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 deals with the question of whether dPoS staking providers in Germany are subject to authorization.
This article is first on the Fin Law Blog published.
In Germany, due to the legal classification of most cryptocurrencies as financial instruments within the meaning of the German Banking Act (KWG), many blockchain business models cannot be implemented without first obtaining permission from BaFin. The German legislator has clearly confirmed this administrative practice of the supervisory authority, which has existed since 2011, through the explicit regulation of crypto values as financial instruments and the introduction of the new crypto custody financial service that requires authorization. However, the authorization requirement under the KWG does not automatically apply as soon as a business model is related to cryptocurrencies. Rather, a BaFin license is only required in cases in which a business activity also represents a banking business or financial service that is regulated as subject to authorization in the KWG.
A comparatively new business model in the blockchain industry is the provision of dPoS staking infrastructures. The providers operate servers that allow them to participate as nodes in the respective consensus mechanism of blockchains, which work on the basis of Delegated Proof-of-Stake (dPoS). Customers can delegate their tokens of the relevant blockchain to these nodes in order to participate in the staking rewards generated by the nodes in the form of new tokens. A delegation of tokens works via a smart contract on the underlying blockchain, to which the customer only has to communicate the information that his tokens should be delegated to a node operated by the provider. It is not necessary to transfer the tokens. The tokens and the associated private keys remain with the customer in full. The tokens newly generated through participation in the consensus mechanism are credited to the customer or the provider in the agreed ratio at the moment they are created by the smart contract.
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The operation of dPoS staking infrastructures that are offered to customers is therefore initially a purely technical service. Since a transfer of tokens to the provider is not required at any time to use the staking infrastructure and the private keys to the tokens also remain with the user, the activity does not constitute crypto custody Access to the crypto values or the associated private key from others. Providers of dPoS staking infrastructures regularly lack this mandatory requirement. The two other variants of the crypto custody business of managing and securing crypto assets are also ruled out, as BaFin also requires actual access as a basic requirement in this regard.
Taken alone, the offer of dPoS staking infrastructures does not provide any indications of authorization requirements under the KWG. This does not mean, however, that activities that require authorization within the framework of corresponding business models cannot still exist in individual cases if providers, in addition to the mere operation of a dPoS staking infrastructure, provide additional services such as the sale or brokering of transactions via the purchase or sale of staking offer suitable tokens. In individual cases, depending on the specific type of design, such additional services can give rise to authorization requirements under the KWG.
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