What falls under the management alternative of crypto custody business?

This article is first on the Fin Law Blog published.

That since January 1, 2020 as Financial services in the German Banking Act (KWG) Regulated crypto custody business does not only include the custody of crypto assets and the associated private keys for customers. Rather, permission from BaFin to operate crypto custody may also be required if a service provider offers the management of crypto assets. It is not yet possible to conclusively assess what exactly is to be understood by this alternative offence, since the BaFin in its leaflet published on the offense of crypto custody business hardly specifies anything more than the legislator did in the federal government’s draft law at the time to implement the fifth money laundering directive . Like the Federal Government, BaFin merely states that administration in the sense of crypto custody business in the broadest sense includes the administration of rights from customers’ crypto assets. This very broad definition only restricts it by requiring crypto assets or private keys to be “taken into care” for all alternative courses of action in the crypto custody business.

What exactly can be understood by exercising rights from a crypto asset?

The definition offered by the supervisory authority is very thin and unfortunately open to further interpretation, which leads to little legal certainty in this context. Above all, the question of what exactly BaFin wants to understand by the concept of law is unclear. The question arises as to whether only those rights are meant that must be asserted against another legal subject or also those that the entitled person can easily benefit from. A similar question of interpretation must be answered in relation to perception. Does the act of perception in the context of crypto administration only concern an active exercise of a customer’s rights against a third party? Or should there also be perception in the required sense if a service provider merely accepts the benefits of a right for its customer without any active action?

When does the definition of crypto governance become relevant?

Thanks to the clear statement in BaFin’s information letter, it is clear that the management of crypto assets that requires a license can only be considered if a service provider takes custody of its customer’s crypto assets and has actual access to the crypto assets. This regularly requires that the service provider knows the private keys belonging to the customer’s crypto assets. Whether the crypto administration requires active action by the service provider or not is unclear as seen. This question can become relevant in particular when receiving airdrops that are credited to holders of crypto assets without any active action merely due to the fact that their crypto assets qualifying for participation in the airdrop are held in a compatible wallet. On the other hand, the assertion of voting rights linked to crypto assets, delegation for the purpose of staking, the assertion of claims for returns from security tokens or voting on governance issues based on token ownership will regularly require active action by the service provider.