BaFin Tightens Regulations on Asset Managers’ Direct Crypto Investments

Germany's financial regulator, BaFin, is tightening regulations on asset management firms investing directly in crypto assets, which have gained popularity in recent years but are considered high-risk.

In a newly issued circular, now open for consultation, BaFin outlined legal obligations for asset management firms and custodians dealing with direct crypto investments. The regulator stated that asset managers must apply for an extension of their licence to invest in crypto assets through Alternative Investment Funds (AIFs), if their current licence does not cover such investments.

Before making crypto allocations, asset managers must adapt and test their investment processes. They are also required to assess whether the crypto asset qualifies as an eligible investment that custodians are permitted to hold and submit this assessment before investing.

Additionally, firms must ensure they have sufficient resources, both human and material, as well as solid internal processes to handle crypto assets. Employees must possess the necessary knowledge and experience to manage crypto investments based on their roles and responsibilities. If existing employees lack the required expertise, companies should provide training or hire external specialists, BaFin advised.

At least one portfolio or risk management manager must demonstrate both theoretical and practical knowledge of crypto assets, which remain relatively new in regulated investment funds.

While certain investment funds are permitted to allocate funds to crypto assets, they carry risks such as potential losses from hacker attacks. Spezial-AIFs, a type of alternative investment fund available to professional and semi-professional investors, including pension funds, can directly invest in crypto assets.

Under Germany's Fund Location Act (FoStoG) introduced in 2021, Spezialfonds can allocate up to 20% of their portfolios to cryptocurrencies. Meanwhile, the Future Financing Act (Zukunftsfinanzierungsgesetz), which came into effect in 2023, allows domestic Publikums-AIFs to invest directly in crypto assets.

Despite the opportunities, BaFin warned that crypto investments carry risks, including potential losses from hacker attacks.