This article first appeared on the Fin Law Blog.
Anyone who trades crypto assets professionally in Germany for their own account requires a BaFin license to operate proprietary trades in many constellations. According to German supervisory law, proprietary trading can take place in four different configurations. So-called market making occurs, for example, when a company continually offers to buy and sell crypto assets on regulated financial markets using its own capital at prices it sets itself. If a service provider opens or facilitates access to trading in crypto assets for its customers through a trading offer in relation to crypto assets, this service may also require a license as trading on own account.
Less common in cryptocurrency trading is the use of high-frequency algorithmic trading techniques in organized trading venues, which can also result in a business requiring approval as a proprietary trader. Finally, there is the proprietary trading variant of systematic internalization for the area of so-called over-the-counter transactions (OTC transactions). It can be met if a supplier frequently arranges and systematically trades with clients on its own account to a significant extent outside of an organized market or multilateral trading center. Systematic internalization also relates to financial instruments and thus, in principle, also to crypto assets. However, it is questionable whether systematic internalization can also be fulfilled when trading crypto assets.
Only the heavyweights of OTC trading should be regulated
OTC trading is characterized by the fact that it takes place outside of strictly regulated and supervised stock exchanges. Since there are a large number of participants here, some of whom trade financial instruments in fairly small amounts, not all participants in OTC trading are worth monitoring. Therefore, the law prescribes certain thresholds that providers of OTC financial instruments must exceed to be considered systematic internalizers. The fact that a provider’s trading has substantial scope in the sense of proprietary trading is measured by the proportion of OTC trading in the provider’s total trading volume in a relevant financial instrument or by the ratio of its OTC trading and the total trading volume in a specific financial instrument in the European Union.
Vendors can also overcome this hurdle for OTC trading of crypto assets. However, the law also stipulates that systematic internalization can only be fulfilled if the upper limits of frequent systemic trading and significant trading volumes specified in articles 12 to 17 of the EU Regulation No. 2017/565 on the requirements are exceeded. organizations of investment firms. However, the EU regulation does not recognize the concept of crypto value, which is only regulated at the national level, and only sets upper limits for the categories of financial instruments recognized under the European MiFID regulation. On the other hand, there are no regulations in the cryptoasset regulation. Therefore, the de facto requirement established by the German supervisory law that the upper limits must be exceeded according to EU Regulation No. 2017/565 cannot be met in the case of trading crypto assets.
Can there be a systematic internalization with crypto assets that requires a permit?
The lack of upper limits for OTC trading of crypto assets in the EU Regulation No. 2017/565 could be used as an argument that the fact of systematic internalization within the meaning of the German supervisory law cannot be fulfilled in this area . However, it could also be argued that the requirement to exceed the upper limits of the EU regulation in the case of crypto assets should be omitted because there are no relevant regulations. In the latter case, however, the scope of the terms frequent systemic trading and significant trading volume in OTC trading of crypto assets would not be delimitable at all.
In view of this legal uncertainty, an interpretive decision by BaFin would be necessary and useful. It is true that most providers for whom the question is relevant will, in any event, transact on their own account as a service to others and therefore require a permit. However, the regulatory classification as a systematic internalizer would imply additional regulatory obligations for the company in question, so a general clarification of the legal issue would be welcome. To avoid legal uncertainties, those affected can, in the best case, voluntarily submit to the rules for systematic internalisers and submit the corresponding request for approval to BaFin.
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