This post first appeared as blog post at FIN LAW.
In Germany, investment advice on crypto assets has been regulated for many years and may only be provided on the basis of a BaFin license under the German Banking Act (KWG) or the Securities Institutes Act (WpIG). Once the new EU Regulation on Markets in Crypto Assets (MiCA) comes into effect, a license for advisory services relating to crypto assets will eventually be required throughout the European Union. Crypto service providers who want to advise their customers on investment opportunities in crypto assets must then meet the general regulatory requirements of MiCA and – if they operate in Germany – have a corresponding BaFin license.
In addition to professionally suitable and reliable managers, a proper business organization and a minimum regulatory capital of EUR 50,000, crypto investment advisors must fulfill numerous specific obligations when providing their advisory services. In particular, this involves far-reaching information and clarification obligations towards the customer. In addition, crypto investment advisors will need to collect detailed investor profile information from their clients prior to providing advice.
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Strict transparency obligations and kickback ban for investment advice according to MiCA
In the future, investment advice on crypto assets should only be provided in Europe if high transparency standards are observed. In particular, the crypto service providers must disclose to their customers whether they provide independent advice. In this context, MiCA provides for a general ban on provider commissions (so-called kickbacks). Crypto investment advisors will then be prohibited from receiving commissions or other payments or inducements of value from crypto asset providers or other actors other than the client for the provision of their advisory services. The crypto service providers must also disclose whether they advise on the basis of an open analysis or only on selected crypto assets of certain issuers or providers. They must also declare whether they have economic relationships with issuers or providers of crypto assets.
The crypto investment advisors will also have to explain to their customers what costs and fees, including advisory fees, the customer will incur in the event of an investment. With regard to risk clarification, MiCA obliges the consulting crypto service providers to expressly inform customers of certain risks associated with crypto assets. These include risk of fluctuations in value, risk of loss, liquidity risk and, where relevant, risk related to the transferability of crypto assets. They should also point out to customers that there are basically no deposit protection systems for crypto assets.
Investment advice from crypto service providers only with a detailed customer profile
Before providing advisory services in relation to investments in crypto assets, crypto service providers will have to extensively check their customers and create investor profiles under the MiCA. You are obliged to inquire about the specific situation of the customer and in particular his financial situation. In addition, they must determine the customer’s willingness to take risks and determine how high the customer’s risk tolerance and loss-bearing capacity is. Only on the basis of this information can crypto investment advisors check which specific crypto values are suitable for the specific customer and could fit into his portfolio.
According to MiCA, the information collected as part of the customer review must be checked after two years at the latest and updated if necessary for long-term consulting contracts – especially in the context of portfolio management. According to MiCA, crypto service providers who advise customers on investments in crypto assets must also provide a detailed protocol of the advice on a durable medium after each consultation. On the one hand, the consultation record must show the expectations and needs of the customer before the consultation and, on the other hand, the specific recommendation given.
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