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German regulatory framework for market Legal definition: crypto assets
participants in crypto assets
According to section 1 para. 11 sentence 4 of the German Banking Act (KWG) rypto assets are defined
as: “Digital representations of a value that has not been issued or guaranteed by any central bank or public
body and does not have the legal status of a currency or money, but is accepted by natural or legal persons
as a means of exchange or payment or serves investment purposes on the basis of an agreement or actual
exercise and which is transmitted electronically, can be stored and traded.”
This definition reflects the EU definition in the 5th EU Anti-Money Laundering Directive2 and
includes digital units of value such as currency or payment tokens, which are often also referred to
as virtual currencies.3 Government-issued currencies are by definition not crypto assets, as well as
e-money, interconnection payment systems and payment transactions of providers of electronic
communications networks or services.
Hans Stamm Matthias Meinert
Partner Associate Pursuant to section 1 para. 11 sentence 1 no. 10 KWG, crypto assets also qualify as financial
Dechert LLP Dechert LLP instruments. Since crypto assets can already fall under one of the other categories of financial
Email Hans Stamm Email Matthias Meinert instruments due to their diverse characteristics, section 1 sec. 11 sentence 1 no. 10 KWG was
designed as a catch-all to avoid regulatory gaps for virtual currencies.
While crypto assets and some of the associated services have started to be covered by Tokenised assets (security tokens)
the traditional financial supervisory regulations (such as MiFID II), in recent years the
European Union and some individual EU member states have aligned and strengthened The holder of security tokens is entitled to membership rights or claims to a certain asset under the
their supervisory regulations to deal with the rapid innovations in this area. These law of contracts. These claims or rights are “embodied” in the token created on a blockchain and
adjustments were intended to prevent an unregulated market for virtual currencies and comparable to the rights of a security holder. Examples are claims for dividend-like payments, co-
other digital assets, especially against the background of high money laundering risks. In determination, repayment claims or interest payments.
addition to the legislative changes regarding the regulatory treatment and classification
of crypto assets, the German regulator, the Federal Financial Supervisory Authority Security tokens designed under German law regularly represent other forms of securities (e.g.
(BaFin) has issued several information letters and guidance that further clarify these tokenized bonds), or qualify as original digital securities after the introduction of the Act on Electronic
European and German regulations. 1 Securities (eWPG),4 which came into force on June 10, 2021. As a consequence, German securities
law applies to security tokens, i.e. the Prospectus Regulation, the German Securities Prospectus
This article provides a brief overview of BaFin’s regulatory principles with regard to crypto Act (WpPG) and the German Securities Trading Act (WpHG) or, if designed accordingly, also as an
assets and the associated services under German law. Please note that this can only investment fund unit within the meaning of the German Capital Investment Code (KAGB). At the same
be a preliminary assessment. In particular, the application of the existing regulations time, security tokens are considered financial instruments under the KWG, due to the technology-
and interpretation by BaFin in the field of decentralised finance (DeFi) applications are neutral definition of the “financial instrument” in MiFID II as “transferable securities”5 according to
currently subject to a considerable degree of uncertainty. Article 4 para. 1 no. 44 MiFID II.
Types of ‘crypto assets’ Utility tokens
The starting point for a regulatory classification of crypto assets should be a conceptual Utility tokens provide the holder with access or usage rights to certain services or products. A
differentiation of the terminology for different types of digital assets. Defining crypto repayment of the purchase price or granting of property rights is usually excluded. From this point
assets as tokens is too vague, because the term ‘token’ is only understood as a generic of view, pure utility tokens can be compared with tickets or vouchers and are therefore not financial
term of virtual assets or crypto assets. A more precise and legalistic distinction between instruments. However, distinguishing them from tokenised assets or, if a payment function is
the digital assets, such as virtual currencies, security tokens and utility tokens is crucial integrated, from virtual currencies can sometimes be difficult and depends on the main function of
for answering any subsequent regulatory questions. In particular, the functionality (use the token’s use case.
case) of the digital asset must be taken into account. All crypto assets are based on a
blockchain technology.
2 Directive (EU) 2018/843 of 30 May 2018.
3 Among the most well-known virtual currencies are, for example, Bitcoin, Ether, Litecoin and Ripple. A list of virtual
currencies can be found on the website www.coinmarketcap.com/de/.
1 BaFin – Advisory Letter (WA) - GZ: WA 11-QB 4100-2017/0010; BaFin – Guidance Notice: Second Advisory 4 Law on Electronic Securities (eWpG), promulgated as Art. 1 G of 3.6.2021 (Federal Law Gazette I p. 1423); Entry into force
Letter - GZ: WA 51-Wp 7100-2019/0011 and IF 1-AZB 1505-2019/0003; BaFin – Guidance notice: Guidelines in accordance with Article 12 of this G on 10.6.2021.
concerning the statutory definition of crypto custody business. 5 “Categories of securities which may be traded on the capital market: with the exception of from Payment instruments [...]”.
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Financial services related to crypto assets The result may be different if the service provider
only offers a software that interacts with crypto
Regulatory authorisations are required in Germany exchanges, for example via interfaces called
for commercial services related to tokens that are application programming nterfaces (APIs),
classified as crypto assets, financial instruments, without ever having contact with the private
securities, investments or investment units. The cryptographic keys. BaFin has expressly stated
required authorisation differs depending on the that the production or distribution of hardware or
actual service and regulatory classification of the software to secure the crypto assets or the private
crypto assets. It should be noted (for providers as cryptographic keys, which are operated by the
well as for users) that even if these services are users on their own responsibility, are not covered
offered from outside Germany to German users by the crypto custody business definition if the
in a targeted manner, this may trigger a German service providers do not have access to the crypto
authorisation requirement. assets or private cryptographic keys held by the
user. These software-as-a-service business models
Depending on the factual design of the usually do not constitute a regulated activity under
transaction, it may qualify, for example as a German law.
banking transaction, i.e. as a financial commission
transaction or underwriting business. In addition, Effects of these principles on the regulatory
an authorisation as a financial service may be authorisation requirements of DeFi Services –
required where the service involves investment ‘staking’ and ‘lending’
brokerage, investment advice, operation of
a multilateral or organised trading system, Any regulatory authorisation requirements for
placement business, brokerage, financial portfolio DeFi-Services (such as staking or lending) must
management, proprietary trading, or investment also be assessed. Staking is where crypto assets
management. In this respect, there is no difference are stored in a special blockchain address (wallet),
to traditional financial instruments, with BaFin blocked for the holder’s dispositions, to serve
referring to the ‘technology neutrality’ of the the validation of transactions on the blockchain
financial regulations. (referred to as ‘proof-of-stake mechanism’). For
the holding period of the staked tokens, their
Crypto custody business holders are rewarded with transaction fees of the
blockchain (staking rewards). Another use case is
With the inclusion of crypto assets in the definition liquidity staking’, in which the crypto assets are
of financial instruments in Germany, a new made available to increase the trading liquidity of
financial service for the custody of crypto assets automated trading venues (automated market
was introduced.6 This financial service is defined making) of decentralised exchanges (DEX)
as the “custody, management, and securing of (referred to as ‘liquidity pools’). As a fee, the
crypto assets or private cryptographic keys used to holders will usually receive a part of the trading
hold, store, and transfer crypto assets for others”. fees of the DEX.
BaFin has described the relevant criteria and
requirements in detail in its guidance notice on Another very common form of DeFi is crypto
crypto custody business.7 lending, where units of crypto assets (e.g. in
the form of stable coins) or money loans are
Whether the activity conducted by the service transferred for use for a fee. The lending is
provider is a regulated activity often depends remunerated, for example, in the form of interest
on if the service provider holds the private or additional units of a crypto asset.
cryptographic key in its systems on behalf of the
client and so has access to the decentrally stored Typically, the granting of the loan is not based
crypto assets. on the creditworthiness of the borrower, but by
depositing crypto assets as collateral. For example,
Bitcoin can be lent up to a certain value. In this
respect, this is comparable to repo transactions
in the traditional securities market, with the
6 Section 1 para. 1a sentence 2 no. 6 KWG essential difference that the lending, control and,
7 BaFin - Guidance notice – guidelines concerning the if necessary, utilisation of the collateral is handled
statutory definition of crypto custody business.
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automatically via a smart contract. A distinction must also be made between this form of financing
Cross-border
made coherent
through a decentralised blockchain protocol and providers who offer secured crypto loans directly:
centralised finance (CeFI).8
It is still unclear if these types of transactions may qualify as regulated lending (banking) activities
under German law which, in general, require authorisation from BaFin.
With a leading bench that spans the USA, UK, Ireland, France,
Extension of the licensing requirements by the proposed EU regulation ‘MiCA’
Luxembourg, Brussels and Germany, as well as the Middle East and
On 24 September 2020, the European Commission published its proposal for a Markets in Crypto
Assets Regulation (MiCA Regulation) as part of the package for the digitisation of the financial sector. Asia, we advise on all major asset classes, fund domiciles and investment
This is a package of measures to further develop and promote the innovation and competitive structures, collaborating for the benefit of our clients at every stage of the
potential of digital finance as well as to mitigate possible risks associated with digital finance. The
regulation is currently in the consultation process and is expected to enter into force in the third investment life cycle. dechert.com
quarter of 2022.
1000 lawyers | 10 time zones | one firm
Among other things, the MiCA Regulation pursues the goal of creating legal certainty regarding
crypto assets that are not covered by existing EU legislation in the financial services sector. The future
harmonised rules for issuers of crypto assets and crypto service providers are intended to create a
common, ‘sound’ regulatory framework and a single market. It will replace national rules for crypto
assets that are not covered by existing EU financial services legislation.
The proposal of the MiCA Regulation shows that there is now greater momentum at EU level
regarding the regulation of crypto assets and crypto service providers. This will further reinforce
the rapid developments in national legislation in recent years as well as in the corresponding
interpretative decisions of BaFin.
Issuers and service providers, as well as users and investors in crypto assets, should therefore keep
an eye on the dynamic regulatory developments at national and EU level.
8 e.g. www.celsius.network/crypto-loans.
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