Germany: The unexpected leader of the digital asset revolution
- Future of Finance
- Dec 15, 2023
- 5 min read
Singapore has a good claim to be the jurisdiction that is leading the digital asset revolution. The Monetary Authority of Singapore (MAS) has certainly earned universal admiration for its dense and practical engagement with the private sector and the State at home and with its regulatory counterparts abroad to progress the development of digital asset exchanges and other infrastructures in Singapore and to build the support that cross-border activity requires.
In Europe, Switzerland – again with conspicuous levels of mutual support between the central bank, the private banks and the vertically integrated stock exchange – has emerged as the leading jurisdiction. Finanzplatz Schweiz has built infrastructure and made some progress in re-shaping securities laws and regulations to accommodate digital assets, though it is not yet completely clear what counts as a security token.
Luxembourg might argue it has achieved that clarity but, unlike Switzerland, it is a member-state of the European Union (EU), where uncertainty over securities tokens persists. The flagship Markets in Crypto-Assets (MiCA) Regulation, which came partially into force on 29 June 2023 and will not be fully in force until December 2024, explicitly excludes securities (as opposed to cryptocurrencies, Stablecoins and e-money). Instead, the EU is testing future possibilities via its so-called Pilot Regime for financial market infrastructures interested in developing digital assets services.
True, this has left the field open for national governments and regulators in EU member-states to set their own pace of reform. And Luxembourg is right to consider itself a contender for leadership. After all, the government has passed a succession of three “Blockchain Laws” that enable tokenised securities and funds to be issued, registered and used as collateral. These laws have persuaded a number of digital asset businesses – notably those in the funds sector - to establish themselves in the Grand Duchy.
What nobody had expected to find is that Germany – by the admission of its own leadership, a digital laggard in most areas – is leading both Switzerland (see Box 1) and Luxembourg in getting digital securities and funds issued into the marketplace, as opposed to being experimented with and merely talked about. By November 2023, Germany had hosted the tokenisation of no less than 56 bonds and funds. So the explanation of that success, whether it is more apparent than real, and how Germany might build upon it, is worth exploring.
Box 1: A comparison of digital asset developments in Germany and Switzerland
Switzerland has built a reputation as a magnet for FinTechs in general and cryptocurrency and digital asset talent and invest-ment. It has certainly promoted that image and introduced policies designed to encourage the development of the market. Germany, on the other hand, has pursued a quieter strategy. But quietness has not made it any less effective. A FINTECH Global survey of deal activity in FinTechs in the third quarter of 2023 put London far ahead (with 85 deals) but Germany (41) ahead of both France (30) and Switzerland (13). (1) Similarly, in the AI Rankings prepared by Tortoise Media, Germany is only one place (eighth) ahead of Switzerland (ninth) overall but third in terms of scale – behind only Singapore and Israel - while Switzerland is in 16th place. (2) Where the two countries are closely matched is in terms of legal infrastructure. Both are civil law jurisdictions that must pass new laws to make securities compatible with on-chain activities. Both adopted the same basic solution of an omnibus act plus amendment of multiple related laws. In Switzerland, the Federal Act on the Adaptation of Federal Law to Developments in Distributed Electronic Ledger Technol-ogy (known colloquially as “the DLT law”) amended four core laws and six others. In Germany, the Gesetz zur Einführung von elektronischen Wertpapiere (eWpG) also not only introduced electronic securities to Germany but made changes to existing laws. (3) Structurally, where Germany and Switzerland part company is that the Swiss emphasise the integration of security tokens with regulated trading markets under the DLT law. Custody, on the other hand, is not integrated with the legal reforms be-cause the Swiss Financial Market Supervisory Authority (FINMA) deals with custody of digital assets as part of its overall supervision of banks and securities firms. In short, if a bank offers digital asset custody, it must have FINMA approval. The German approach, by contrast, is to treat custody of cryptocurrencies and digital assets as an explicitly separate activity, with no pre-approval for banks looking to provide a service. That said, the transitional arrangements in Germany for switching from conducting an unregulated custody activity to acquiring a licence to do so seem to be generous in terms of timing. The German strategy recognised that “crypto securities” – “native,” non-asset backed tokens that have no life outside the blockchain onto which they are issued - are a desirable end-state, but also emphasised practicability. Most importantly, Ger-many had to accept that under EU law “crypto securities” issued on to decentralised blockchain networks rather than into a CSD are not eligible to trade on regulated marketplaces. This is a major point of difference with non-EU Switzerland, where the goal was to drive security tokens on to regulated exchanges. Overall, what is the outcome in the two markets and how do they compare? Switzerland has SDX, a fully regulated digital asset exchange with a digital CSD attached. SDX works with Aktionariat, an exchange that specializes in issuing native shares of private companies in tokenized form. It lists more than 40 equity tokens, issued under the DLT Law, for purchase. Switzerland also has Organised Trading Facilities (OTFs) run by regulated securities firms. They include OTFs controlled by Sygnum (a digital bank) and Taurus (a technology firm with a broker-dealer arm). Neither has a large volume of securities listed or traded. SDX has three digital bonds listed, one of which was issued by its parent company. Given the effort that the Swiss authorities have put into crafting rules for a regulated, blockchain-based trading venue it is ironic that none of the current trading venues fall within their scope. SDX, for example, is licensed under the traditional rules but allowed to trade blockchain-based securities. Likewise, the OTFs remain alternative trading facilities. Germany hosts digitally native “crypto securities” but on a small scale, with securities “digitised” at the issuance level only achieving much higher volumes. The German market is developing a supportive eco-system of registrars and advisors but secondary market trading is not yet considered, let alone expected. |
(3) The laws affected by the omnibus eWpG are extensive. They include the German Safe Custody Act (Depotgesetz – DepotG); KWG, the German Banking Act (Kreditwesengesetz – KWG); the Securities Prospectus Act (Wertpapierprospektgesetz – WpPG); the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG); the German Bond Act (Schuldverschreibungsgesetz – SchVG); the German Pfandbrief Act (Pfand-briefgesetz – PfandBG); the Investment Firm Act (Wertpapierinstitutsgesetz – WpIG); and the German Investment Code (Kapitalanlagegesetzbuch – KAGB).
Leader of the digital asset sector