Below is piece on MiCA regulations in Europe by Benedikt Rütter, Director of Institutional Sales at BitGo Europe GmbH, the institutional digital asset infrastructure provider based in Frankfurt, Germany. BitGo Europe GmbH has held the BaFin Crypto custody business license (section 1 (1a) sentence 2 no. 6 KWG) since 24th October 2023.
The market here is quite interesting. Germany was among the first countries to recognize digital assets' importance and develop specific regulations. These included a definition for this new category of financial instruments and the introduction of one of the world’s first crypto custody licenses. Since January 1, 2020, BaFin has licensed businesses offering custody, administration, and safeguarding of crypto assets and/or private cryptographic keys.
With that early lead and Germany’s historic strength in banking and financial services, one might expect the market here to be more developed. In fact, the market was on a steady upward trajectory from 2017 to 2020, growing to just under half a billion USD during that time, according to data from Statista. In 2021, it more than quadrupled, hitting $2.2B. Revenue per customer rose from $134.70 to $228.80 during that period.
Events in the latter half of 2021 sent crypto markets tumbling worldwide. Then came the wait for MiCAR to be finalized, and then all legal issues for BaFin and the Bundesbank to be granted regulatory authority by the EU had to be sorted out. Though market volume has now nearly recovered to 2021 levels, revenues have not. At $68.20, revenue per customer is near all-time lows.
This is partly due to scant participation from institutional customers, which typically generate higher per-customer revenues than retail. The entry of banks into the market could provide a positive signal for institutions but to date, only a handful of banks have received licenses.
As we have seen in the U.S. with the success of spot Bitcoin and Ethereum ETFs, many institutions want to diversify into digital assets, but only with partners they can trust. Banks have that trust. MiCAR plus BaFin should provide that seal of assurance to banks and their customers that it is safe to enter the market.
Banks have many opportunities to capture new revenue streams, retain existing customers, and even attract new ones by providing crypto services.
Secure institutional trading is an obvious place to start. Commerzbank and DZ Bank have already started down that path. As comfort with digital assets increases, staking, borrowing, and lending are also attractive opportunities. The list goes on. Blockchain is being applied to every aspect of traditional financial services, including clearing, settlement, bond issuance and more.
The foundation for all these activities is secure custody, whether that is through the bank or other licensed providers. The offerings themselves do not have to be built from scratch. Partnerships are the quickest route to market, and proof of concepts can be done without the risk of incurring high internal costs. The digital asset industry is young enough to have untapped potential but mature enough to have proven, long-established infrastructure firms that can provide out-of-the-box capabilities.
There is still time to capture the first-mover advantage. Crypto-native firms have a head start, and some are starting to offer traditional financial services such as credit cards, bill pay, and savings accounts. However, banks have trust and an installed customer base, and the field is wide open for them to play.
That said, people under 40 have a growing preference for crypto. Banks also tend to have a really long uptake cycle. Now is the time to start testing things out and to generate new revenue streams.
How? Connect a wallet to your bank account to understand the user experience. Survey your customers to determine interest. Talk to established firms to understand the market landscape and the key differentiators between providers. Work out your value proposition and how you’ll market it. Pick a segment to do proofs of concept. Start with a handful of coins, the top five or ten.
The most critical piece is maintaining security and trust, which German banks have in abundance. It’s one of their most important assets. Right now, few offer crypto products and services because it hasn’t been clear how to do so safely. Now that we have the guidance, we will start to see the market return to growth mode.
About BitGo
BitGo is the leading infrastructure provider of digital asset solutions, offering custody, wallets, staking, trading, financing, and settlement out of regulated cold storage. Founded in 2013, BitGo is the first digital asset company to focus exclusively on serving institutional clients. BitGo is dedicated to advancing a digital financial services economy that is borderless and accessible 24/7. With multiple Trust companies around the world, BitGo is the preferred security and operational backbone for more than 1,500 institutional clients in 50 countries, including many of the world’s top brands, cryptocurrency exchanges, and platforms. BitGo also secures approximately 20% of all on-chain Bitcoin transactions by value and is the largest independent digital asset custodian.
Disclaimer
This communication is for informational purposes only and should not be viewed as any form of recommendation as to a particular course of action or as investment advice. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Opinions, estimates and assumptions expressed herein are made as of the date of this communication and are subject to change without notice. This communication has been prepared based upon information, including market prices, data and other information, believed to be reliable; however, BitGo does not warrant its completeness or accuracy.
