What’s Going On In Germany?The German Finance Ministry issued a hugely important press release on Aug 11. Regulators are drafting a bill that will cover the issuance of tokenized securities as part of the country’s blockchain policy. The bill wants to change the current requirements for financial instruments. Currently, all financial assets issued in Germany need a paper document behind them, a procedure called securitization. If the bill passes intact, it will create new legislation expanding this requirement to cover digital signatures for tokenized assets. The paper requirement is hardly compatible with new technologies like cryptocurrencies or blockchain-based electronic bonds. For instance, a single Bitcoin transaction would require tens of paper registries, one for each person and time that the asset has been transacted.
Why Is Germany Changing The Law?The bill will open several paths that will reshape the understanding of securities in Germany, and possibly soon in the rest of the European Union:
- Securities will detach from paper certificates. This has several implications, from reducing costs in physical documents to transportation and compliance. More importantly, by going paperless, Germany is creating a solid foundation for the digital capital markets of the future.
- Opening the registry competition. At the moment, the registry of securities in Germany is done mostly on a central securities depository property of the Deutsche Börse, called Clearstream. If the bill passes, other registers will be able to perform the same function, guaranteeing competition. Traditional registries not only will compete among them, but also against blockchain-native projects. Centralized versus decentralized registries will be a battlefield to watch.
- Anyone can register securities. Less paper and legal costs will make registering securities a faster and seamless process. Those that stand to benefit the most from this will be industrial, brick-and-mortar corporations, which will now be able of registering their own digital securities.
- Decentralized securities. Thanks to this bill, German regulators are creating the conditions for an explosion on new kinds of securities. This is especially interesting regarding the current boom on decentralized finance (DeFi), mostly happening on top of the Ethereum network. Making registering easier will likely open the gates to all sorts of digital products, like decentralized insurance, shared ownership and real estate, and public spaces tokenization.
Building A Crypto SuperpowerGerman financial authorities have been paying attention to cryptocurrency for a long time. Although its position has been ambivalent, the country seems to be moving slowly to a crypto-friendly environment. The first approach to crypto came from the German Federal Financial Supervisory Authority in 2011. The Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin, classified cryptocurrencies as “units of account.” Additional comments came when Bitcoin started gaining traction and the first altcoins emerged, in 2013. BaFin issued then cryptocurrency guidance that accepted the conditions of some tokens as a substitute for legal tender. This came into contrast with public law, as this feature was exclusively attributed to fiat currencies. The document says:
Tokens which exhibit features that go beyond serving as a mere payment substitute, i.e. security, asset, and utility tokens, in particular, must be classified on a case-by-case basis. They may qualify as securities or even unites or shares in investment funds.
ICO Madness RegulationAfter the 2017 bull market, the BaFin issued its ICO guidance in February 2018. This updated guidance aimed to improved consumer rights and investors’ protection, especially after the endless stream of scams related to ICOs. This guidance stated that cryptocurrencies were not perceived as a financial instrument and hence didn’t need any licensing from the BaFin:
Using cryptocurrencies purely as a substitute for cash of book money in order to participate in the economic cycle in the exchange business is not a regulated activity.On Feb. 27, 2018, the German Ministry of Finance released its guidance regarding the taxation of cryptocurrencies. The document said that the following activities are exempted of VAT under German law:
- Exchanging crypto to crypto.
- Exchanging fiat to crypto or vice versa.
- Using cryptocurrency as payment.
- Cryptocurrency mining.
The Proactive Vision of Europe’s Economic EngineGermany’s blockchain policy contains a long-term strategy to become a leading power in blockchain technology and digital securities. The strategy is based on the principles of stimulating innovations, fair free-market competition, environmental concerns, global collaboration, and above all, deepening a digital single market in Europe. The strategy will be implemented in phases up until the end of 2021, although the COVID-19 crisis might have impacted the timeline. Some of the blockchain-based projects that will be piloted are linking energy facilities to public databases, and the verification of higher education certificates. In the public administration front, the Federal Government will trial a blockchain-based digital identity system. Weeks after the release of this strategy, regulators okayed commercial banks offering crypto-related services. A few months later, by February 2020, over 40 banks applied for cryptocurrency custody licenses. A curious case was the veteran Von der Heydt bank, which started developing a stablecoin pegged to the euro on the Stellar blockchain. https://twitter.com/hoergen/status/1227571621038305281 In March 2020, BaFin officially classified cryptocurrencies as financial instruments, adapting regulations from the Financial Action Task Force (FATF). The new bill is the latest step of this policy, originally aiming bond bearers, but general enough to open the doors for a full update of the financial markets as we know them.
Why It Matters For CryptoOne thing is clear with Germany’s latest blockchain and cryptocurrency developments — governments are no longer in the dark. Financial authorities have built a strong understanding of cryptocurrencies and digital assets, and are now ready to start adapting the legal system to the digital age. Many cryptocurrency users have the wrong perception that politicians and regulators are still years from touching their precious digital portfolios. Financial and tax authorities are fully aware of cryptocurrencies, at least in Germany. We can also expect that German expertise can and will influence the rest of Europe, and Germany will likely push its crypto and blockchain policies to other members of the European Union.
Crypto Philosophical DilemmaThere’s also a fundamental aspect of regulators getting into crypto. The original promise of Bitcoin was to undermine the power of governments and central banks and establish a more horizontal and democratic governance. Some hardcore cryptographers and cypherpunks reject any regulatory approach, as they consider them an enemy to be destroyed. Many believe that “code is law,” therefore the governments’ laws are not needed anymore. On the other hand, part of the community welcomes regulators’ advances, as they consider this is a necessary step in the road to mainstream adoption. Regulation could help to prevent the current “wild west” atmosphere where scammers and hackers do as they please.
Will the Bill Shape the Future of Crypto?Although we’ve yet to see if the bill passes the legislative project intact, regulation seems impossible to escape. Unlike other countries that are taking a negative view and prosecuting cryptocurrencies, German regulators show an “open for business” mindset. Germany will face several challenges when regulating this new tech, but its proactive views can make the country the global leader for blockchain. Keeping an eye on future development is a must to anyone holding digital assets. Cryptocurrency holders should be open to dialogue and participate in building a common future where the traditional and new financial instruments can live and thrive together. This, in turn, may be the catalyst for the biggest transfer of wealth in human history.
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