list for crypto securities:
- Under ZuFinG I, the requirement to publish entries of crypto securities in the German Federal Gazette was abolished to reduce the bureaucratic burden and costs for issuers.
- According to the Draft Bill, the public list of crypto securities maintained by BaFin will also be abolished to save costs and reduce the effort required by BaFin to maintain the list and by issuers to submit notifications.
Removal of the Employee and Complaints Register (Mitarbeiter- und Beschwerderegisters – “MBR”) at BaFin:
- The obligation for institutions to notify BaFin of their investment advisors, sales representatives, and compliance officers, as well as to report complaints to the MBR, will be removed, which will reduce the administrative burden on both institutions and BaFin.
- The obligation for institutions to only employ competent and reliable staff for the relevant tasks remains unchanged and is unaffected by the abolition of the MBR.

Looking Ahead: What’s Next?

The Draft Bill is still in the legislative process and is expected to undergo several amendments. However, financial sector participants can already consider how they might adapt their internal processes to comply with the upcoming regulations. In particular, the proposed bureaucratic relief and enhanced options for safeguarding customer funds present attractive opportunities for more efficient and flexible business practices.

Dubai and Abu Dhabi Firms Involved in Crypto: Regulatory Pitfalls to Avoid When Dealing with EU or UK Clients

By Renate Prinz on 26. September, 2024

Posted In Crypto Regulation

Co-Authors: Vlad Maly | Michal Chajdukowski

Continuing developments in the crypto regulatory sphere have significantly increased the attractiveness of Dubai and Abu Dhabi for crypto firms with global ambitions. Firms should remember, however, that they may also need to comply with the EU or UK crypto regulatory regimes, especially when engaging with clients or investors from these jurisdictions.

In this article, we summarise recent crypto developments in the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), and discuss the pitfalls crypto firms should avoid when dealing with EU or UK clients.

Recent Crypto Developments in Dubai and Abu Dhabi

Both DIFC and ADGM have historically been very active in the crypto sphere.

Most recently, on 13 March 2024, DIFC released its DIFC Law No. 2 of 2024 (Digital Assets Law) providing for a comprehensive set of rules relating to crypto-assets. Among other things, the Digital Assets Law defined a ‘Digital Asset’ as an asset which:

“(a) exists as a notional quantitative unit manifested through the combination of the active operation of software by a network of participants and network-created data;

(b) exists independently of any particular person and legal system; and

(c) is not duplicable and the use or consumption of the thing by one person or a specific group of persons necessarily prejudices the use or consumption of the thing by one or more other persons”.

In response to diverging case law on how crypto-assets should be qualified, the Digital Assets Law clarified that they should be considered as intangible property that is neither a thing in possession nor a thing in action. Specific rules have been introduced relating to the change of control, the transfer of legal title, the exercise of rights upon insolvency and the recovery of crypto-assets.

On the ADGM side, on 18 December 2023, its Financial Services Regulatory Authority released updated Guidance on Regulation of Virtual Asset Activities. Among other things, the Guidance sets out the legal framework for crypto firms willing to operate as multilateral trading facilities for crypto-assets, which have recently proven to be increasingly popular amongst investors.

Providing Crypto Services to EU clients

Dubai and Abu Dhabi-based firms willing to engage with clients based in the EU should carefully assess the applicable regulatory regime. Depending on the type of crypto products and services they offer, firms may fall within the scope of EU Regulation 2023/1114 on markets in crypto-assets (MiCA) or under the regime of EU Directive 2014/65/EU (MiFID II).

Under MiCA, non-EU firms providing crypto products or services to EU clients will require an authorisation unless such products or services are provided at the own initiative of the EU client. As clarified by the European Securities and Markets Authority (ESMA), this so-called “reverse solicitation” exemption is, however, “very narrowly framed and as such must be regarded as the exception; and it cannot be assumed, nor exploited to circumvent MiCA.” Indeed, the reverse solicitation rule under the MiCA regime is much stricter than in other regulations so far. In addition, ESMA reiterated that (in practice usually used) standardised contractual clauses or disclaimers in which clients declare that the products or services are provided at their own initiative are not relevant for assessing whether the activity falls within the scope of exemption or not.

For the purposes of MiCA, “solicitation” includes the promotion, advertisement or offer of crypto-assets or services by any means, including social media platforms or mobile applications as well as “promotions, advertisements and offers of a general nature and addressed to the public (with a broad and large reach) such as, for instance, brand advertisements by way of sponsorship deals.” This also includes the promotion of a crypto product or service by a third party, which may also be attributed to the provider and accordingly requires a license. Additionally, the reverse solicitation exception also no longer applies to pre-existing customers of the crypto service provider. This means that the (also individual) offering of products and services to pre-existing EU customers requires permission, as does the offering of services to the market in general.

Learn more by watching our webinar, Are You Ready for MiCAR?

Providing Crypto Services to UK clients

Crypto firms should assess the applicable regulatory regime even more carefully when engaging with UK clients, given that they will unlikely be able to rely on the “reverse solicitation” exemption.

Under the Financial Services and Markets Act 2000, non-UK firms may not provide regulated services to clients based in the UK unless they are authorised, or rely on an exclusion. Although the UK Government is still working on how to incorporate crypto-assets into the existing UK financial regulatory regime (noting that derivatives referencing crypto-assets are already covered by specific rules), it has indicated that the Overseas Persons Exclusion (which is the UK equivalent of the “reverse solicitation” exemption) will not be available to non-UK firms providing crypto services to UK clients.

Non-UK firms may not engage in the marketing of investment activity relating to specific crypto-assets to UK clients without an authorisation, approval of such marketing by an authorised person, or reliance on an exemption. Here, although the Overseas Communicator Exemptions (which are the UK equivalents of the “reverse solicitation” exemption for marketing activities) would generally be available, a number of other exemptions will not be available to non-UK crypto firms (such as the high-net-worth individuals or self-certified sophisticated investors exemptions).

Please do not hesitate to call with any questions you may have. Our experienced team are here to help you to navigate through the complexities of EU and UK crypto regulatory regimes.

Endnotes

[1] DIFC Law No. 2 of 2024: https://edge.sitecorecloud.io/dubaiintern0078-difcexperie96c5-production-3253/media/project/difcexperiences/difc/difcwebsite/documents/laws–regulations/digital_assets_law_2_of_2024.pdf.

[2] Guidance – Regulation of Virtual Asset Activities in ADGM, Financial Services Regulatory Authority, December 18, 2023: https://en.adgm.thomsonreuters.com/sites/default/files/net_file_store/Guidance-Regulation_ofVirtual_Asset_Activities_in_ADGM_(VER05.181223).pdf.

[3] ‘How The UAE Became A Crypt Hub Poised For Explosive Growth’, Forbes, November 16, 2023: https://www.forbes.com/sites/digital-assets/2023/11/16/how-the-uae-became-a-crypto-hub-poised-for-explosive-growth/?sh=667c494c32a8.

[4] Article 61 of MiCA: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02023R1114-20240109.

[5] ‘ESMA clarified timeline for MiCA and encourages market participants and NCAs to start preparing for the transition’, ESMA, October 17, 2023, Page 5: https://www.esma.europa.eu/sites/default/files/2023-10/ESMA74-449133380-441_Statement_on_MiCA_Supervisory_Convergence.pdf.

[6] Consultation Paper on the draft guidelines on reverse solicitation under the MiCA, ESMA, January 29, 2024, Paragraph 18: https://www.esma.europa.eu/sites/default/files/2024-01/ESMA35-1872330276-1619_Consultation_Paper_on_the_draft_guidelines_on_reverse_solicitation_under_MiCA.pdf

[7] Idem, Paragraph 12.

[8] Prohibiting the sale to retail clients of investment products that reference cryptoassets – Policy Statement PS20/10, Financial Conduct Authority, October 2020: https://www.fca.org.uk/publication/policy/ps20-10.pdf.

[9] Future financial services regulatory regime for cryptoassets – Response to the consultation and call for evidence, HM Treasury, October 2023, Paragraph 4.33: https://assets.publishing.service.gov.uk/media/653bd1a180884d0013f71cca/Future_financial_services_regulatory_regime_for_cryptoassets_RESPONSE.pdf.

[10] Financial promotion rules for cryptoassets – Policy Statement PS23/6, Financial Conduct Authority, June 2023, Section 1.17: https://www.fca.org.uk/publication/policy/ps23-6.pdf.

From payment service providers to professional football clubs: New EU regulations to combat money laundering adopted

By Annabelle Rau on 30. April, 2024

Posted In Banking Supervision, Crypto Regulation, Financial Services, Money laundering, Payment Services

On April 24, 2024, the European Parliament adopted a new anti-money laundering legislative package to strengthen the EU’s tools to combat money laundering and terrorist financing.

The package includes

• the sixth Anti-Money Laundering Directive (“AMLD6”) as well as
• the EU Regulation on a Single Rulebook and
• a new central supervisory authority.

Extended access to beneficial ownership data

A key aspect of the new legislation is to ensure that persons with a legitimate interest – including journalists, civil society organizations, supervisory authorities and other relevant stakeholders – have direct and unhindered access to beneficial ownership data.

This information, stored in national registers and networked at EU level, also includes historical data going back at least five years. In the case of legal entities, a beneficial owner is any natural person who owns more than 25% of the capital or voting rights of a legal entity or exercises control in any other way. The information on the beneficial owner includes the name, date of birth, nationality, country of residence and the nature and extent of the beneficial interest of the owner.

Stricter due diligence obligations for obliged entities under money laundering law

The new regulations require obliged entities to implement stricter due diligence measures.
Obliged entities under money laundering law include, for example

• Banks
• Asset managers
• Crypto asset service providers (“CASPs”)
• Real estate and virtual real estate agents
• Lawyers, auditors and notaries
• Retailers of luxury goods

In future, the obliged entities will not only have to check the identity of their customers more thoroughly, but also report suspicious activities.
From 2029, this will also apply to professional football clubs involved in high-value financial transactions.

Restrictions on cash payments and stricter monitoring

The legislative package introduces an EU-wide limit for cash payments of EUR 10,000, except in the non-professional sector between private individuals.
In addition, increased monitoring of particularly wealthy individuals (total assets of at least EUR 50,000,000, excluding their main residence) will be implemented.

New central supervisory authority: AMLA

The new Anti-Money Laundering and Terrorist Financing Authority (“AMLA”) will be established in Frankfurt, Germany. AMLA will not only directly supervise the highest-risk financial companies but will also serve as a central coordination point for national supervisory authorities and monitor the enforcement of targeted financial sanctions.

Outlook

Formal adoption by the Council of the European Union is still pending before the new regulations can enter into force. Once adopted, the laws will be published in the EU Official Journal.
Those subject to anti-money laundering obligations should therefore familiarize themselves with the new regulations and extended due diligence obligations now.

Update for crypto asset service providers: Draft bill to transfer German crypto regulation to the EU MiCAR regime

By Annabelle Rau on 24. April, 2024

Posted In Crypto Regulation, Financial Services

On April 5, 2024, the German Federal Ministry of Finance (BMF) published a draft bill for two regulations intended to facilitate the transition of national crypto regulation into the EU MiCAR regime.
These proposed regulations specify the simplified authorization procedure and create the possibility of submitting applications before the MiCAR regulations become fully applicable.

In brief: Simplified authorization procedure for already regulated institutions

At the end of 2023, the German legislator presented the draft Financial Market Digitization Act (“FinmadiG“), which, among other things, provides for a separate Crypto Markets Supervision Act (“KMAG“) (we reported here). The KMAG enables a so-called simplified procedure through which institutions that already have a national license for crypto asset services can obtain a MiCAR license under simplified conditions.

Key points of the draft bill

The draft bill comprises two regulations:

The MiCAR-TransitV, which specifies the simplified procedure for already regulated institutions, and
the MiCAR-AntragsV, which allows applications to be submitted before the MiCAR becomes fully applicable.

Implementation of the simplified procedure through the MiCAR-TransitV

The MiCAR-TransitV is intended to structure the simplified procedure for companies already holding a license. This applies in particular to owners of a German license for the crypto custody business who do not also hold other (EU) licenses that would allow them to make use of the notification procedure. This is intended to enable already regulated institutions to make a simple transition to the MiCAR legal framework.
The BaFin review to be carried out in the simplified procedure in accordance with MiCAR-TransitV should be limited to those aspects in which the MiCAR requirements go beyond the existing requirements under current supervisory law and take into account the special features of the market and business models.
For example, applicants must present their current business organization and corporate governance to BaFin and submit an updated business plan. Depending on the specific crypto-asset service to be provided, additional obligations to provide proof may apply.

Application before MiCAR comes into force through the MiCAR-AntragsV

Parallel to the MiCAR-TransitV, the MiCAR-AntragsV regulates the details of the application for authorization as a crypto asset service provider (also “CASPs“) under MiCAR. This regulation is particularly relevant as it enables applications to be submitted before MiCAR comes into full force on December 30, 2024.
This is the BMF ‘s response to the business community’s need to make the transition as smooth and efficient as possible. Both already regulated companies and new market entrants should be able to enter into dialog with the supervisory authority at an early stage in this way. The MiCAR-AntragsV will expire once its purpose has been fulfilled, probably at the end of 2024.

Practical implications for CASPs

The new legal framework in Germany, which is to be introduced by the MiCAR-TransitV and the MiCAR-AntragsV, represents a significant step in the right direction for existing and prospective crypto asset service providers:

Regulated institutions should now consider the substantive requirements that will be placed on their application as part of the simplified authorization procedure and start preparing their application.
Furthermore, regulated institutions as well as new market entrants can prepare for the possibility of submitting an application as early as this year. With regard to the exchange with BaFin required as part of the application procedure, this option should be made use of in order to be able to offer crypto asset services in the EU single market at the same time as MiCAR becomes fully applicable.

Market participants and experts had until April 19, 2024 to comment on the proposed regulations. It is expected that the regulations will be adopted and enter into force by summer 2024 at the latest.

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.

Are You Ready for MiCAR? – Webinar on the Introduction to the new EU Crypto Regulation

By Annabelle Rau | Renate Prinz on 09. February, 2024

Posted In Crypto Regulation, MiCAR

We had the pleasure to host our webinar on the new regulation of crypto-assets in the EU (Markets in Crypto-Assets Regulation (MiCAR)), with a focus on the scope of MiCAR, licensing requirements and procedures, and obligations for crypto-asset service providers in the EU. Our experts, specializing in Financial Regulatory Law with a focus on the current crypto regulation, engaged in discussions regarding the upcoming changes due to MiCAR in 2024.

The seminar was targeted at all those who were (or aspired to be) involved in the crypto scene or provided services in this domain, seeking insights into compliance with the new regulation.

You can view a recording of the session below:

FinmadiG and KMAG – Implementation of European crypto-financial market regulation in Germany

By Annabelle Rau on 29. January, 2024

Posted In Crypto Regulation, Financial Services

The German legislator has responded to the harmonization of European financial market regulations: In October 2023, the Federal Ministry of Finance published the draft bill for the Act on the Digitization of the Financial Market (Finanzmarktdigitalisierungsgesetz – “FinmadiG“), followed by the publication of the government draft of the FinmadiG just one month later.

MiCAR, DORA and money transfers – what does the FinmadiG implement?

The FinmadiG is intended to implement the following EU regulations on digital financial market regulation:

Markets in Crypto-Assets Regulation (“MiCAR”): The first EU-wide uniform set of rules for markets in crypto assets (we provided information here, for example)
The EU DORA package (Digital Operational Resilience Act): The financial sector-wide EU regulation of cybersecurity, ICT risks and digital operational resilience
Revision of the EU Transfer of Funds Regulation (TFR): Including regulating the collection and disclosure of customer information in crypto transfers

New regulations on the terms “crypto assets” and “crypto custody business”

The FinmadiG is intended to harmonize the German definition of crypto assets with the European MiCAR standard. The term crypto assets will be removed from the catalogue of financial instruments of the German Banking Act (“KWG“), which means a realignment of the regulatory coverage of crypto assets. In future, crypto assets as defined by MiCAR will be directly covered and regulated by MiCAR.
At the same time, a new term – cryptographic instrument – will be introduced. This is intended to cover digital assets that do not fall within the scope of MiCAR (e.g. security tokens within the meaning of MiFID II) and must therefore continue to be regulated by the KWG and the German Securities Institutions Act.
Consequently, the previous national crypto custody business will also be renamed “qualified crypto custody business”. In future, it will apply to the custody of crypto assets that do not fall under MiCAR but qualify as cryptographic instruments within the meaning of national regulations.
In future, both issuers and providers of crypto services will therefore have to check exactly which crypto asset term the respective tokens fall under and which supervisory regime will subsequently apply.

MiCAR supervision by BaFin: the new Crypto Markets Supervision Act (KMAG)

The German Federal Financial Supervisory Authority (“BaFin“) is responsible for the supervision of crypto assets, issuers, and service providers within the meaning of MiCAR. To regulate its powers and sanctions in connection with the new regulation, a separate Crypto Markets Supervision Act (“KMAG”) is to be created.
The KMAG also addresses the possibility of a simplified licensing procedure for institutions that are already regulated. The exact structure of the simplified procedure is then to be regulated by a separate ordinance to be issued by the BMF.

Digital resilience of the financial sector: implementation of DORA

DORA addresses the digital operational resilience of financial companies in a standardized manner to create a common framework for the effective management of cyber security and ICT risks. BaFin recently published its own DORA information page on this.
To implement DORA, the FinmadiG provides for numerous amendments to national supervisory laws. This also includes authorization bases for BaFin orders in the event of violations of DORA as well as the introduction of administrative offenses that can be punished with a fine.

Crypto and money laundering: implementation of the TFR

The FinmadiG also aims to adapt national regulations to the requirements of the updated EU Funds Transfer Regulation. In future, crypto service providers will have to collect, transmit and make available information on the originators and beneficiaries of the transfers of crypto assets they carry out. In addition, such crypto service providers will continue to be considered obliged entities under money laundering law within the meaning of the Money Laundering Act (“GWG“).

Outlook

The form in which the implementation proposals of the FinmadiG will find their way into legislation remains to be seen. In particular, the dual regulation of crypto assets under MiCAR on the one hand and security tokens under MiFID II on the other, which was already laid out in MiCAR, will continue to challenge legal practitioners in the future. It is to be hoped that the German legislator will find a way of implementation that is comprehensible and legally secure in practice.

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.