Crypto trading under liability umbrella: The requirements for intermediaries

This article is first on the Fin Law Blog published.

Since cryptocurrencies have changed their image in recent years from a means of payment used by money launderers and internet fraudsters to a modern alternative in the investment portfolio, many companies have been interested in offering their customers access to the crypto market. However, since most cryptocurrencies in Germany are regulated as financial instruments within the meaning of financial supervisory law, the commercial offering of trading activities with cryptocurrencies in Germany generally requires a license from BaFin.

Depending on the specific design of the service offered, crypto trading can be classified, for example, as proprietary trading that requires a license, as financial commission business or as investment brokerage. Applying for a corresponding license requires a large amount of time and financial resources, not only in the context of preparation, but also in the context of the ongoing supervision by BaFin and the Bundesbank after the license has been granted. For many companies, obtaining their own license is therefore a supposed showstopper. For business models that are designed as investment brokerage, investment advice or placement business, however, cooperation with a sufficiently licensed institute can be a solution – the so-called liability umbrella.

Which crypto business models can be offered under a liability umbrella?

Not all activities that require a license can be offered via a liability umbrella solution. In particular, proprietary trading that requires a license, financial commission business and the operation of a multilateral system of hands are excluded within the framework of this structure. The exemption can only be used in relation to commercial transactions in the case of brokerage services. As soon as a company wants to acquire or sell cryptocurrencies in its own name, a connection to a liability umbrella is no longer an option for the regulatory structure.

The activities of investment brokerage and placement business permitted by the exceptional circumstances only exist if the company itself does not become a contractual party to the commercial transactions, but merely mediates supply and demand as an intermediary. In the placement business, there is also a placement agreement between the company and the seller of the cryptocurrencies. The investment advice, which is also approved for liability umbrella solutions, does not relate to trading transactions, but exclusively to the issuance of investment recommendations that are tailored to the investor.

What are the regulatory requirements for a liability umbrella solution?

Compared to applying for your own BaFin license, the setup for a liability umbrella solution can be implemented quickly and cost-effectively. First of all, a contractual agreement is required between the company and an institute approved for investment brokerage, investment advice or placement business. The agreement must stipulate that the tied agent is integrated into the compliance infrastructure of the liability umbrella and also that the liability umbrella is liable to its customers for all damage resulting from the activities of the tied agent.

The tied agent must disclose the assumption of liability to its customers. The liable institution must then notify BaFin of the inclusion of the tied agent. The liability umbrella must also confirm to the supervisory authority that the contractually bound agent is technically suitable and reliable. BaFin maintains a public register on its website in which the connection of contractually tied agents is announced after notification has been made.