CMS Expert Guide to Crypto Regulation in Germany

In addition to the general MiCAR framework (covered here), the German Banking Act (Kreditwesengesetz – “KWG”) and the German Securities Institutions Act (Wertpapierinstitutsgesetz – “WpIG”) govern certain services related to financial instruments within the meaning of MiFID II, as well as the custody of cryptographic keys and cryptographic instruments (a term covering certain crypto-assets not subject to MiCAR). Furthermore, the German Prospectus Act (Wertpapierprospektgesetz – “WpPG”), together with European prospectus law, regulates public offerings and admissions to trading of financial instruments within the meaning of MiFID II.

This leads to the following supervisory law landscape for crypto-assets:

• KWG / WpIG: Regulation of certain services related to crypto-assets that are functionally comparable to financial instruments within the meaning of MiFID II (e.g. security tokens), as well as the custody of cryptographic instruments (including NFTs) and cryptographic keys.
• MiCAR: Regulation of crypto-assets as defined in Art. 3(1) no. 5 MiCAR and certain related services (e.g. utility tokens, e-money tokens, asset-referenced tokens, certain governance and other tokens).

WpPG and European prospectus law: Regulation of public offerings and the admission to trading of crypto-assets that are functionally comparable to financial instruments.

Direct sales of token by issuers

• MiCAR: See here
• KWG / WpIG: The initial offering of crypto-assets that are functionally comparable to financial instruments is generally not regulated under the KWG or WpIG. However, the subsequent sale of such crypto-assets — e.g. transfers to a buyer in return for payment or in exchange for other crypto-assets — may fall within the scope of the KWG / WpIG, as it could constitute a regulated financial service such as proprietary trading.
• Prospectus law: In any case, the issuance and sale of crypto-assets functionally comparable to financial instruments is generally subject to prospectus obligations, e.g. under the WpPG and the European Prospectus Regulation. However, exemptions may apply.

Exchange (buy/sell)

• MiCAR: See here
• KWG / WpIG: The exchange of crypto-assets that are functionally comparable to financial instruments may require authorisation under the KWG / WpIG, as such activity could qualify as proprietary trading, brokerage, or the operation of a multilateral trading facility (MTF).
• Prospectus law: The sale of a crypto-asset functionally comparable to a financial instrument may be subject to prospectus obligations.

Custody (hold)

• MiCAR: See here
• KWG / WpIG: A custody licence must be obtained from BaFin if cryptographic instruments (e.g. security tokens or NFTs) or cryptographic keys are taken into custody. Companies offering storage space only (e.g. web hosting or cloud services) do not require a BaFin licence, provided they do not explicitly offer the storage of private keys. Manufacturers and sellers of hardware or software for self-custody also do not require a licence, as long as they do not have access to the crypto-assets stored by users.

Borrowing/lending

• MiCAR: See here
• KWG / WpIG: There are structures that may not require a licence, but no official guidance has been issued by the regulator so far.

Yield/staking services

• MiCAR: here
• KWG / WpIG: There are structures that may not require a licence, but no official guidance has been issued by the regulator so far.

Staking on proof of stake consensus mechanisms

• MiCAR: here

KWG / WpIG: Generally, staking is not regulated under KWG/WpIG.

Yes, but activities may be regulated.

·        Active solicitation: According to current supervisory practice, a licence for regulated activities is required not only when a foreign provider operates a branch or agency in Germany, but also when it actively targets the German market from abroad (e.g. through advertising on social media) with the intention of offering financial services “repeatedly and in a business-like manner” in Germany.

·        Reverse solicitation: If a service is provided solely at the initiative of the domestic recipient – i.e. requested without any prior solicitation – no licence is required. However, this is considered a narrow exception and should be interpreted restrictively.

High.

The biggest roadblocks (in our experience) are:

• No sufficient IT.
• Unsuccessful ownership control procedure.

Lack of qualified management.

• There are several compliance requirements, including the obligation to have a physical presence in Germany (except in cases of EU passporting), and the need to demonstrate to BaFin a certain level of initial capital and management reliability.
• EU consumer protection laws must also be complied with.