In Europe, Switzerland has been at the forefront of crypto regulation. Germany managed to keep up, despite having started late.
After a period of unclarity, BaFin presented the German Act Implementing the Amending Directive on the Fourth EU Anti-Money Laundering Directive (Gesetz zur Umsetzung der Änderungsrichtlinie zur Vierten EU-Geldwäscherichtlinie), going above and beyond the scope of the implementation of the European Directive AMLD5. The law entered into force this January, legitimizing crypto assets and clarifying the rules applicable to crypto start-ups.
The new crypto law sets a new standard, which is expected to serve as an initial filter to the crypto business models emerging in the market. Introducing crypto custody (Kryptoverwahrgeschäft) services into German law as a new type of financial business, in addition, the law outlines the BaFin authorization requirements for crypto custodians, i.e., the companies managing the custody, management, and protection of crypto assets or private cryptographic keys, which are used to keep, store or transfer crypto assets for others. As required by the new law, companies handling (or planning) crypto services in Germany are already at BaFin’s door for the license.
Berlin-based white label banking service provider solarisBank with its subsidiary solaris Digital Assets is one of the first movers of the DeFi BaaS services and intends to become the pioneer in crypto custody business shortly, enabling more and more crypto-asset based projects in the European ecosystem through the crypto custody license it is now pursuing.
Michael Offermann, former MD of solarisBank Blockchain Factory and current advisor for solaris Digital Assets GmbH, agreed to share his insights on this noteworthy process and give us a sneak peek on solarisBank’s plans.
- Michael, it’s a pleasure to have you as a guest! Let’s kick off this interview by getting to know you better. Starting as a business executive at solarisBank, you have evolved into a true blockchain expert. Can you walk us through this transition?
Since my early days at solarisBank in 2015, I worked in the field of Business Development and later on became the Head of the department. As Business Development, we always looked into the latest developments and banking trends to identify potential new markets for solarisBank. That way I started focusing on Blockchain and cryptocurrencies in early 2017 and put it on the strategic agenda for solarisBank. All of this resulted in us launching the solarisBank internal Blockchain Factory with its mission to bridge the gap between the banking and the crypto world by providing banking APIs into the market. It was always clear to us that this is just the starting point but that we want to enter the space step by step.
- I remember that as one of the first three employees of the stealth project solarisBank, you were among the lucky few to have the chance to observe solarisBank evolving from a small start-up into a BaaS giant. What were your learnings in this “build-a-bank” process?
The idea of solarisBank was born within the fintech company builder finleap – an incubator solely focused on launching financial technology startups. We realized back then that no banking partner was focused on serving fintech startups and decided to fill that void. When conceptualizing this first idea we understood that the market for BaaS is way bigger and more diversified than we thought. Not only fintechs needed a digital banking partner but also e-commerce companies, tech giants and even banks. As mentioned, we had this thought already in 2015. It’s extremely exciting and satisfying to see that many big techs have moved into the fintech space using BaaS offerings, like Apple has done with the Apple Card. Essentially, my biggest learning was: believe in your idea and stick to it while making slight adjustments along the way.
- Let’s steer the wheel more towards the DeFi topic. You were running the solarisBank blockchain unit (Blockchain Factory), and since last year there is a new entity focused solely on digital assets (solaris Digital Assets GmbH). What products are planned to be offered through this new entity?
The mission of solaris Digital Assets is to drive digital asset adoption. We want to empower digital asset pioneers to create outstanding user experiences while staying secure and compliant. During the last years we learned that there is a strong demand for banking services in that growing industry but still a limited offer and a lot of addressable pain points. Our first product focusses on an important pain point. It’s our digital assets custody API, which simplifies the secure and compliant storage of digital assets by smoothly connecting custody with banking services such as know-your-customer (KYC) procedures and account services. Of course, we have more ideas on how to further develop the product palette but will start with the safekeeping of digital assets.
- Which crypto start-ups do you have a cooperation with? Are there more exciting first-timers out there preparing for their debut through solarisBank?
As the solarisBank Blockchain Factory, we were fortunate to achieve some great partnerships with Bitwala, Bison and BSDEX of Börse Stuttgart for example – We are currently working on announcing our first custody partners. Stay tuned as we have some great names coming up.
- By making one of the first licensing applications, solaris Digital Assets is shaping the industry precedence about crypto custodian licensing, and therefore your experiences are crucial. Can you walk us through the application stages you’ve dealt with so far? What requirements did you have to fulfill? What exactly will this license entail?
I think all of us realized in 2019 that this field will be regulated, and that Germany might actually become a regulatory trailblazer in this regard. As an early-mover in this space we decided to be on the forefront of this development. By launching our service in December last year and submitting a formal notification to the BaFin about our intent to apply for a custody license by November 2020, we were one of the few players to benefit from grace period, granting us permission to already perform custodial services today. We are currently working on completing our license application. As a company which has already successfully gone through a financial licensing process in Germany, we have a good idea how to manage such a challenging process. We take all of its accompanying hurdles extremely seriously as we know they exist for good reasons, namely for the protection of the customer.
- How does the German regulator approach the licensing topic? It wasn’t so long ago when solarisBank received its (traditional) banking license – does BaFin have a stricter approach when it comes to crypto?
The German regulator took a progressive approach in 2019 with its disclosure to regulate crypto custodians. We highly appreciate this approach since it brings more trust into this whole field. I’m certain that the German regulator taking care of the crypto market will help to bring it out of its niche. The licensing process itself is very much comparable to other licensing processes. Crypto custodians actually have to fulfill a lot of requirements from banking laws such as the KWG, GwG, MaRisk and BAIT. As the nature of digital asset custody revolves a lot around IT systems and processes, AFC-Compliance naturally also plays a very important role.
- Since the German crypto custodian license does not qualify for EU passporting, all non-German custodian license holders are required to have a local presence and apply for a separate license in Germany. This means that the crypto business models will stay mostly regional due to increasing operational costs, at least for now. How do you think this will affect market competition?
On the one hand I can imagine that other jurisdictions will observe closely what a country like Germany is doing and how this will work out. So, maybe at a certain point we will see some kind of harmonization towards the German legislation. Without talking too much about potential competition, I believe that a key part of our value proposition is our technology, and not just the fact that we are regulated. solarisBank was founded explicitly as a tech company with a banking license, not the other way around, and solaris Digital Assets shares that same belief. Taking that into consideration, it shows that we will not focus solely on the German market in the future.
- If I am not mistaken, some of the more traditional banks are also waiting in line for the crypto custody license. However, they are unlikely to have the technical know-how. How do you think they will keep up? Is the German banking sector ready to adapt to the needs of DeFi in general?
It is great to see that there is a positive momentum for this topic. At the same time, from my experience traditional banks usually struggle with the identification of new business opportunities as well as the execution due to structural and technological legacy. We on the other hand have the advantage that we’ve built up tangible experiences and partnerships with use cases in the Blockchain field which strengthen our credibility. If some of the rather traditional players look into a partner-centric approach to add external technology to their projects, maybe solaris Digital Assets could even be a good fit for them.
- I would like to wrap it up with a personal touch – what blockchain enhanced financial services (payments, wallets, etc.) do you use? What are your anticipations for the crypto market?
I’m always hesitant to mention names but I’ve tried and use a variety of services from the crypto and blockchain industry. It is impressive to see the innovation coming from that field and how customer-centric some of these players have become. It is always difficult to come up with anticipations for this highly dynamic field. Last year we saw a huge hype around STOs. Today, a lot of things are going on around DeFi. What definitely has brought up real use cases and traction over the last years are open blockchain protocols such as Bitcoin and Ethereum and I am excited to observe the evolution of that.
Interview by S. Elif Kocaoglu Ulbrich