Specialist lawyer Lutz Auffenberg and his law firm Fin Law have specialized in the field of fintech and innovative technologies. In particular, blockchain technology and its regulation is the focus of his work. In his guest article he is devoted to the upcoming WpIG and crypto custody by securities institutions.
This article is first on the Fin Law Blog published.
On June 26, 2021, the new supervisory regime for securities institutions will come into force in Germany with the Wertpapierinstitutsgesetz (WpIG). The new set of rules is relevant for all companies that offer financial services such as investment brokerage, investment advice, proprietary trading or financial portfolio management and comparable services. So far, the supervision of these companies was regulated uniformly with the supervision of credit institutions in the Banking Act (KWG). From the transfer of the supervisory regulations for investment firms to the new WpIG, the German legislator expects a clearer supervisory practice and simplifications with regard to the directive-compliant implementation of the requirements of the European Investment Firm Directive (IFD) on which the WpIG is based. The KWG remains in force, however, and continues to provide the supervisory framework for companies that conduct banking business such as deposit or lending business.
Not all activities previously regulated as financial services will be transferred to the new WpIG. The crypto custody business, for example, which has been included in the KWG as a new financial service provider since January 1, 2020, will remain in the KWG, as will factoring, finance leasing and asset management. The background to this is that these activities do not represent activities that require a permit due to European requirements, but rather on the basis of national legal decisions of the German legislature. Consequently, the activities mentioned are not defined in the IFD as securities services or ancillary securities services that require a license. The application for a license for crypto custody business will therefore continue to be based on the KWG after June 26, 2021.
In order to be able to ensure a sharp separation between the regulatory regimes, the WpIG will in future contain an exclusivity requirement that clarifies that a license under the WpIG does not match a license under the KWG, the Payment Services Supervision Act (ZAG), the Insurance Supervision Act (VAG) or the Capital Investment Code (KAGB) may be combined. In order to avoid contradictions under supervisory law with regard to the regulatory requirements for institutions, the separation may appear sensible. Nevertheless, it raises a number of problems of interpretation. BaFin wrote to the securities trading banks currently under its supervision on May 5, 2021 with the request to make a notification on the use of any permits held for factoring, finance leasing or asset management. BaFin understands the exclusivity rule of the WpIG to mean that in future the services mentioned may only be provided by companies that fall under the KWG and not under the WpIG. With its letter, the authority intends, against the background of the information requested, to get an overview of the effects this legal change will have on the market.
The interpretation of BaFin initially means for all securities trading banks and other companies that offer securities services that they cannot simultaneously obtain a license for crypto custody business. If you want to integrate crypto custody into your offer, a separate company must be founded, which in turn applies for permission under the KWG. In practical terms, this procedure was advisable even before the introduction of the WpIG, especially since crypto custodians who did not offer any other financial services besides crypto custody business enjoy attractive privileges, particularly with regard to the equity ratios to be met. However, it is questionable whether the legal opinion of BaFin is actually correct, because the legislature has also made changes in the KWG that speak strongly in favor of a different interpretation of the exclusivity requirement. According to the new wording of Section 32 (2a) KWG, a license under the KWG will in future only be able to be issued if a license to conduct at least one banking transaction is requested at the same time. In cases in which a permit for crypto custody business is requested at the same time and the banking transactions or financial services carried out relate to units of account or crypto values, the new wording of the law in the KWG should not even impose any restrictions, so that the KWG should continue to be decisive in these constellations .