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 dedicated to degelated staking as a crypto administration and the assessments of the BaFin.
This article is first on the Fin Law Blog published.
Holders of crypto values that are suitable for so-called delegated staking can delegate their crypto values to staking providers in order to participate in the consensus mechanism underlying the respective crypto currency for confirming transactions in the network. For participation, rewards are distributed by the system in the form of newly generated blockchain units, which are shared between the delegate and the staking provider to whom the crypto values have been delegated. There are different forms of delegated staking. What they all have in common is that in order to participate in the consensus mechanism and thus in the mining process, the crypto values held must be allocated to a third party. However, there are differences with regard to the specific form of this allocation.
Anyone wishing to offer crypto custody in Germany requires prior approval from BaFin. According to the wording of the legal definition in the German Banking Act (KWG), the crypto custody business comprises three different alternative courses of action. The offense can then be fulfilled in the case of custody, administration or backup of crypto assets or associated private cryptographic keys for others. Staking providers, to whom crypto values are actually transferred to their own wallets for the purpose of delegation, can fulfill the option of custody of crypto values in individual cases. According to its administration practice published in a leaflet, BaFin understands custody to be the custody of crypto assets as a service for third parties in such a way that “the customer no longer has any knowledge and therefore no longer has the possibility of disposal over his crypto assets”. Crypto custody can therefore only be considered by staking providers if they actually have the customers’ crypto values transferred to their own wallets as part of delegated staking.
In most cases, however, participation in a delegated staking consensus mechanism does not require that the owner of the crypto values actually transfer his or her pieces to the staking provider. The delegation of the crypto values takes place rather through a corresponding dedication in a smart contract on the underlying blockchain to the selected staking provider. The crypto values remain completely in the staking customer’s wallet. In certain constellations, BaFin nevertheless sees staking provider transactions requiring authorization through the administration of crypto values for others. Both the official legal justification for the introduction of the crypto custody business in the KWG and, with reference to it, the BaFin leaflet on the offense of the crypto custody business define the administration as “in the broadest sense the ongoing exercise of the rights from the crypto asset”. The BaFin also regards validation rights and voting rights as rights from the crypto value. If the delegator transfers such rights to his staking provider for the purpose of participating in delegated staking, according to the broad interpretation of BaFin, there may be an administration of crypto assets for others that requires authorization. In this context, BaFin can counter its own information sheet, which, according to its wording, requires crypto assets to be taken into custody for all three variants.
However, the BaFin does not accept administration in the sense of the crypto custody business in the case of the mere provision of a technical infrastructure for participation in a delegated staking consensus mechanism. Here, for example, customers are only given the technical option of validating transactions through the operation of mining nodes. In these cases, validation or voting rights are not transferred, so that there is no room for acceptance of the crypto management requiring authorization.