By: Gerelyn Terzo of Sharemoney
While the European Central Bank (ECB) decides the fate of a potential digital euro, Germany has been moving forward with the creation of its own cryptocurrency regulatory framework. The Western European nation has green-lighted a new policy called the Fund Location Act that will address innovative asset classes, including bitcoin. Lawmakers did not take much time to recognize the need for such a policy, as the legislation made its way from the Bundestag in April into law by early July.
Thanks to the new rule, Spezialfonds, or special asset management funds, may direct up to one-fifth of their holdings into cryptocurrencies. Spezialfonds are designed for institutional investors rather than individuals, though it is a step in the mainstream direction.
The development is a boon for the cryptocurrency industry, which is looking to achieve wide-scale adoption. The broader cryptocurrency market currently boasts a combined market capitalization of 1.3 trillion USD. The new law could pave the way for some USD 415 billion in Germany to move into digital assets such as bitcoin, analysts predict.
The German asset management industry oversees EUR 2 trillion in Spezialfonds as of the end of the first quarter in 2021. Analysts are not expecting fund managers to rush into cryptocurrencies, given the volatile nature of these investments compared to traditional assets including stocks and bonds.
In addition, the potential for fraud and scams in this nascent market means fund managers might be reluctant to direct retirement assets toward cryptocurrencies. On the other hand, bitcoin’s returns have the potential to bolster retirement portfolio returns. The largest cryptocurrency has been known to handily outperform other asset classes, its recent market downturn notwithstanding.
Germany Lays the Crypto Groundwork
Germany has been moving toward the acceptance of cryptocurrencies for some time now. For instance, securities authority BaFin has granted popular cryptocurrency exchange Coinbase a license to custody assets in the country. It was the first time that the regulatory authority granted such approval to a cryptocurrency exchange.
BaFin made the decision despite its characterization of the cryptocurrency asset class as “highly risky and speculative.” At the same time, the authority is also interested in nurturing innovation. Germany has required BaFin approval for cryptocurrency businesses to operate in the country since 2019.
At year-end 2020, the German government crafted a law to group electronic securities under the blockchain umbrella. Before the law, issuers and users of digital securities had to rely on paper certificates to keep track of transactions. At the time, Finance Minister Olaf Scholz reportedly touted electronic securities for their cost-saving features and efficiency. In addition, regulators have made it possible for German companies to issue debt securities on the blockchain, which is the technology that underpins cryptocurrencies.
Separately, major German financial institution Deutsche Bank has sent mixed signals on bitcoin as volatility has gripped the market. In the first quarter of the year, Deutsche Bank economist Marion Labore published a report saying bitcoin’s ascent to more than a USD 1 trillion market capitalization “makes it too important to ignore.” She also noted that cryptocurrencies weren’t going anywhere and that regulation would be making its way into the industry this year and into 2022.
Meanwhile, Deutsche Bank’s Laboure in May seemingly had a change of heart, comparing bitcoin to a statement made by the late fashion designer Karl Lagerfeld, saying, “Trendy is the last stage before tacky,” and what holds true for fashion might also apply for bitcoin. She would not be surprised if regulators cracked down on cryptocurrency the more that the digital assets pose a threat to fiat money.
A Deutsche Bank survey revealed that roughly one-third of millennials across the United States, Germany, China, the U.K. and beyond expect that at some point, digital currencies will take the place of banknotes and debit cards. Deutsche Bank warns, however, that bitcoin faces competition from the likes of technology giant Facebook, which is behind a stablecoin called diem that is tied to the U.S. dollar.
The crypto push is not just occurring in Germany; Brazil is experiencing a similar trend. The friendly environment for technology innovation appears to be working. For instance, Switzerland-based digital asset startup 21Shares has teamed up with Germany’s top online brokerage, comdirect, to deliver physically backed cryptocurrency ETPs to savings accounts.
As a result of the deal, comdirect users now have access to nearly a dozen of Germany-listed ETPs. For its part, comdirect boasts close to 3 million customers, and the partnership with 21Shares is the first of its kind to deliver digital assets to investors’ savings accounts. Asset manager Van Eck also has a bitcoin ETP that is available to German investors.
Meanwhile, Berlin-based mobile bank N26, which has 7 million users, is looking to add support for cryptocurrency payments including bitcoin for its users by year-end. The startup has teamed up with a company in Serbia to integrate the cryptocurrency infrastructure. N26 is reportedly doing this in response to customer demand despite the fact that co-founder Valentin Stalf is not sold in cryptocurrencies.
The rise of cryptocurrencies comes as consumer prices in Germany have been at multi-year highs. For instance, inflation in the country hovered at 2.5% in May, which was the highest rate in 10 years. The rising prices were largely fueled by the energy sector. Inflation dipped to 2.3% in June. Also in June, Germany’s wholesale prices climbed 10.7% vs. year-ago levels, which is the sharpest increase in three decades. The increase was driven by the following:
● Wholesale petroleum products, the prices for which rose 45.8%
● Scrap and residual materials, the prices for which increased 77.6%
● Ores, metals and semi-finished products, the prices for which increased 54.2%
Overall, Germany’s Economy Ministry believes the economic recovery is underway, supply chain constraints notwithstanding. Those very supply chain bottlenecks have hurt the manufacturing sector, triggering reduced forecasts for GDP. The Ifo expects the economy to expand at a rate of 3.3%, which is below the economic institute’s previous expectations.
The Economy Ministry is predicting inflation to hit 3% or higher in the back half of this year amid last year’s reduction in the VAT rate as policymakers sought to stimulate the economy during the pandemic. The rise in inflation is expected to be temporary, with rates poised to relax next year.