Germany is becoming an European leader in crypto-assets?
Cryptocurrency is a digital currency designed to be faster and more reliable than regular government-issued money. With the latest developments in blockchain and cryptocurrency, Germany has gained a solid understanding of digital currencies and assets. What bet is Germany making on the decentralized finance (DeFi) and centralized finance (CeFi) markets?
Since 2019, German policy has included a long-term strategy for blockchain and digital securities (see the German government’s blockchain strategy dossier | Source: Bundesministerium der Finanzen). It aims to make its country a powerhouse in the field. A strategy based on principles of stimulating innovation, fair competition and environmental concerns. Germany is looking to a model of global collaboration and the deepening of Europe’s digital single market.
Law in April 2021 for crypto-currency investment funds
With the Fund Location Act, Germany now allows managers of institutional investment funds (Spezialfonds) to invest up to 20% of their portfolio in cryptocurrencies. This is an important step towards the acceptance of digital currencies. Indeed, BaFin (the German financial supervisory authority) is now allowing Coinbase, one of the world’s leading cryptocurrency exchange platforms, to operate in the country. In addition, many related activities are tax-free (mutual exchange, exchange with fiat currency, mining).
This regulatory provision in Europe’s leading economy has been welcomed by the crypto community. It comes at a time when institutional investors are increasingly interested in cryptoassets. The legislation strengthens Germany’s position as a center for financial investment, and boosts the sector by giving digital currencies greater legitimacy in the country.
Decree in June 2021 to introduce electronic bonds
On December 16, 2020, German Chancellor Angela Merkel’s cabinet passed new legislation concerning financial securities (elektronisches Wertpapiergesetz – eWpG). The law marks a quantum leap for financial securities, moving directly from paper to digital securities. In the past, securities had to exist in the form of paper certificates. Transactions also had to be carried out using paper registers.
Finance Minister Olaf Scholz said, « The paper certificate may be expensive to some for nostalgic reasons, but the future belongs to its electronic version. » He also added that « electronic securities will be more cost-effective and will enable more streamlined processes. »
The law values the interest of blockchain, which makes it possible to do away with the use of certain contracts still in paper format in the world of finance. It reduces costs and procedures in favor of an efficient transfer process. Access to registers is now open to all, enabling the creation of digital products in the insurance and real estate sectors, for example.
On June 10, 2021, Germany published a decree implementing the Electronic Securities Act (eWpG). It initially concerns debt securities. This legislation was approved in December 2020 and also allows the issuance of electronic securities using a distributed ledger, called the crypto securities ledger.
This law (eWpG) introduces a new category of « electronic securities » which are equivalent to traditional securities issued by means of a physical share certificate. The requirement for a physical certificate is replaced by registration in an electronic securities register.
Electronic securities are divided into central register securities and cryptographic securities. A central register security is defined as « an electronic security that is registered in a central register », while a cryptographic security is defined as « an electronic security that is registered in a cryptographic securities register ».
If electronic securities are issued using the crypto securities register, the issuer must designate an entity as the operator of the distributed ledger. This entity is subject to a financial market licensing requirement, issued by the BaFin. The law also clearly defines electronic securities as « property » under German property law, meaning that existing civil law principles apply. Thus, in principle, the rules relating to tangible objects will apply to intangible property.
Although the European Union is acting in favor of the use and development of these digital assets, some countries are adopting a more negative or even repressive attitude towards cryptocurrencies. Europe’s leading economy, on the other hand, is showing a willingness to innovate and numerous signs of interest. Deutsche Bank tweeted on March 19 that Bitcoin is now « too important to ignore ».