What is BaFin?
BaFin is the Federal Financial Supervisory Authority and is the German supervisory authority for credit institutions, insurance companies, financial service providers and securities trading houses. BaFin monitors and regulates the German financial market and ensures that companies operating in this market comply with the statutory rules. BaFin was established in 2002, replacing the previous supervisory authority, the Federal Banking Supervisory Office (BAKred). Since its foundation, BaFin has been based in Bonn. In 2011, however, the agency moved (at least in part) to Frankfurt am Main. BaFin’s main task is to safeguard the integrity of the German financial system. This includes BaFin inspecting financial companies and ensuring that they comply with the legal rules. The authority also acts as a dispute resolution body between customers and companies. BaFin is subordinate to the Federal Ministry of Finance.
Tasks of BaFin
BaFin is responsible for the proper conduct of banking transactions as well as financial services and e-money throughout Germany. It takes control of banks, insurance companies, financial service providers and investment funds and ensures that these companies meet their obligations. BaFin also has an important role in the regulation of e-money in Germany. It is responsible for monitoring the activities of companies offering e-money and ensuring that they fully comply with applicable laws. The authority may also impose fines or other sanctions if companies violate regulations or requirements.
To effectively regulate these companies, there are various laws and regulations that all financial companies must abide by. This includes regular reporting to BaFin and an anti-money laundering program to prevent money laundering activities by these organizations. In addition, BaFin is responsible for reviewing or issuing strict control measures when issuing license applications to companies, as well as regularly reviewing existing license applications and establishing new rules or guidelines as necessary. The aim here is always to ensure customer protection with regard to financial services products and services and to hedge potential financial risks for investors.
Providers of NFTs could also be required to be regulated by BaFin or fall under the relevant laws, depending on their design. If NFTs are classified as securities, this means that they are subject to the same rules as other financial instruments. This means that companies wishing to offer or trade such NFTs must obtain approval from BaFin. They must also adhere to the same transparency and risk management standards that apply to other securities. This is an important step in ensuring that investors are treated fairly when purchasing NFT in a regulated market. The distinction between NFT, for example in computer games or for fashion, and NFT, which actually only serve investment purposes, is currently very difficult and one of the great challenges for lawyers in this area.
Regulation of e-money by BaFin
Fundamentals of the regulation of e-money institutions
Due to concerns about the financial security and stability associated with e-money, BaFin has established a set of rules that require e-money institutions to meet certain standards. These include:
1. an e-money institution must be able to demonstrate that it has sufficient financial resources to keep customer funds safe and to meet all obligations to customers. BaFin regularly reviews the financial stability of the institution.
2. an adequate risk management structure must be in place to ensure that customers’ funds are protected from the risk of financial loss. This structure should include sound internal audit and control, as well as a code of conduct for all employees of the Institute.
3. reasonable precautions must be taken to protect customer data to ensure that personal information cannot be misused and customer data remains protected from unauthorized access.
4. precautions must be taken against fraudulent activities and manipulation of transactions. This includes risk-based screening of potential business relationships and transaction transparency.
5. the institution must be able to remain liquid and maintain all payment obligations by building up adequate reserves or taking other measures to avert or mitigate a liquidity crisis.
Requirements for the issuance of a license as an electronic money institution
BaFin sets strict requirements that must be met in order to obtain a license as an e-money institution. These include:
1. an applicant must obtain approval from BaFin and undergo a licensing procedure before it can be licensed as an e-money institution. This procedure includes a detailed examination of the technical and organizational components of the company and its activities.
2. the applicant must also demonstrate a minimum capital in proportion to the activities envisaged. The amount of minimum capital required depends on the type and size of the company and its activities.
3. in addition, an applicant must have the necessary expertise to perform the e-money institution’s tasks efficiently and in accordance with the applicable regulations. This also includes proof of recognized qualifications, which must be checked regularly.
4. finally, it is necessary for an e-money institution to adhere to certain requirements regarding customer identification, transparency and money laundering prevention. This includes the implementation of effective internal control systems and appropriate procedures to prevent manipulation or fraud in the Company’s financial services operations.
BaFin also sets certain reporting requirements to ensure that all relevant information can be reported in a timely manner. In addition, it may in certain cases require the provision of further evidence of performance or impose conditions to ensure that the legal requirements are met. To ensure that all regulations are properly followed, BaFin regularly monitors all e-money institutions in Germany and initiates measures to improve compliance if necessary.
This includes, among other things, reviewing the use of new technologies or products and their impact on the market and customer protection regulations. Due to its strict regulation, BaFin ensures that e-money institutions can fulfill their duties correctly and protect customer funds appropriately. Therefore, it is very important for companies to understand what BaFin’s requirements are and what steps need to be taken to become licensed as an e-money institution and stay in business.
E-money, computer games and play money?
E-money may also have an impact on the computer games market in the future. Since play money may be classified as e-money, this could mean that computer games that use play money, especially those that can be used in multiple games or in games from different providers, will be regulated by BaFin.
In the past, there have been cases of providers falling out of favor because they did not follow the applicable rules. To avoid this risk, it is advisable to seek professional advice when doing more with an in-game currency than using it purely internally in just one game, or when using blockchain mechanics or content to handle the currency.
Although there are no strict regulations for individual computer games yet, it is important to understand that any company with a product or service related to virtual money and digital payments has legal obligations. This includes compliance with certain data protection standards and, under certain circumstances, provisions of the German Money Laundering Act. This can, for example, prevent illegal activities such as money laundering or terrorist financing from being supported via the game. BaFin is currently looking at various ways to ensure that new technology is not abused and developers are able to sell their products legally. It is therefore advisable for all parties involved in the e-money sector to contact BaFin before making any changes to their products or services. This is the only way to be sure that you comply with all applicable laws and regulations and thus do not get into trouble unintentionally.
Ultimately, such regulation provides individuals and companies with protection against financial risk and unlawful conduct. Therefore, it is crucial that all companies in the e-money sector refresh their knowledge and always comply with BaFin in light of the latest developments.
Conclusion: Great opportunities, but also great effort to become an e-money institution
E-money offers great opportunities for companies that take on the effort and expense of establishing and operating an e-money institution. Especially in the field of computer games or when trying to establish a currency for more than one provider, there are hardly any providers so far.
Even though BaFin strictly monitors the regulation of e-money institutions, these companies can operate quite profitably. However, it is also important to note that an e-money institution is a very complex business and therefore also requires a lot of effort.
I am happy to advise on these issues and can also help with the creation of a business model or assist with any issues away from BaFin.
