When the blockchain technology for enabling decentralized transaction systems became known in 2009 through BTC, the validation of blockchain transactions still worked via so-called proof-of-work consensus mechanisms (PoW). Since then, however, not only the market price of BTC and other crypto assets has increased massively. The technology underlying crypto assets has also evolved. The younger blockchain infrastructures hardly rely on PoW for the consensus mechanism. Instead, the use of so-called Proof-of-Stake consensus mechanisms (PoS) is very common, which are clearly superior to PoW systems, especially with regard to their energy efficiency.
In PoS systems, the discovery of a new transaction block no longer depends on the investment of computing power, but rather on the mere possession of units of the blockchain in question. In order to participate in mining in PoS systems, it is usually not even necessary to make the crypto values available by transferring them to another blockchain address. In many systems, participation works by simply delegating the crypto values to a server that acts as a mining node in the relevant blockchain system (delegated Proof-of-Stake, dPoS).
Staking participation also makes sense as a service in certain constellations
Even if a delegation of crypto values that can be used accordingly can usually be carried out by the respective owner himself via wallet software without great effort, in practice there is definitely a need for service providers who enable their customers to participate in dPoS staking. Especially in constellations in which crypto investors have to or want to have their crypto assets held by third parties, they need service providers who, in addition to storing the crypto assets, also ensure that the crypto assets participate in dPoS staking in order to generate returns in the form of block rewards. On the other hand, constellations are also conceivable in which crypto investors grant a service provider power of disposal for their crypto wallets and commission them with the management of their crypto assets. How are such services regulated in Germany?
Crypto staking for others can be crypto custody business
Service providers who store crypto assets from customers for them and have the associated private cryptographic keys are already regulated as crypto custody institutions under the German Banking Act (KWG), provided they offer custody to German customers and operate the business commercially or at least on a professional scale. If they also delegate the crypto assets of their customers beyond custody in order to participate in dPoS mining, they usually fulfill the second variant of managing crypto assets for others regulated in the wording of the legal definition of crypto custody business. BaFin understands management within the meaning of the regulation in the broadest sense as the exercise of rights from a crypto asset. The suitability of a crypto asset for participation in dPoS mining is a property of the crypto asset itself. There are good reasons for considering the suitability for dPoS staking as a right from the crypto asset, especially since BaFin has stated its scope in its published administrative practice interpretation of the term. As far as can be seen, BaFin itself has not yet commented on its specific interpretation in this case, so prior coordination with the supervisory authority will be advisable for corresponding services. If BaFin would not accept the management variant, for example because one right must be able to be asserted against another according to the usual understanding and this is not the case when block rewards are received from a decentralized system, a classification of the Working as a financial portfolio manager.
Use of customer crypto assets as financial portfolio management
The use of third-party crypto values in dPoS mining to generate block rewards can also be classified as financial portfolio management. According to the legal definition in the KWG and the Securities Institutes Act (WpIG), this involves the management of one or more assets invested in financial instruments for others who have discretionary powers. According to both the KWG and the WpIG, crypto assets are financial instruments. A crypto balance on a customer wallet can certainly be regarded as an asset within the meaning of the regulation. In particular, the wording of the law does not speak against the existence of a factual management in the sense of financial portfolio management if the financial instrument is used to generate returns without being purchased or sold. Rather, the decisive criterion is that the service provider has taken on the management of the customer’s assets.