- The German Finance Ministry has outlined a bill that will refresh its legal structure concerning securities.
- The bill targets tokenized securities and will deliver digital assets closer to traditional financial instruments.
- German governors’ considerable activity may form the future of cryptocurrency for the whole planet.
Germany’s Finance Ministry has outlined a bill that will update its legal framework regarding securities. The law expressly aims to tokenized securities and will bring digital assets closer to traditional financial instruments.
After ages following the advancements of cryptocurrency, German regulators are taking a proactive approach, placing Germany at the front of the race for legalizing digital crypto money.
What is Germany up to these days?
The German Finance Ministry published a very significant press announcement last week. Regulators are outlining 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. At the moment, 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 example, a single Bitcoin transaction would require tens of paper registries, one for each person and time that the asset has been transacted.
What’s the reason behind Germany’s Changing the Law?
The bill will present 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 present, 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 records 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 to register their digital securities.
- Decentralized securities. Thanks to this bill, German regulators are shaping the conditions for an explosion on new kinds of protection. 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.
German regulators are betting big on blockchain. This goes against the popular perception that governments know close to nothing about cryptocurrencies, and that regulation is still far on the horizon. That belief, however, is far from the truth.
A Crypto Superpower Soon To Rise
German financial officials have been considering 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.”
Further remarks 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 characteristics 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 Insanity Regulation
After the 2017 bull market, the BaFin issued its ICO administration in February 2018. This refreshed guidance aimed to improved consumer rights and investors’ protection, especially after the endless stream of scams related to ICOs.
This guidance said that cryptocurrencies were not perceived as a financial instrument and hence didn’t need any licensing from the BaFin:
Utilizing cryptocurrencies purely as a substitute for cash of book money 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.
More recently, in September 2019, the German Ministry of Finance released a 24-page document launching its national blockchain policy. This is probably the single most important document for cryptocurrency since the release of the Ethereum whitepaper.
The Proactive Vision of Europe’s Economic Engine
Germany’s blockchain policy contains a long-term strategy to become a leading power in blockchain technology and digital securities. The approach is based on the principles of stimulating innovations, fair free-market competition, environmental concerns, global collaboration, and above all, deepening a single digital market in Europe.
The approach 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.
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.
It Greatly Matters for the Crypto Market
One 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. Germany will likely push it is crypto and blockchain policies to other members of the European Union.
Crypto Philosophical Dilemma
There’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 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 the 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.