Crypto Securities Register – the new financial service in Germany
The introduction of the German Electronic Securities Act (eWpG) added another financial service to the German banking law (Kreditwesengesetz – KWG).
Financial services, i.e. services for which authorization from the Federal Financial Supervisory Authority (BaFin) is required, have developed considerably in recent years. It was not until January 1, 2020 that the financial department of crypto guard was added. It took about a year and a half before BaFin also issued the first license for a crypto custodian. Now, as of June 10, 2021, there is already the next new element of authorization: the management of the crypto securities register.
Context and eWpG
Until now, a very traditional view of securities has prevailed in Germany. It was a paper document that was transferred by transfer of title. This agreement was broken by the introduction of electronic securities by the eWpG on June 10, 2021. In the future, certain securities (initially only bearer bonds) may be issued as electronic securities. A sub-category of electronic securities are crypto securities. These are electronic securities that are entered in a cryptographic securities register.
Activity of the crypto securities register
The eWpG imposes certain requirements on a register of cryptographic values. It should be kept on a tamper-proof recording system that records data in chronological order and is protected against unauthorized deletion and subsequent modification. The registration system must be a decentralized association in which the control rights are distributed among the entities operating the respective system according to a predetermined model. The law should both cover blockchain technology and be open to new developments.
The crypto securities register should contain various details about crypto securities. This includes, for example, the essential content of the securitized right to cryptographic securities and their identification numbers as well as their designation as securities, issue volume, nominal amount, issuer, holder and an indication whether it is an individual or collective registration.
Companies wishing to provide crypto securities registry services require authorization from BaFin. Insofar as an issuer does not use a service provider for the management of the crypto securities register, it is deemed to be the manager of the register itself. According to the explanatory memorandum to the law, the issuer which itself keeps crypto-securities registers is subject to the same monitoring obligations as an external service provider. In this case, the issuer also needs a license from BaFin. Point issuers are therefore likely to be forced to work with a service provider as a rule, as the barriers to their own authorization are unlikely to be worth the trouble.
In the sense of a single market in Europe, the authorization to provide a financial service can be passported. However, this only applies if the authorization requirement is based on EU law. This is not the case for the authorization to provide registry management of cryptographic values. This is a national special path related to crypto values under German law. Passport to other EU states is therefore not possible.
Conditions for granting an authorization
As with any request for authorization under German banking law, the request for authorization to manage the crypto securities register must be submitted in writing to BaFin by the future licensee and must meet the requirements of BaFin and of the Bundesbank. BaFin has not yet released any information on the request for authorization to keep crypto-securities registers.
The list of requirements for service providers wishing to obtain a crypto securities registry license included:
- Sufficient the initial capital: at least 150,000 EUR Since the law does not contain independent regulations on the amount of initial capital, the amount of initial capital is assessed in accordance with § 33 para. 1 Sentence 1 n ° 1 b) KWG. These are financial services establishments which do not act on their own account, but do not fall under any other category of § 33 para. 1 sentence 1 nos. 1 a) – d) KWG. The explanatory memorandum to the law still speaks of an initial capital of 125,000 euros; however, the amount was increased to 150,000 euros by the law on investment firms, which entered into force on June 26, 2021. The initial capital must also be maintained subsequently and only constitutes a minimum amount of the required capital. If the applicant also provides other financial services, the initial capital required may be higher.
- Professionally qualified and reliable managers (cf. Art. 1 para. 2 sentence 1 German Banking Act) who are not only employed on a voluntary basis (cf. art. 32 para. 1, 33 para. 1 sentence 1 nos. 2, 4 and 5 of the German Banking Law). Managers must prove their aptitude for BaFin and devote sufficient time to their activities for the company.
- The company’s head office must be located in Germany (Article 33 (1) sentence 1 no.6 KWG).
- The person who holds a significant interest in the company that wishes to provide crypto securities registry services (Article 1 (9) KWG) must meet the requirements to be fulfilled in the interest of sound and prudent management of the financial services institution.
- The company must be willing or able to create the necessary organization precautions for running the business properly for which he requests the authorization (article 33 (1) sentence 1 n ° 7 KWG). This includes in particular meeting the requirements of MaRisk and BAIT. BaFin will pay particular attention to the tamper-proof registration system.
As the company only provides the management of the crypto securities register (and no other financial services), only limited regulation under German banking law applies. In particular, the regulations on additional capital adequacy requirements (section 10 KWG), the regulations on capital buffers (sections 10c to 10i KWG), the regulations on liquidity (section 11 KWG), the regulations on large exposures, exposures in millions and exposures to governance bodies (articles 13, 14, 15 KWG) as well as the CRR regulations (articles 39, 41, 50 to 403 and 411 to 455 of the regulation (EU ) No. 575/2013) do not apply. Whether the facilitations also apply if the company simultaneously provides custody of cryptocurrencies and management of the crypto securities ledger remains unclear according to the wording.
Unlike the introduction of the license requirement for crypto custody, which was previously provided by many unlicensed companies, previously there was no company that provided crypto securities registry services. The introduction of crypto securities only created this activity. Therefore, it is not necessary to create a regulation for acquired rights.
Transitional provisions do exist, however. Considering the length of the licensing process, all of the crypto securities legislation would in fact be postponed if no company could already provide crypto securities registry services now. Therefore, a transitional agreement has been created for companies that take over the activity of managing the crypto securities register by December 10, 2021. Authorization will be granted if the company submits a full authorization request to BaFin within six months of the start of management activities for the crypto securities register. and notifies BaFin in writing of its intention to provide crypto securities registry management services two months prior to commencement.