What applies to BaFin-licensed companies?

This article is first on the Fin Law Blog published.

The Markets in Crypto Assets Regulation (MiCAR) will in future impose licensing requirements on providers of crypto asset services. For example, operators of crypto trading platforms, other crypto exchange providers and crypto custodians will have to obtain permission from the national supervisory authority responsible for them – in Germany the BaFin – before starting their business operations. In Germany, the obligation to obtain a permit from BaFin for the operation of many crypto business models has long existed on the basis of national law, because German legislators have given crypto assets the status of a financial instrument.

However, the current regulation in Germany stipulates that crypto service providers must obtain a banking or financial market license under the German Banking Act (KWG) or the Securities Institutes Act (WpIG). European law does not follow this approach and will not regulate crypto assets as financial instruments in the sense of European financial market directives and regulations in the future either. While markets in financial instruments are to continue to be regulated via the MiFID2 directive, MiCAR will regulate markets in crypto assets that do not qualify as financial instruments under MiFID2.

But what does this separation mean for German banks and investment firms that have business models with crypto values ​​and have obtained permission for this under the KWG or the WpIG?

MiCAR provides exceptions for credit institutions and investment firms

According to the new MiCAR, approved credit institutions should not need any further permission to operate cryptocurrency services. In this respect, MiCAR stipulates that they only have to notify their national authority – i.e. BaFin in Germany – at least 40 days before starting business that they want to provide cryptocurrency services in accordance with MiCAR.

There should also be relief for investment firms. According to MiCAR, these should be entitled to provide those cryptocurrency services that they are already permitted to provide in connection with financial instruments under their existing license. Investment firms will also have to notify the competent authority 40 days before the provision of cryptocurrency services in order to make use of this exemption.

MiCAR expressly stipulates which specific crypto asset services according to MiCAR should correspond to which specific investment services according to MiFID2. In this respect, it is advantageous for the interpretation of the MiCAR that it is systematically very closely based on the MiFID2 system.

Will German crypto custodians also benefit from the exemption?

In this context, problems are caused by the fact that crypto custodians in Germany are not regulated as securities institutions within the meaning of the WpIG, but as financial service institutions via the KWG. The crypto custody business is a national special regulation of the German legislator without a legal basis in the MiFID2 or any other European directive. In this respect, the question arises as to whether German crypto custodians can also claim the exemption for securities firms in the MiCAR.

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With regard to crypto custody, the wording of the MiCAR only refers to the securities ancillary service of custody and administration of financial instruments, from which the German legislator in the WpIG has expressly excluded units of account and crypto values. According to the wording of the MiCAR, the exception should therefore not actually apply to German crypto custodians.

In this context, however, it must also be taken into account that MiCAR and MiFID2, as European legal provisions, take precedence over national laws and national laws cannot be used to interpret European regulations. In addition, it can be assumed that authorized German crypto custodians will be in a better position to meet the regulatory requirements for crypto custody provided for by MiCAR than securities institutions that also hold financial instruments as an ancillary service.

With a corresponding interpretation, German crypto custodians should also be able to make use of the MiCAR exception. In any case, BaFin will have to comment and position itself in this regard in good time before the MiCAR comes into force. The German legislature will also be able to contribute to solving this problem by making adjustments to national law that are required anyway for the implementation of MiCAR.