Specialist lawyer Lutz Auffenberg and his law firm Fin Law have specialized in the field of fintech and innovative technologies. In particular, blockchain technology and its regulation are the focus of his activities. In his guest commentary, he explores the question of what is better suited for crypto trading: proprietary trading or financial commission business?
This article is first on the Fin Law Blog published
Since the prices of Bitcoin, Ether, Litecoin and other cryptocurrencies have been targeting all-time highs again these days and institutional investors are increasingly interested in including relevant positions in cryptocurrencies in their investment portfolios, the daily trading volume in the crypto market has also increased significantly. The trading volume within 24 hours has been between 150 and 200 billion USD in the last few days, and the trend is rising.
The increasing interest in crypto trading in the investor market also means weddings for service providers who want to offer their customers access to the crypto market and enable trading in crypto values. Insofar as crypto values are to be placed on one’s own books in such business models, a permit from BaFin to operate proprietary trading or finance commission business is generally required for business operations under the applicable banking supervisory law in Germany. But what is the difference between the two facts and which variant is best for crypto trading?
When does proprietary trading exist?
Proprietary trading, which is subject to authorization, is carried out by anyone who purchases or sells financial instruments in their own name and for their own account and fulfills additional special requirements stipulated by the German Banking Act. Since crypto currencies in Germany generally represent financial instruments as crypto values, trading in crypto currencies can also constitute proprietary trading that requires authorization. For example, the activity as a so-called market maker who continuously offers trading in crypto values at trading venues at self-set prices or as a so-called systematic internaliser who systematically and organizes trading in crypto values outside of trading venues can constitute proprietary trading that is subject to authorization.
In addition, proprietary trading always comes into consideration if someone trades a considerable amount of crypto assets for their own account and offers this as a service for their customers. Proprietary traders enter into direct contractual relationships with their trading partners and identify themselves to them as contractual partners. It is controversial whether the activity must always be of a service nature in order to be required to obtain a permit, but BaFin does not consider it to be a prerequisite for a permit requirement in all cases.