Regulating Cryptocurrencies: opportunities and Challenges for Investors

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Introduction

The rapid evolution of cryptocurrencies has transformed them from niche financial instruments into a significant asset class. This development brings new opportunities for investors but also introduces complex legal and regulatory challenges. This article explores key aspects of the cryptocurrency landscape, including:

Emerging Opportunities

Cryptocurrencies and blockchain technology as innovative investment options
Integration of digital assets into institutional and retail portfolios

Regulatory Landscape

Overview of European and German regulatory frameworks, including:

Markets in Crypto Assets Regulation (MiCA).
German Capital Investment Code (KAGB).
German Capital Investment Code (KAGB).

Insights into the impact of these regulations on investment strategies and compliance.

Sector-Specific Implications

Analysis of the opportunities, risks, and obligations for:

Funds (AIFs, private equity, and hedge funds).
Banks and insurance companies.
Pension funds and family offices.
Retail investors accessing crypto markets via private banks or external asset managers.

Challenges and Opportunities

Addressing risks like high volatility, limited liquidity, and technological vulnerabilities.
Leveraging structured products, tokenized assets, and innovative blockchain applications.
The role of regulations like MiCA and the Future Financing Act in shaping the future of crypto investments.

Furthermore, this article provides valuable insights into how diverse financial sectors can navigate regulatory complexities and capitalize on the transformative potential of cryptocurrencies.

Investments in currencies based on blockchain technologies – often referred to as “cryptocurrencies” – have developed from a niche topic into an established and dynamic asset class. The market capitalisation of Bitcoin, the oldest and best-known cryptocurrency, has since surpassed the USD 2,1 trillion mark. Ethereum, the leading platform for smart contracts and innovative blockchain applications, remains a key topic with a market capitalisation of around USD 405 billion.

The blockchain technology behind these digital assets offers far-reaching application possibilities that go beyond the creation and trading of cryptocurrencies. The underlying distributed ledger technology is considered revolutionary and is increasingly being compared to the importance of the internet. Applications such as supply chain management, identity verification and the tokenisation of assets illustrate the transformative power of this technology.

A prominent signal of the growing importance of cryptocurrency in the financial sector is the application for crypto custody licences by major banks such as DekaBank and Commerzbank to the German Federal Financial Supervisory Authority (BaFin) in accordance with the German Banking Act (KWG). At the same time, demand for capital market-related products based on cryptocurrencies is growing. Institutional investors and retail investors are actively looking for opportunities to position themselves in this promising asset class.

A. Funds
1. Possible investment objects

The integration of crypto assets into the portfolios of asset managers and private equity funds has developed into an exciting investment option in recent years. Special AIFs (alternative investment funds) in particular offer a suitable vehicle for utilising these innovative assets due to their flexible investment strategies. However, the legal framework for such investments is strictly regulated and requires compliance with numerous regulations arising from the German Capital Investment Code (KAGB), the EU Regulation on Markets in Crypto Assets (MiCA) and other supervisory regulations.

Asset managers who manage special AIFs benefit from the broad investment guidelines of the KAGB. Unlike mutual funds, special AIFs can invest in a wide range of alternative assets, including crypto-assets such as cryptocurrencies, tokenised assets or blockchain-based financial products. Nevertheless, they are obliged to comply with the principles of risk diversification and professional asset management. This means that investments in cryptocurrencies must be appropriately diversified in order to minimise the risk for investors. Such investments also require a comprehensive risk analysis, particularly with regard to volatility, market liquidity and regulatory uncertainties.

Private equity funds, which are also structured as special AIFs, have the opportunity to invest directly in companies that specialise in blockchain technology or crypto-related services. They often use the flexibility of their structures to invest in start-ups or scale-ups that offer innovative solutions in the field of tokenisation or the development of crypto products. Such investments offer high potential returns, but are associated with considerable risks, particularly in terms of market acceptance and technological development. Like other special AIFs, private equity funds are subject to the requirements of the KAGB and must ensure that their investment decisions are transparent and comprehensible.

With the entry into force of MiCA in 2024, the regulatory framework for crypto-assets in Europe has been significantly strengthened. MiCA creates a standardised basis for the issuance, trading and custody of cryptocurrencies. For asset managers and private equity funds, this means that they may only invest in products that comply with MiCA requirements. This applies in particular to transparency requirements, which ensure that investors are fully informed about the characteristics and risks of cryptocurrencies. MiCA also requires providers and custodians of cryptocurrencies to obtain a licence and act under strict supervision, which significantly reduces the risk of fraud and mismanagement.

Secure custody of cryptocurrencies is a key issue for asset managers and private equity funds. According to Section 1 (1a) no. 6 KWG, crypto assets such as cryptocurrencies may only be held by licensed custodians. Asset managers and funds must therefore ensure that their partners meet the highest security and compliance standards. This is particularly relevant as crypto assets are vulnerable to cyber attacks and technical failures.

The investment opportunities for special AIFs and private equity funds are diverse. Funds can invest in the following cryptoassets:

Cryptocurrencies that are traded via crypto exchanges,
Crypto assets pursuant to section 1 (11) no. 10 KWG,
Crypto securities pursuant to Section 4 (3) eWpG,
Security tokens that are classified as securities under MiFID II.
Derivatives based on cryptocurrencies or indices,

2. Investments through open-ended special AIFs (Sections 278 et seq. KAGB)

a. General open-ended special AIF (Section 282 KAGB) The investments must comply with the principle of risk diversification and the assets must be liquid to ensure redemptions. Sufficient market liquidity is crucial here, rather than legal restrictions. Investments in crypto-assets are generally possible, provided that redemption liquidity is guaranteed.
b. Hedge funds (Section 283 KAGB) Hedge funds are subject to the same requirements as general open-ended special AIFs, but with the possibility of using leverage or making short sales. They can invest in crypto-assets, but in compliance with risk diversification.
c. Open-ended special AIFs with fixed investment conditions (section 284 KAGB) Such funds may invest in securities (section 284(2) no. 2(a)), crypto assets (section 284(2) no. 2(j)) or derivatives (section 284(2) no. 2(c)). Crypto assets are permitted if their market value can be determined, subject to an upper limit of 20% of the fund volume (section 284(3) no. 2 KAGB). Special requirements apply to custody, as custodians require a crypto custody licence in accordance with section 1 (1a) no. 6 KWG.
d. Public AIF (1) Closed-ended public AIF (Sections 261 et seq. KAGB) Strict requirements apply to closed-ended public AIFs. The permitted assets are exhaustively regulated in Section 261 KAGB. Investments in crypto-assets are possible if they constitute investments pursuant to section 261 (1) nos. 2-4 KAGB or assets pursuant to sections 193-195 KAGB. For crypto-assets, a review of liquidity and tradability is required in particular. Crypto securities and security tokens are currently not recognised as securities pursuant to Section 193 KAGB. Indirect investments, for example via 1:1 certificates, are possible provided they fulfil the requirements of Section 261 (1) No. 7 KAGB.
(2) Open-ended public AIF (Sections 214 et seq. KAGB) Open-ended public AIFs can invest in tokenised fund units (Section 196 KAGB). The acquisition of derivatives with cryptocurrencies as underlying assets is possible to a limited extent under Section 197 KAGB. Investment in crypto assets is limited to 10% of the fund volume. In accordance with Section 219 KAGB, these funds may invest in assets such as securities (Section 193 KAGB), money market instruments (Section 194 KAGB) or tokenised fund units (Section 196 KAGB). Direct investments in cryptocurrencies are currently not possible. However, indirect investments can be made via 1:1 certificates, provided they fulfil the requirements of the UCITS Implementation Directive.
e. Other investment funds and UCITS (1) Other investment funds (section 221 KAGB) These funds can invest directly in crypto assets, provided the requirements of the CryptoFAV are met. Up to 30% of the fund volume may be invested in derivatives with cryptocurrencies as the underlying asset. Investments in security tokens and unsecuritised loan receivables are also possible.
(2) UCITS investment assets UCITS funds are limited to the assets listed in Sections 193-198 KAGB. Derivatives with cryptocurrencies as underlying assets are not permitted. Investments in crypto securities and security tokens are limited to 10% of the fund volume.
(3) Special features and challenges Determining the market value is essential for all AIFs. Crypto-assets must be liquidatable, especially in the case of open-ended funds. Custody regulation: Security tokens and crypto assets require custody by a KAGB custodian, which also requires a crypto custody licence. For special AIFs with fixed investment conditions and public AIFs, upper limits for crypto investments must be observed.

3. Outlook

The Future Financing Act explicitly regulates investment in crypto assets for closed and open-ended public AIFs. Crypto assets are to be included as permissible assets in future, with an investment limit of 10% of the fund volume. This strengthens the integration of digital assets into the fund industry and promotes Germany as a financial centre.

By explicitly incorporating crypto assets into the regulatory framework, the Future Financing Act positions Germany as a leader in the modernization of financial markets. This forward-looking regulation underscores the growing importance of blockchain technology in traditional finance and reflects the act’s commitment to fostering innovation. At the same time, the regulation ensures that investor protection and financial stability remain central priorities, creating a balanced approach to integrating this dynamic asset class into the broader financial ecosystem.

In conclusion, the KAGB already offers extensive opportunities for investments in crypto-currencies, even if there are still some regulatory and practical hurdles. Increasing tokenisation and the continuous development of the legal framework will continue to transform the fund industry.

B. Banks

Investing in crypto-related assets such as cryptocurrencies offers banks considerable potential for diversification and tapping into new markets. At the same time, the high risks and strict regulatory requirements demand careful planning and implementation. Banks need to integrate crypto assets into their strategies as a new asset class without losing sight of the strict regulatory requirements. By combining innovative approaches and compliance with existing regulations, banks can design their strategies to effectively capitalise on the opportunities of the crypto market without jeopardising financial stability.

The legal framework, particularly with regard to the German Banking Act (KWG), Basel III and the Capital Requirements Regulation (CRR), sets clear limits, but also offers opportunities.

1. Legal requirements According to the KWG, cryptocurrencies are considered financial instruments within the meaning of Section 1 (11) KWG. Banks that offer services in connection with cryptocurrencies like custodian or trading services require a licence from BaFin. It should be particularly emphasised that a separate licence is required for the custody of crypto assets in accordance with Section 1 (1a) sentence 2 no. 6 KWG. Proprietary investments in crypto assets is generally permitted, but is subject to the Minimum Requirements for Risk Management (MaRisk). These regulations ensure that banks carefully monitor and evaluate their crypto investments.
2. Basel III requirements A key aspect of the regulatory requirements is capital adequacy in accordance with Basel III. Due to the high volatility of cryptocurrencies, they are considered extremely risky and must therefore be backed by high risk weights. A risk weighting of 1250% is required for direct investments in cryptocurrencies, which corresponds to full capital backing. This makes direct investments less attractive for many banks. Indirect investments, for example in derivatives or structured products, on the other hand, can be accompanied by lower capital requirements under certain conditions, provided there is sufficient diversification.
3. Requirements of the CRR The Capital Requirements Regulation (CRR) supplements the regulatory requirements by specifying how banks must calculate their capital requirements. Crypto assets that are not categorised as "high quality assets" cannot be included in the liquidity ratio (LCR). As cryptocurrencies are generally considered illiquid, they are excluded from inclusion unless they are traded on regulated markets and fulfil high transparency requirements. This further restricts the investment opportunities for banks.
4. Restrictions for banks Capital adequacy is one of the biggest challenges for banks when integrating crypto investments. Smaller banks in particular often find themselves overwhelmed by the strict requirements, as these limit their ability to hold significant holdings of cryptocurrencies or derivatives. Added to this is the extreme volatility of cryptocurrencies, which not only jeopardises the stability of the equity ratio, but also brings with it additional requirements for internal risk management systems. At the same time, banks are obliged to fulfil the requirements of the EU Anti-Money Laundering Directive (AMLD). This stipulates that strict due diligence obligations must be adhered to in order to effectively prevent money laundering and terrorist financing. This includes verifying the identity of customers and tracking transactions.
5. Solution approaches Banks can pursue various approaches to overcome the challenges mentioned above. The use of structured products such as ETPs or crypto derivatives makes it possible to gain access to crypto markets without having to fulfil the high capital requirements for direct investments. Partnerships with specialised crypto custodians offer a further opportunity to minimise regulatory and operational risks. These custodians, which hold a BaFin licence, can ensure the secure storage and management of cryptocurrencies. At the same time, banks should develop internal expertise to meet the specific requirements of the crypto market. This includes training employees in blockchain technology and the corresponding regulatory requirements.

Another promising approach is to focus on tokenized assets such as real estate or bonds. In contrast to cryptocurrencies, these often offer a more stable return and are less complex from a regulatory perspective. Such investments could allow banks to capitalize on the benefits of blockchain technology without taking on the extreme risks of the cryptocurrency market.

From a legal standpoint, while tokenized assets generally carry the same fundamental risk profile as their non-tokenized counterparts, the process of tokenization introduces unique considerations. These include technological risks, such as cybersecurity vulnerabilities, operational risks related to blockchain infrastructure, and questions about the legal enforceability of digital representations. Regulatory frameworks like Basel III and the Capital Requirements Regulation (CRR) typically determine risk weightings based on the underlying asset. However, tokenized assets may face additional scrutiny if their liquidity, valuation methods, or market infrastructure are not as well-established as those of traditional assets.

Nevertheless, when traded on regulated and transparent platforms, tokenized assets can align with the risk profile of their non-tokenized equivalents, offering institutions a secure and innovative means of diversifying their portfolios. By leveraging tokenized assets, banks can navigate these regulatory challenges while benefiting from the efficiency and transparency provided by blockchain technology.

C. Insurance company

The increasing relevance of cryptocurrencies in the financial world has also presented insurance companies with new challenges and opportunities. In view of the dynamic developments in this area and the regulatory requirements resulting from the German Insurance Supervision Act (VAG), the Solvency II Directive and other regulatory frameworks, the industry is faced with the task of developing innovative investment strategies that take into account both the legal requirements and the specific risks of this asset class.

1. Solvency II requirements Crypto-assets such as cryptocurrencies are primarily viewed as alternative investments for insurance companies. Under Solvency II, they are categorised as assets that must be subject to a comprehensive risk assessment. The categorisation as alternative investments implies that these assets cannot be fully reflected in any of the standard Solvency II categories and therefore require increased capital requirements and a strict assessment of the risks. In particular, the high volatility and limited liquidity of cryptocurrencies such as Bitcoin or Ethereum pose significant challenges. When investing in such assets, insurance companies must not only assess their market price risks, but also consider the impact on their capital requirements. These capital requirements are regulated by the risk-based capital ratio (SCR), which is intended to ensure that the company remains solvent even under stressful market scenarios.
2. Investment requirements according to VAG According to the Insurance Supervision Act (VAG), insurers must pursue a secure, high-quality and liquid investment policy. Cryptocurrencies can only be included in the investment portfolio if they fulfil the requirements for security and profitability. In particular, investments in tokenised securities or real estate backed by blockchain technologies are seen as forward-looking.
3. Diversification and portfolio management A further challenge when investing in cryptocurrencies arises from the requirements for diversification and liquidity in the portfolios of insurance companies. Solvency II requires investments to be sufficiently diversified in order to minimise the risk of concentration on individual assets or markets. As cryptocurrencies are often subject to high price fluctuations and their market liquidity can vary greatly, insurers must ensure that their investments do not jeopardise the stability of the overall portfolio. In addition, cryptocurrencies held as long-term investments must not jeopardise the liquidity requirements for short-term obligations.
4. Risk management and valuation In addition to the quantitative requirements, Solvency II also places qualitative requirements on the risk management and governance structures of insurance companies. Before investing in crypto-assets, insurers must ensure that they have appropriate internal control mechanisms in place to enable continuous monitoring of these investments. This includes assessing the security of the underlying technology, particularly the blockchain, as well as vetting the providers, such as crypto exchanges or custodians. Insurance companies that invest in tokenised assets must also comply with the legal requirements for the custody of these assets, which are strictly regulated in accordance with the German Insurance Supervision Act (VAG) and the guidelines of the European Insurance and Occupational Pensions Authority (EIOPA). A promising approach for insurance companies is to invest in tokenised traditional assets such as bonds, real estate or infrastructure projects. These offer a more stable return and are easier to manage from a regulatory perspective than volatile cryptocurrencies. Tokenised bonds allow insurers to use innovative technologies without being exposed to the risks of volatile markets. Similarly, tokenised real estate funds offer a way to benefit from the efficiency advantages of blockchain technology while meeting diversification and stability requirements. Another option is to use structured products such as crypto derivatives or exchange-traded products (ETPs). These give insurance companies indirect access to the crypto markets without having to invest directly in the underlying assets. These products often offer lower volatility and in many cases fulfil the regulatory requirements for inclusion in insurers' investment strategies. At the same time, insurers should check whether the providers of such products meet the applicable regulatory standards, particularly with regard to transparency and the safeguarding of the underlying assets. In addition to the regulatory and operational challenges, money laundering regulations also play a key role. The EU Anti-Money Laundering Directives (AMLD) require insurance companies to comply with strict due diligence obligations when investing in or managing crypto-assets. This includes verifying the identity of business partners, tracking transactions and reporting suspicious activities to the competent authorities. Insurers that invest in crypto-assets or offer them as part of their products must ensure that their internal processes fulfil these requirements.
5. Regulatory reporting Insurers are obliged to document their crypto investments in detail and report them to the supervisory authority. This includes information on the type, scope and valuation of the investments as well as the valuation methods used. These strict requirements and guidelines allow insurers to ensure that their crypto investments are in line with the long-term interests of policyholders and regulatory requirements.

D. Pension funds

The integration of cryptocurrencies into the investment strategies of pension funds is an increasingly relevant topic, as these innovative assets offer both opportunities and significant challenges. Pension funds traditionally pursue conservative investment strategies that focus on stability, long-term returns and the fulfilment of future liabilities. At the same time, they are under increasing pressure to diversify their portfolios and utilise innovative technologies such as blockchain. However, strict regulatory requirements, in particular from the IORP II Directive, the Investment Ordinance (AnlV) and national regulations, must be adhered to.

1. Investment Ordinance The Investment Ordinance (AnlV) plays a central role in determining the investment options available to pension funds. It defines which assets are permitted and which requirements for diversification, security, profitability and liquidity must be met. Although crypto-assets are not explicitly regulated in the AnlV, they can be considered as "other investments" or as part of an investment fund under certain conditions. The prerequisite for this is that the market value of the crypto assets can be reliably determined, which is often fulfilled by their listing on regulated crypto exchanges. However, according to AnlV, these assets may only be integrated into portfolios to a limited extent in order to maintain the principle of risk diversification.
2. The IORP II Directive According to the IORP II Directive, which forms the legal framework for institutions for occupational retirement provision (IORPs) in the EU, pension funds must conduct sound risk management to ensure the security and sustainability of their assets. This includes a careful review of new asset classes such as crypto-assets. The AnlV supplements these requirements by stipulating that the permitted assets must be diversified and generate stable long-term returns. Crypto assets such as Bitcoin or Ethereum, which represent a significant risk due to their price fluctuations, can therefore only be included in portfolios to a limited extent and with clear diversification strategies.
3. Concentration risks Another key aspect of the regulatory requirements concerns the limitation of concentration risks. Pension funds may not concentrate their investments in a small number of high-risk assets in order to ensure the stability of the overall portfolio. Crypto assets, which are often highly volatile, must therefore generally be balanced by more stable assets. Many pension funds opt for indirect investments, for example via exchange-traded products (ETPs) or investment funds that contain crypto assets. These products provide diversified access to the crypto markets without the fund being directly exposed to the risks of individual cryptocurrencies.
4. Qualitative specifications In addition to the quantitative requirements, pension funds must also fulfil qualitative requirements. This includes the development of internal control systems and ensuring that all investments comply with the requirements of the anti-money laundering regulations (AMLD). In particular, when managing cryptocurrencies, it is necessary to verify the identity of business partners and report suspicious activities. In addition, pension funds must ensure that all service providers involved in the crypto investment process, such as custodians or crypto exchanges, comply with the applicable regulatory standards.
5. Future Financing Act A significant step towards expanded investment opportunities for pension funds is the Future Financing Act (ZuFinG), which has been in force since the end of 2023. This law has expanded the German Investment Code (KAGB) and other relevant regulations in order to strengthen the German financial market. The ZuFinG now allows crypto assets to be included as eligible assets for institutional investors such as pension funds, provided their market value can be reliably determined. The law also stipulates that pension funds may invest up to 10% of their portfolio in crypto assets, which opens up new opportunities for diversification. However, the principle of risk diversification remains essential in order to ensure the stability of the overall portfolio.

E. Pension schemes (Versorgungswerke)

Pension schemes, which typically pursue conservative investment strategies and have to fulfil long-term obligations, are faced with the question of whether and how crypto-assets can be integrated into their portfolios. Legal requirements such as the German Pension Schemes Act, the German Investment Ordinance (AnlV) and other national and European regulations play a key role here.

Pension schemes are subject to strict requirements regarding the security and diversification of their investments. In accordance with Section 2 (1) of the AnlV, the investments of the protection assets must be selected in such a way that they are secure, profitable and can be liquidated at any time. Crypto currencies such as Bitcoin or Ethereum are characterised by high volatility and limited liquidity, which is why they are considered particularly risky. Due to these characteristics, they can generally only be included in the portfolios of pension funds to a limited extent and under certain conditions. However, the AnlV opens up a certain scope for investments in innovative assets such as crypto-assets under the “Other investments” category, provided their market value can be reliably determined and they comply with the principles of risk diversification.

Another regulatory framework results from the ZuFinG. ZuFinG expands the investment opportunities for institutional investors, including pension funds, by defining cryptocurrencies as permissible assets. In accordance with the provisions of ZuFinG, pension funds can invest up to 10% of their portfolio in crypto assets as cryptocurrencies, provided they meet the definition in accordance with Section 1 (11) sentence 4 KWG. The prerequisite for this is that the market value of the cryptocurrencies can be determined, which is guaranteed for regularly traded cryptocurrencies and tokenised assets. This regulation offers pension funds the opportunity to gain controlled access to the crypto markets without jeopardising their obligations to policyholders.

However, the introduction of cryptocurrencies into the portfolio of a pension fund requires careful examination and implementation. The investment must be made in accordance with the general principles of risk management. In particular, it must be ensured that crypto assets do not pose disproportionately high risks to the long-term fulfilment of pension obligations. This includes assessing the high volatility of these assets, the risks of cyberattacks and the operational and regulatory risks associated with the custody of crypto assets. Pension funds must therefore commission specialised service providers with the safekeeping of crypto-assets that have the appropriate authorisation for crypto-custody in accordance with Section 1 (1a) sentence 2 no. 6 KWG.

In addition to direct investments in cryptocurrencies, pension funds can also rely on indirect investments, for example via structured products such as exchange-traded products (ETPs) or investment funds that contain crypto assets. These approaches make it possible to reduce the risk of individual cryptocurrencies through diversification. Another promising approach is to invest in tokenised assets such as real estate or infrastructure projects, which are less volatile and at the same time take advantage of the efficiency and transparency of blockchain technology.

To summarise, investing in crypto-assets for pension funds must be carefully examined and planned due to the regulatory and risk-related requirements. However, the AnlV and the ZuFinG create a legal basis that allows pension funds to include this innovative asset class in their portfolios as long as the principles of security, profitability and diversification are upheld. By using structured products, tokenised assets and specialised custodians, pension funds can reap the benefits of blockchain technology while meeting their long-term obligations to policyholders. It will be crucial to continue to closely monitor developments in this dynamic market and adapt investment strategies to the changing legal and regulatory framework.

F. Family Offices

Investing in crypto-assets offers (multi-)family offices an attractive opportunity for diversification and the utilisation of innovative technologies such as blockchain. Due to their more flexible structure compared to institutional investors such as pension funds or insurance companies, family offices can tailor their investment strategies more closely to individual needs and higher potential returns. At the same time, however, they are subject to regulatory requirements designed to ensure that risks are appropriately assessed and controlled. Relevant regulations can be found in particular in the German Investment Code (KAGB), the German Banking Act (KWG) and the EU Anti-Money Laundering Directive (AMLD).

Family offices that exclusively manage the assets of a family are typically exempt from the strict regulatory requirements for institutional investors. They can therefore invest more directly in risky asset classes such as cryptocurrencies, provided they comply with the general legal framework. Multi-family offices that act on behalf of several families and professionally manage third-party funds, on the other hand, are subject to the requirements of the KAGB. They are considered alternative investment fund (AIF) managers if they bundle and manage investments, which entails additional requirements for risk diversification, liquidity and transparency.

A key regulatory aspect of investing in crypto-assets is the categorisation of these assets in accordance with Section 1 (11) KWG. Cryptocurrencies such as Bitcoin or Ethereum are considered financial instruments, which means that a licence pursuant to Section 1 (1a) sentence 2 no. 6 KWG may be required for their management and custody. Family offices that wish to invest in larger holdings of cryptocurrencies or manage them for their clients must ensure that either they themselves or a contracted service provider have the appropriate crypto custody licence. This requirement has been further specified by the ZuFinG, which defines crypto assets as permissible assets in investment portfolios.

Another important aspect concerns the prevention of money laundering. In accordance with the AMLD and national implementing legislation, family offices must ensure that the identity of their business partners is verified and transactions are scrutinised for potentially suspicious activities. This is particularly relevant for crypto-assets, as these are often traded in pseudonymised networks, which increases the risk of money laundering or terrorist financing. Family offices must therefore have suitable compliance structures in place to fulfil the legal requirements.

The investment opportunities themselves are diverse. Family offices can invest directly in cryptocurrencies, either via regulated crypto exchanges or via specialised over-the-counter (OTC) platforms. Alternatively, they can invest indirectly in crypto-assets via structured products such as exchange-traded products (ETPs) or investment funds, which reduces risk while providing access to the markets. Another approach is to invest in tokenised assets such as works of art, real estate or company shares. These offer an innovative way of combining traditional asset classes with the efficiency and transparency of blockchain technology.

Family offices benefit from their flexibility, as they do not have to adhere to any fixed regulatory requirements for portfolio composition unless they act as AIF managers. This allows them to take greater risks and pursue higher potential returns. At the same time, however, they must carefully assess the inherent risks of crypto assets. These include the high volatility, technical risks associated with blockchain technology and potential regulatory uncertainties arising from the fledgling legislation in this area.

G. Retail investors in cryptocurrencies via private banks and external asset managers

Investing in cryptocurrencies has become significantly more important for retail investors in recent years. Retail investors can gain access to this innovative and dynamic asset class, particularly through the support of private banks and external asset managers (EAMs). Both types of institution enable investors to enter the crypto market, but offer different approaches and services. The legal framework resulting from the EU Markets in Crypto Assets Regulation (MiCA), MiFID II, the Anti-Money Laundering Directive (AMLD) and national regulations ensures that investor protection as well as transparency and security are guaranteed.

1. Private banks Private banks offer retail investors broad access to crypto assets through structured products, direct investments or tokenised assets. As regulated financial institutions, they are obliged to comply with the requirements of MiFID II, which ensures that investors are fully informed about the risks and characteristics of the investment products on offer. Private banks must check whether the investments are in line with the risk profile, knowledge and investment objectives of their clients. As crypto currencies such as Bitcoin or Ethereum are considered particularly risky due to their high volatility and speculative nature, detailed risk disclosure is essential. For example, investors must be informed about potential total losses, regulatory uncertainties and technological risks associated with blockchain technology.
2. EAM External asset managers also play a central role in opening up crypto investments for retail investors. They offer customised asset management that is tailored to the individual needs of clients. Like private banks, EAMs are also bound by MiFID II and must ensure that the products offered are suitable for the respective clients. EAMs often operate independently of large banks and therefore have the opportunity to develop more flexible and specialised investment strategies. This allows them to offer innovative approaches to investing in crypto-assets, for example through the use of exchange traded products (ETPs) or crypto funds. With the entry into force of MiCA in 2024, the legal framework for crypto-assets has been significantly strengthened. MiCA defines clear rules for the issuance, trading and custody of crypto-assets, thereby increasing security for retail investors. Both private banks and EAMs must ensure that the crypto products they offer are MiCA-compliant. This includes ensuring that crypto token providers provide standardised and transparent information that enables investors to assess the characteristics and risks of the assets. MiCA also ensures that crypto exchanges and custodians are regulated, which reduces the risk of security breaches and fraud. A key aspect of the activities of private banks and EAMs is compliance with the Anti-Money Laundering Directive (AMLD). Crypto-assets are considered to be particularly susceptible to money laundering and terrorist financing, which is why strict due diligence obligations are required. This includes customer identity verification (KYC procedure) and transaction monitoring. Both types of institutions must ensure that their internal compliance systems are robust enough to fulfil the requirements of AMLD and protect the integrity of the crypto markets. The specific investment opportunities for retail investors cover a wide range of approaches. In addition to direct investments in cryptocurrencies, which are processed via regulated crypto exchanges, private banks and EAMs often offer structured products such as ETPs, certificates or specialised funds. These products offer the advantage that they are often less volatile and are managed by professional asset managers. Another option is to invest in tokenised assets such as real estate, works of art or bonds that are mapped on the blockchain. These investments combine traditional asset classes with the efficiency and transparency of blockchain technology and are often better suited to investors who have a moderate risk profile.

H. Foundations

Investing in crypto-assets is also becoming increasingly important for foundations, particularly as this new asset class offers attractive potential returns and opportunities for diversification. At the same time, foundations face particular challenges, as their investment decisions must comply with the specific legal framework for foundations and their statutory purposes. Relevant legal requirements arise primarily from the state foundation laws, the German Fiscal Code (AO) and the Investment Ordinance (AnlV). These regulations set clear limits and requirements for the asset management of foundations, particularly with regard to security, profitability and the preservation of the foundation’s capital.

Foundations are subject to the principle of capital preservation, which ensures that the foundation’s assets are permanently preserved and that the income can be used sustainably to fulfil the purpose of the articles of association. Crypto assets such as Bitcoin or Ethereum are categorised as particularly risky due to their high volatility and speculative nature. They can therefore only be included in the portfolio of foundations to a limited extent and in strict compliance with the investment guidelines. The decisive factor is that the investments do not jeopardise the foundation’s capital and enable sustainable income to be secured . Investments in crypto-assets should therefore be well justified and supported by a sound risk assessment.

Under the “Other investments” category, the Investment Ordinance offers foundations a certain amount of leeway for the inclusion of innovative assets such as crypto assets. However, the prerequisite is that the market value of these assets can be reliably determined. This is generally the case for crypto assets, as they are traded on regulated crypto exchanges and their market prices can be determined transparently. Nevertheless, foundations must ensure that the investments comply with the principles of diversification and security. An excessive proportion of crypto assets in the total assets would violate the principle of risk diversification and could jeopardise the purpose of the foundation.

Another important aspect is compliance with the regulations on asset management in accordance with Section 55 (1) No. 1 AO, which apply to tax-privileged foundations. These stipulate that the foundation’s assets must be invested in such a way that they support the tax-privileged purpose of the foundation in the long term. Crypto assets can be considered in particular if they are used specifically for innovative projects or the promotion of technical developments that are in line with the foundation’s purpose. Examples of this include investments in blockchain start-ups or the promotion of sustainable technologies based on tokenisation.

In addition to the tax requirements, foundations must also comply with the provisions of the Anti-Money Laundering Directive (AMLD). Crypto-assets are considered susceptible to money laundering and terrorist financing, which is why foundations must comply with strict due diligence obligations when managing such assets. This includes checking business partners and ensuring that all transactions are transparent and traceable. Foundations should therefore only work with regulated platforms and service providers that meet the applicable regulatory standards.

The investment opportunities for foundations are diverse and range from direct investments in cryptocurrencies via regulated exchanges to indirect investments in structured products such as exchange-traded products (ETPs) or specialised funds. These indirect investments offer the advantage that they are generally better regulated and less volatile. Another promising option for foundations is to invest in tokenised assets such as real estate, works of art or sustainable infrastructure projects. These assets combine the advantages of blockchain technology with more stable earnings prospects that are more compatible with the requirements of foundations.

I. Conclusion.

The increasing acceptance and regulation of cryptocurrencies opens up a wide range of investment opportunities for various players in the financial world. Whether institutional investors such as pension funds, insurers and pension schemes, specialised funds such as private equity funds and special AIFs or retail investors via private banks and external asset managers – each investor group faces specific opportunities and challenges that shape their strategies and regulatory requirements.

1. Opportunities Crypto-assets offer attractive diversification opportunities and innovative approaches to capital investment, particularly through the tokenisation of assets such as real estate, bonds or infrastructure projects. Institutional players benefit from the opportunity to expand their portfolios through an asset class that offers high long-term growth potential. Specialist AIFs and private equity funds are utilising the flexibility of these assets to invest in emerging technologies and markets. For retail investors, increasing regulation, particularly through MiCA, has created a safer environment that facilitates access to crypto markets through structured products or specialised funds.
2. The challenges High volatility, limited liquidity and technological risks continue to be key obstacles. Banks and insurers are faced with strict capital and solvency requirements that limit the scope of their investments. Foundations and pension funds need to harmonise their investments with the principles of capital preservation and risk diversification. Although family offices and retail investors benefit from more flexible framework conditions, they are faced with the task of carefully managing the inherent risks of these dynamic markets. In addition, adherence to money laundering and compliance requirements remains a key challenge for all parties involved.
3. Future prospects Progressive regulation through MiCA, the Future Finance Act and other national and international regulations is creating a more stable and transparent legal framework that will further promote investment in crypto-assets. At the same time, the ongoing development of blockchain technology will open up new fields of application, which could further attract the interest of investors. Nevertheless, it remains crucial that investors continuously adapt their strategies to maximise the opportunities of this innovative asset class while keeping the risks under control. To summarise, crypto-related assets such as cryptocurrencies are no longer just a niche phenomenon for investors with an affinity for technology. They are becoming an integral part of the global financial markets and offer diverse potential for growth and innovation. However, it remains essential for every financial sector to pursue a sound strategy that fulfils both individual requirements and regulatory requirements. Only in this way can the opportunities of this asset class be utilised sustainably without jeopardising the stability and security of the investments.