A Safe Pair of Hands – Germany’s measured approach to digital assets

More than a decade ago, Berlin first became a hotspot for cryptocurrency developers and early adopters of bitcoin; it is now one of Europe’s key hubs for blockchain startups. Likewise, Germany’s financial centre, Frankfurt, has emerged as an important bridge between the worlds of traditional and decentralised finance.

Institutional interest in digital assets investing in Germany is growing but could still be described as cautiously optimistic. According to a recent investor survey conducted by KMPG, just over half (54%) of those surveyed have invested more than 20% of their total assets in digital assets while 67% of investors who spend more than 50% of their total assets on digital investments are invested for the medium to long term (from 3 to over 5 years).

Many Germans remain nervous, however, about the potential risks either due to worries about volatility or safekeeping of their assets. When choosing their preferred crypto exchanges, security (82 per cent), is the most important criteria cited by investors. Trusted providers such as Zodia Custody, who are backed by major banks and financial institutions, thus have an important role to play as part of a landscape that fosters greater trust that assets will be securely protected.

Regulatory landscape

The quality of regulatory oversight is one of the key elements which combine to build investors’ trust, particularly for regulated financial institutions. Digital assets in Germany are regulated by BaFin, which supervises companies providing services related to digital assets including trading platforms, ATMs, custodians and securities registers. Since January 2020, companies wishing to provide digital asset custody have required authorisation from BaFin. Earlier this year, BaFin also began regulating issuers of asset-referenced tokens (ART) and e-money tokens (EMT) as part of the wider EU Markets in Crypto Assets (MiCA) regulations.

MiCA implementation

One of the key objectives of MiCA is to protect consumers against risks associated with participation in the digital asset ecosystem and to increase accountability and industry standards for services provided by CASPs. Specifically, custodians must take steps to protect consumers’ wallets and private keys, and will become liable if they lose either participants crypto assets or keys as a result of an incident that is attributable to them.

MiCA has become a hot topic across the industry, since full implementation is scheduled to take effect from the end of 2024. Despite this timeline, the regulation includes a ‘grandfathering’ clause that allows for variation in implementation timelines across Member States. The clause provides a limited period of protection for CASPS operating under existing legislation. Germany is implementing a 12-month grandfathering period for MiCA, which is considerably shorter than the 18 months suggested by MiCA itself. Consequently, companies operating in Germany will need to move faster to ensure that they are MiCA compliant.

Digital asset innovation – tokenisation and greening of digital assets

Outside of the regulatory discussions, a key factor influencing support for digital assets is their innovative potential. While investors want trusted digital asset infrastructure they also have other investment objectives which digital assets may have a unique ability to serve.

German industrial giant Siemens has been an early player in the space with two digital bond issuances over the last 2 years valued at €60 million and €300 million respectively. The issuance also played a crucial role in the ECB’s and Bundesbank’s trials of blockchain technology for the digital financial market.  Barbara Schlyter, Head of Xtrackers Digital Products and Partnerships at DWS, says that “Germany stands out as an innovator in digital assets and tokenisation with a number of fintechs collaborating with large institutions. At DWS, we exemplify this via our partnership with Galaxy and Flow Traders to issue a MiCA-regulated Euro stablecoin. There are multiple examples now in Germany where traditional finance and the digital assets industry are coming together to drive the institutionalisation and greater adoption of digital assets”.

Germany has also been one of the most active countries in the adoption of ESG practices but concerns about the environmental impact of certain cryptocurrencies may deter investors from exploring digital assets. New options such as digital green bonds are beginning to open up, however, which could alter perceptions and drive change.

Education is the key

For all investors, there is a thirst for better education to understand both the risks and advantages of digital assets and blockchain. Users want reliable information and high-quality education to enable informed decision-making. Organisations like the Frankfurt Blockchain Centre have been very active in events and learning, fostering knowledge in this rapidly moving field of technological change but more still needs to be done.

Bringing these key elements of regulatory clarity, trusted institutional providers, industry partnership and better knowledge together will help to ensure that Germany can remain a strong, innovative and stable home for digital assets both now and into the future.

Disclaimer: This article is provided to you for your information and discussion only. It should not be regarded as a solicitation or an offer to buy or sell any products or services in any country to any person to whom it is unlawful to make such an offer or solicitation. Virtual Assets may lose their value in full or in part and are subject to extreme volatility, and the owner and/or investor in the Virtual Asset can lose all the money or other value they invest, and does not benefit from any form of financial protection. View full disclaimer here: zodia-custody.com/marketing-disclaimer.