This article first appeared on the Fin Law Blog.
Cryptostake has become in recent years an attractive and very profitable way to generate passive income. Investors not only have the opportunity to use their own cryptocurrencies in participation offers. Meanwhile, there are numerous low-threshold offerings from vendors on the market that allow investors to access venture projects. Such providers pool their clients’ assets into so-called staking pools in order to generate more block rewards and thus more returns.
The vendor landscape is vast, and investors are sometimes promised returns of 20 percent or more per year. However, for operators of such holding groups, the question arises as to whether their offering can be classified as an alternative investment fund (AIF) for regulatory purposes. In this case, a permit or at least a registration under the Capital Investments Code would be required for the administration of the assets managed in the participation group. There are also restrictions and reporting obligations regarding the marketing of the holding pool that must be observed.
Staking pools as investment funds
Equity groups can only be classified as IDAs if they qualify as an investment fund within the meaning of the KAGB. According to the legal definition of the KAGB, an investment fund is any undertaking for collective investment that raises capital from a number of investors to invest it according to a defined investment strategy for the benefit of these investors and is not an operating company . outside the financial sector. An organism in the required sense can be present in almost every conceivable configuration. For example, it is not required to be a registered company. Rather, it is sufficient if the assets are pooled in some way.
Therefore, silent holdings, profit sharing constellations or smart contracts can also establish bodies according to the KAGB. So stake pools, where assets are pooled in fiat or crypto currency to have a larger pool of assets available, can also be organisms. There is also usually a defined investment strategy, as holding pools disclose the holding projects in which they will use common capital. Since the participation rewards are usually divided among the participants for the most part, the investment is also made for the benefit of the investors.
Are staking pools for collective investment?
However, the problems are caused by the characteristics of investment funds in the sense of the KAGB, according to which the body must serve collective investments. Collective investment is an entity that raises and pools capital to generate a collective return for investors as a result of the collective assumption of risk through the purchase, holding and sale of assets. This is not necessarily the case with participation groups. If participation in a participation project does not require a direct transfer of a crypto value, but a delegation of the crypto value or a vote on the crypto value is sufficient, this feature may be missing.
Even if investors only transfer their crypto assets to the agency to participate in staking, the agency will only hold them and will not buy or sell them. However, if investors have fiat money to transfer, the body will regularly serve as a common investment, since in this case the investors’ money must first be invested in crypto assets in order to use them for staking.
Are participation pools non-financial operating entities?
Finally, for the existence of an investment fund, the KAGB requires that the body not be an operating company outside the financial sector. The characteristic is problematic in the case of participation pools because, in general, it cannot be said that they belong to the financial sector. Many blockchain units that are suitable for staking are also crypto assets and thus financial instruments under German supervisory law. However, there are other cryptographic entities that do not qualify as financial instruments.
Furthermore, the commercial activity of using blockchain units in participation projects is not necessarily an activity regulated by the financial supervision law. If the staking group itself does not have access to the investors’ blockchain units because only a delegation is required, or if the staking units are not financial instruments at all, the financial oversight activity is ruled out. In such cases, the holding group cannot be classified as a financial sector company.
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