Between the Poles of Authorization Requirement and Geoblocking – What Can BaFin Demand from Service Providers from Other EU Countries?

(For German version click here)

 

In Germany, companies often require prior authorization from BaFin for commercial handling of cryptocurrencies if their offered services qualify as banking businesses or financial services. For example, the operation of an exchange platform, which enables users to trade cryptocurrencies will regularly qualify as a financial service, which is subject to authorization either because it qualifies as the operation of a multilateral trading facility, as investment brokerage or as proprietary trading. Besides the qualification of the activity as either a banking business or a financial service, the obligation to obtain authorization pursuant to sec. 32 of the German Banking Act (KWG) also requires that the respective service provider offers the service on a commercial scale with a reference to Germany. While BaFin assumes a commercial scale where the service is not only offered temporarily and the service provider is acting on basis of an intention for generating profits, the authority’s administrative practice regarding the question whether a service is offered with a reference to Germany is a lot more differentiated. BaFin will always assume so if the provider has its registered seat in Germany. However, BaFin may also assume a service to be offered with a reference to Germany if a service provider from abroad repeatedly and intentionally targets potential clients on the German market with his offer of banking and financial services.

Website in German May Trigger Authorization Obligation Pursuant to Sec. 32 KWG

BaFin always evaluates a possible reference to Germany of an activity in the sense of sec. 32 KWG on a case-to-case basis. A strong indicator for a reference as required for triggering the authorization obligation is a website that is available in German. Since there are other countries in the EU besides Germany in which German is spoken, the overall context and the details of the specific case are then decisive factors. Should for example an Austrian service provider have a German internet presence, it cannot automatically be assumed that the offered services target German customers. In these cases, the question arises if BaFin can demand from the service provider to make the website unavailable to internet users with a German IP-address by means of geoblocking measurements.

Geoblocking Regulation Prohibits Service Providers Using Geoblocking Measurements

Service providers within the European Union are subject to the EU Geoblocking Regulation. The EU regulation, which is directly applicable to service providers is intended to strengthen the European single market and counteract discrimination that is based on nationality, residency or the place of establishment. Inter alia, the Geo-blocking regulation prohibits service providers to block or limit a customer's access to the service provider's online interface for reasons related to the customer's nationality, place of residence or place of establishment through the use of technological measures or otherwise,. By applying geoblocking measurements, operators of crypto exchanges and other financial service providers from EU member states would therefore infringe on applicable EU law. BaFin cannot create a situation like that through its administrative practice.

No Priority of German Regulatory Law

According to an exemption clause from the Geoblocking Regulation, the prohibition of discrimination is not applicable where the blocking or limitation of access is necessary in order to ensure compliance with a legal requirement from the laws of a member state in accordance with the law of the European Union to which the service provider's activities are subject. The obligation to obtain authorization as it is stipulated in the German regulatory law cannot trigger this exemption, because the clarification that an offered service is not targeted towards German customers can also be achieved with a clear wording and disclaimers on the website as well as by omission of marketing activities that aim at the German market. Important in this context is also the passive freedom to provide services which is guaranteed under European law and which allows service providers to serve customers in Germany without triggering of authorization obligations also according to BaFin´s administrative practice, if the customer initially approaches the service provider. This business opportunity would be denied to service providers that would be forced by the supervisory authorities to implement geoblocking measurements.

 

Attorney Lutz Auffenberg, LL.M. (London)

 

I.  https://fin-law.de

E. info@fin-law.de

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