Potential Bankruptcy Risk for Nuri: "A degree of financial peril is inherent"

Potential Bankruptcy Risk for Nuri: "A degree of financial peril is inherent"

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The crushing blow of the crypto market slump is causing ripples among German fintech companies, with Berlin-based digital bank Nuri filing for bankruptcy last week due to sudden cash flow issues. As the first German fintech startup to fold as a result of the crypto crash, Nuri managed assets worth 500 million euros for half a million customers. However, it's worth noting that Nuri wasn't a banking institution in its own right but partnered with Solarisbank in Berlin. The failure of Nuri is perceived as a warning sign, highlighting the potential for contagion risks between the crypto industry and traditionally regulated banks.

Here's what we know about BaFin's response so far:

Boerse-online.de: Given that Nuri wasn't under BaFin's ongoing supervision, we wondered about the investigation into the case. A representative from BaFin explained that they're monitoring the ongoing developments at Nuri and checking for any potential effects on supervised institutions. As for Solarisbank, it appears to be unscathed by Nuri's insolvency.

There's been industry chatter about the likelihood of more bankruptcies. BaFin, however, shared that they routinely assess the business models of institutions under their supervision.

Solarisbank facilitated the banking infrastructure and regulatory framework for Nuri's services, particularly the banking license. We asked about the potential contagion risk between the crypto industry and regulated banks. BaFin's take is that generally, a contagion risk exists if a bank works with a broker and hasn't adequately informed customers about risks.

The question arises as to why crypto fintechs don't require a banking license while the assets of these fintechs in the event of insolvency are safeguarded by regulated banks (like Solaris). The answer depends on the nature of the activities these companies undertake. Typically, businesses providing banking, financial, or payment services need a permit from BaFin. Crypto custody, however, is a financial service, and only companies that provide brokerage, advice, or investment placement on behalf of and under the liability of a credit or securities institution don't require their own permit, falling under the exception of § 2 Abs. 10 KWG or § 3 Abs. 2 WpIG as a so-called contractually bound broker.

Regarding any regulatory consequences emerging from this case, that would be a matter for the legislature to decide.

It's essential to consider the implications of Nuri's downfall for the contagion risks between the crypto industry and the regulated banking sector:

Regulatory Framework

1. MiCAR and EU Regulations: The Markets in Crypto-Assets Regulation (MiCAR) strives to create a harmonized European regulatory framework for crypto-assets. German fintech companies must comply with EU standards and attain necessary authorizations[2][4].
2. BaFin Guidance: BaFin has updated its interpretation and application guidance on the German Anti-Money Laundering Act to encompass crypto-asset service providers. This means increased due diligence obligations, especially for transactions involving self-hosted addresses[1].
3. Anti-Money Laundering Package: The EU's new anti-money laundering package, including the establishment of a new authority to supervise certain financial institutions, aims to standardize national supervisory practices and introduce uniform rules for preventing money laundering and terrorist financing. This package is set to take effect from July 1, 2025[1].

Contagion Risks

1. Regulatory Oversight: The insolvency of Nuri underscores the need for rigorous regulatory oversight to mitigate contagion risks between the crypto industry and traditional banking. Regulators will likely pay closer attention to fintech companies' relationships with digital banks.
2. Stability and Supervision: The enhanced focus on stability and supervision might lead to more stringent requirements for fintech companies to ensure they don't pose systemic risks to the financial system.
3. Risk Management: Companies must implement robust risk management practices to prevent potential contagion effects. This includes thorough risk assessments, maintaining sufficient capital adequacy, and managing liquidity.

Implications for German Fintech Companies

1. Compliance Costs: German fintech companies might face increased compliance costs due to stricter regulations. This could hit smaller companies harder.
2. Operational Challenges: The need for authorization and compliance with regulations like MiCAR and anti-money laundering standards could introduce operational challenges, such as managing complex regulatory requirements and ensuring ongoing compliance.
3. Innovation and Growth: Despite regulatory hurdles, a clear and stable regulatory environment might foster innovation and growth in the crypto industry. Companies may need to adapt their business models to thrive in this environment.

In conclusion, the regulatory implications for German fintech companies working with digital banks in the crypto industry include increased regulatory oversight, compliance costs, and operational challenges. However, these measures aim to stabilize the financial system and provide a framework for safe innovation.

1. The failure of Nuri, a personal-finance fintech company involved in the crypto industry, has raised concerns about potential contagion risks between the crypto industry and traditional banks, emphasizing the need for thorough risk management practices in the business sector.
2. As regulatory bodies, such as BaFin, clamp down on compliance costs and operational challenges for German fintech companies working with digital banks in the crypto industry, the focus is shifting towards fostering safe innovation while ensuring stability and supervision in the financial system.

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