Germany’s Crypto Securities Guidance Nears Deadline
The race is on to comply with Germany’s newly issued guidance on crypto securities before the June 10, 2022 deadline. The document, published by the Federal Financial Supervisory Authority (BaFin), clarifies how digital assets that qualify as securities must be treated under German law.
Asset managers and other financial institutions have been struggling to comply with the European Union’s Markets in Crypto-Assets Regulation (MiCA), which went into effect last year. The regulation created a new category of “crypto assets” and established rules around their custody, trading, and advertising. However, it left many key questions unanswered, including whether digital assets that qualify as securities must be registered with BaFin.
The new guidance provides some much-needed clarity on this issue. It states that any entity wishing to issue or trade crypto securities must obtain prior approval from BaFin. This includes Initial Coin Offerings (ICOs) and security token offerings (STOs).
The guidelines also lay out specific requirements for the storage and custody of crypto securities. They must be kept in a manner that ensures “robust security”, such as through multi-signature wallets or qualified custodians. And they must be segregated from general company funds to protect investors in the event of insolvency.
The guidance paper classifies tokens into three categories:
- Payment Tokens: Tokens that are used only as a means of payment and do not represent any ownership rights or entitlements.
- Utility Tokens: Tokens that represent the right to use a specific product or service.
- Security Tokens: Tokens that represent an ownership or debt interest in a company or other underlying assets.
When it comes to trading security tokens, BaFin clarified that exchanges need to be registered with the agency and meet certain requirements, including the safeguarding of customer funds.
Compliance with these regulations will be crucial for anyone looking to do business in Germany’s burgeoning crypto market. Those who fail to comply by the June 10, 2022 deadline could face severe penalties, including hefty fines and even jail time.
Crypto custodians in Germany now have greater clarity on the regulatory requirements they must meet, following the release of guidance by the country’s financial watchdog.
The document, published by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), classifies cryptocurrencies as “units of account” and “financial instruments,” bringing them under existing securities regulations.
As such, crypto custodians must comply with rules on anti-money laundering and countering-the-financing-of-terrorism, BaFin said. They will also be subject to capital requirements if they hold client assets on a professional basis – that is, if providing custody services forms a core part of their business model.
This is welcome news for the German crypto industry, which has been seeking greater clarity on the regulatory landscape. The new guidance provides much-needed certainty for businesses operating in this space.
Germany Crypto Securities Guidance for Exchanges
The crypto securities guidance clarifies that BaFin considers digital asset exchanges to be financial service providers and thus subject to regulation under the Banking Act, the Securities Trading Act, and the Payment Services Supervision Act.
According to the BaFin, cryptocurrency exchanges must obtain a license from the regulator in order to operate in Germany. In addition, the exchanges must comply with a number of other requirements.
The key points of the guidance paper are as follows:
- Exchanges must be registered with BaFin.
- Exchanges must comply with BaFin’s anti-money laundering (AML) requirements.
- Exchanges must comply with BaFin’s securities trading requirements.
- Exchanges must ensure that their customers are adequately protected.
- Exchanges must disclose their terms and conditions to their customers.
- Exchanges must take measures to prevent market abuse.
- Exchanges must ensure that their systems are secure.
- Exchanges must conduct regular risk assessments.
- Exchanges must report any suspicious activity to BaFin.
BaFin confirms that crypto assets are financial instruments within the meaning of the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG). This means that the offer and sale of crypto-assets and their trading are subject to the WpHG.
Crypto assets are subject to the same regulatory requirements as other financial instruments. In particular, this means that exchanges must comply with the requirements of the MiFID II Directive (Markets in Financial Instruments Directive II, including the prospectus and transparency rules).
BaFin also confirms that initial coin offerings (ICOs) are subject to the WpHG. This means that ICOs must comply with the prospectus and transparency rules and that tokens may be treated as securities.