This article was first published on the Fin Law blog.
Crypto custody has been a regulated financial service in Germany since January 1, 2020. Companies wishing to offer their clients custody, management or security of crypto assets or associated private cryptographic keys must first obtain permission to operate the BaFin business model. In the ever-changing crypto market, crypto custody is a service of particular importance, which is a mandatory part of all centrally designed crypto business models.
As essential as crypto custody may be to mass crypto adoption, it is not central to the services demanded by the market. In this context, it is more of an ancillary to other service offerings such as crypto exchanges or loan/stake models. Profit margins for actual custody of crypto assets are relatively low. The question arises whether crypto custodians are allowed to offer clients interest on held crypto-assets in addition to simple custody based on their crypto custody license.
The crypto custody license covers three different business activities
BaFin’s license to operate the crypto custodial business not only allows crypto custodial service providers to store crypto assets and associated private keys. On the contrary, the facts of the crypto custody activity regulated by German Banking Law (KWG) also cover two other business activities with the administration and security of crypto assets. The BaFin, like the German legislature, understands crypto asset management to mean administering the rights of crypto assets to others in the broadest sense.
Securing cryptographic assets refers to keeping private cryptographic keys on storage media, whether the storage medium is digital (cloud storage) or physical (USB drive or even paper). Like the other two variants, the security variant also requires the provider to have access to its customers’ crypto assets through private key custody. Since BaFin interprets the administrative alternative for the action broadly, the question arises whether the granting of interest also falls under the variant and can therefore be covered by the crypto custody license.
Is crypto administration only conceivable in triangular constellations?
Even though the BaFin interprets the administration variant in the crypto custody activity offense very broadly, there are good arguments against the recording of interest on crypto assets by the crypto administration. Because the exercise of rights, both in the published administrative practice of BaFin and in the justifications of the draft law drawn up before the introduction of the crypto custody activity, fundamentally requires that the crypto administrator assert a right of his client against a third party, who is different from the guardian.
On the other hand, the granting of interest on the crypto-assets on deposit would be a right of the client directly against the depositary, which the depositary could not assert against itself. According to this line of argument, interest on crypto assets would not be classified as crypto administration within the meaning of the second variation of crypto custody activity.
Is it then possible to award interest on crypto assets without regulation?
Even if the granting of interest on crypto assets could not be qualified as crypto administration, a corresponding activity could still represent a transaction requiring a license depending on the individual case. It would be conceivable that the interest provider would operate the authorization-based financial portfolio management if it were allowed to use the crypto assets of its custodian clients at its own discretion in order to generate profits to fund the interest.
Grow your cryptocurrencies with staking
eToro users can easily profit from their crypto holdings. With its own staking service, users can increase their crypto assets in an easy, safe and hassle-free way.
To the supplier