MiCA and KWG: The differences for crypto custodians

This post first appeared as blog post at FIN LAW.

On June 9, 2023, the Markets in Crypto Assets Regulation (MiCA) published in the Official Journal of the European Union. It will officially come into force 20 days later and thus on June 29, 2023. It then develops legal effect step by step. The regulations on the issuance of value-referenced tokens and e-money tokens will apply on June 30, 2024 and the rest of the regulations on the regulation of crypto service providers on December 30, 2024. Crypto custodians will then be regulated via the MiCA. It has not yet been clarified whether German crypto custodians will also continue to be regulated by the German Banking Act (KWG) once the MiCA regulations on crypto service providers come into force.

The regulatory requirements for a crypto custody license under MiCA are very similar to those for a custody license under the German Banking Act. However, they are not congruent. It will take about a year and a half before the regulatory provisions for crypto custody according to MiCA come into force. The German legislator and BaFin, as the supervisory authority responsible in both cases, must nevertheless set the course in a timely manner so that crypto custodians regulated in Germany have sufficient time to prepare for the new regulatory situation.

Additional regulatory requirements for crypto custodians by MiCA

The MiCA will bring some additional regulatory obligations for crypto custodians. Under the MiCA regulatory regime, crypto custodians will have to ensure in particular that the crypto assets they hold for customers are kept strictly separate from their own crypto assets. Such a segregation of customer assets is currently not regulated in the German KWG for crypto custodians, even if the legislator has already proposed corresponding provisions for national law in the first draft bill for the Future Financing Act. It can therefore be assumed that the German legislator intends to introduce the obligation to segregate crypto assets from customers under supervisory law.

So far, however, it is not clear whether the adjustments will actually be made as currently planned in the German Banking Act or whether the legislator will decide to abandon the special national regulation for crypto custodians in the future. In the latter case, the obligation to segregate customer assets would follow directly from the MiCA. However, abandoning the regulation of crypto custodians via the German KWG could result in the corresponding institutions being worse off than they are with their current BaFin license.

Crypto custody of security tokens via MiCA not possible

According to the German KWG, tokenized securities within the meaning of MiFID2 are also recorded as crypto values. As a result, no custodian bank license is required for the custody of securities that are represented in crypto values, only a BaFin license for crypto custody according to the KWG. The background is that a custodian bank license is only required for securities that fall under the Custodian Act. This is not the case with tokenized securities because they lack the necessary securitization in a document. However, under the MiCA regulatory regime, securities within the meaning of MiFID2 are not recorded as crypto assets. Rather, they should continue to fall exclusively under the MiFID2 regulation.

As a result, the custody of tokenized securities via a MiCA license for crypto custody will not be possible. If the German legislature were to abolish the national regulation of crypto custodians under the KWG without replacement, the crypto custodians already supervised by BaFin under the KWG would be deprived of the opportunity to also store security tokens for their customers. The German legislator will have to take this aspect into account when adapting the national regulation with regard to the future validity of the MiCA.