The German financial supervisory authority, BaFin, is tightening its grip on asset management firms investing directly in crypto assets, which have become increasingly popular in recent years, but are also considered high-risk investments.
BaFin has specified legal obligations for asset management firms and custodians directly investing in crypto through a circular now out for consultation.
The regulator said in the circular that asset management companies should request an extension of their licence to invest directly in crypto assets through Alternative Investment Funds (AIFs), if the licence they hold does not cover that type of investment.
Asset managers must also adjust and test investment processes before starting crypto allocations, it said. Before investing in crypto assets for the first time, the firms have to make sure the asset qualifies as an investment that a custodian is allowed to hold, and it has to submit an assessment of the investment, it added.
BaFin also said that asset manager firms must ensure they can rely on sufficient material and human resources, and solid internal processes to deal with crypto assets.
Employees at asset management companies must have the necessary knowledge and experience depending on their tasks, skills and responsibilities to deal with crypto investments. Asset managers should train existing employees, or hire external experts if employees lack the necessary skills to understand crypto investments, BaFin added.
At least one of the managers responsible for portfolio and risk management must have sufficient theoretical and practical knowledge to deal with crypto assets through regulated investment funds that are still relatively new, the regulator said.
Certain types of investment funds are allowed to invest directly in crypto, but they face a risk of losses, for example through hacker attacks, it added.
In Germany, Spezial-AIFs, a type of alternative investment fund open only to professional and semi-professional investors, including pension funds, can invest directly in crypto assets.
German Spezialfonds can invest up to 20% of their assets in cryptocurrencies according to the Fondsstandortgesetz (FoStoG), or Fund Location Act, that entered into force in 2021.
The Future Financing Act (Zukunftsfinanzierungsgesetz), that entered into force in 2023, also allows domestic Publikums-AIFs to invest directly in crypto assets.
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