Commerzbank recently entered the crypto business with a new offer: As part of a strategic partnership with the Deutsche Börse subsidiary Crypto Finance, it now offers its corporate customers access to the cryptocurrencies Bitcoin and Ether, whereby they take custody of the crypto assets and Crypto Finance their Trade takes over.
This is remarkable because so far only very few companies and even fewer universal banks in Germany have the necessary regulatory permission to provide crypto custody business.
German regulation of the crypto custody business
The fact that a major bank is now relying on a crypto offering in this way makes people sit up and take notice. It should also give other banks reason to think about business models for storing crypto assets. At the same time, crypto assets can become more attractive for institutional investors and expand their portfolio.
With the implementation of the 5th EU Money Laundering Directive, the German legislature has recognized crypto assets as a financial instrument as of January 1, 2020 (according to Section 1 Paragraph 11 Sentence 1 No. 10, S. 4 and 5 of the Banking Act, KWG) and the crypto custody business as a financial service (according to Section 1 Paragraph 1a Sentence 2 No. 6 KWG) was introduced to better record the forms of use of “crypto tokens” relevant to the financial market. In addition, crypto custodians should be subject to money laundering regulations.
Crypto custody business and crypto assets
Currently, the crypto custody business (Section 1 Paragraph 1a Sentence 2 No. 6 KWG) is defined as “the custody, management and security of crypto assets or private cryptographic keys that are used to hold, store or use crypto assets for others as well as the security of private cryptographic keys that are used to hold, store or dispose of crypto securities for others in accordance with Section 4 Paragraph 3 of the Electronic Securities Act.
The crypto custody business in this sense is defined by the term crypto assets (Section 1 Paragraph 11 Sentence 1 No. 10 KWG). This is in turn described in more detail by Section 1 Paragraph 11 Sentence 4 KWG. Crypto assets within the meaning of the KWG are “digital representations of a value that has not been issued or guaranteed by any central bank or public body and does not have the legal status of a currency or money, but is considered by natural or legal persons based on an agreement or actual practice is accepted as a means of exchange or payment or is used for investment purposes and can be transferred, stored and traded electronically.
The term covers most forms of tokens, in particular so-called currency tokens, which are also referred to as “cryptocurrencies”, and so-called security tokens.
Lengthy approval procedures for the crypto custody business
Anyone who wants to conduct commercial banking business or provide financial services in Germany generally requires permission from the Federal Financial Supervisory Authority in accordance with Section 32 of the KWG.
If a bank – like Commerzbank – intends to store or manage currency tokens for its customers or would like to secure their private cryptographic keys, it requires permission for the crypto custody business under the current legal situation. However, permission for the custody business would not be sufficient, as currency tokens are not electronic securities within the meaning of the Electronic Securities Act (eWpG).
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The Bafin regularly needs a lot of time to approve applications for permission; in the case of Commerzbank it was over a year and a half.
Changes caused by the Micar regulation
Even though German regulation of crypto custody is still young, it is almost outdated. With the European Micar Regulation on markets for crypto assets, a comprehensive regulatory framework for crypto assets came into force on June 29, 2023. The regulations of the regulation regarding crypto custody will apply from December 30, 2024.
However, they are not identical to the previous German regulations. In the future, there should be a German and a European permit that do not overlap and can be held at the same time.
Conclusion and outlook
The changes brought about by Micar are fundamentally to be welcomed. It is to be expected that the resulting professionalization of the players will have a positive impact on the crypto business. Cryptocurrencies are likely to become attractive to more and more investors.
Even under Micar, submitting an application for permission is likely to be a complex undertaking. However, Micar’s tight deadline regulations regarding the duration of the approval process give cause for hope. For certain financial companies that intend to provide cryptoasset services and that are already regulated at EU level, Micar provides for a pure notification procedure in Article 60: Instead of submitting an application for authorization under Micar, credit institutions in particular must then carry out their intended provision of crypto custody to Bafin only.
As Commerzbank’s new crypto offering to institutional investors such as pension funds, insurers and asset managers shows, the market is currently increasingly paying attention to digital assets. Now it will be exciting to see how competitors will follow suit and how the new EU regulation will impact.
© Rödl & Partner
About the author:
Lawyer and partner Christian Conreder heads the investment law department at the law firm Rödl & Partner. The focus of his legal work is on banking and capital markets law, particularly in the areas of capital investment law. Conreder also specializes in payment transactions law. In addition to capital management companies, issuing houses, asset managers and family offices, he advises banks, payment service providers, card issuers and fintechs, among others, on civil and regulatory issues.
