Best Bitcoin Exchange for Germany
Politicians and regulators are working on stricter rules for virtual IPOs. The industry is in favour, but quick solutions are not in sight. Jörg von Minckwitz’s mission is to shake things up. That’s why the founder of the cryptobank Bitwala, which stores virtual currencies like Bitcoin, took to the streets with other industry representatives in Berlin on Wednesday.
They set up a Bitcoin ATM in front of the Brandenburg Gate. It was out of order. But von Minckwitz wanted to advertise for the fact that the politics takes the rising industry finally seriously – and creates appropriate basic conditions like in other sectors. “Only clear and reliable rules will sustainably strengthen consumer confidence in crypto instruments,” says the Bitwala boss.
Financial market supervisors around the globe have long watched the crypto industry go about its business and have tried to control parts of the new business with existing financial market rules.
This approach has failed to succeed
While functioning business models took some time, virtual IPOs (Initial Coin Offerings, ICOs for short) flourished. The industry service Coinschedule estimates that start-ups raised 21.4 billion dollars with these financing rounds in 2018, after 6.5 billion in the previous year. But four out of five projects failed. A series of scandals and fraud shook the sector. And bona fide investors have lost a lot of money – even in Germany.
Politicians and financial market regulators therefore want to enact stricter rules for ICOs. It is a question of an appropriate further development of financial regulation, says Felix Hufeld, president of the German financial supervisory authority Bafin. “We don’t want to stall innovations, but at the same time of course we want to ward off dangers,” emphasises Hufeld.
Virtual IPOs: Bafin boss wants global regulation for ICOs
Bafin chief wants global regulation for ICOs. “It is important to us, for example, that measures are taken against money laundering and that the personal rights of investors are protected. In addition, there should be certain minimum standards for the contractual conditions of virtual IPOs.
It will take some time before rules are passed
The German government is also keeping an eye on the regulation of the cryptosector. According to insiders, however, rapid legislative initiatives are not to be expected. There are indeed a number of experts in the Ministry of Finance and Economics who deal with the subject, says a person familiar with the processes. “But it will be some time before new rules are actually adopted.” There is hardly a supervisory authority that is not currently looking at the issue, a financial market supervisor emphasizes.” But there are still many unanswered questions.
In the coalition agreement, the CDU/CSU and SPD have agreed to advocate appropriate regulation of crypto currencies and ICOs at European and international level. Following a Franco-German initiative, the topic was discussed for the first time at the meeting of finance ministers and central bank governors of the 20 most important industrial and emerging countries (G20) in Buenos Aires in March.
In Europe, too, several supervisory authorities are observing the development of cryptosystems and ICOs. Subsequently, the EU Commission will decide whether it sees a need for action. The European financial market supervisory authority Esma is currently looking at whether some cryptoassets can be classified as financial instruments and supervised with existing rules, explains the authority. “We will communicate our findings to the Commission by the end of the year.
The statements show that the issue has arrived in politics. But they also suggest that the road to agreement on European or global rules will be a long one. Especially small EU states like Malta or Cyprus see digital currencies as an opportunity for their financial centre – and will therefore hardly submit to strict EU rules without resistance.
If no agreement can be reached on European directives in the foreseeable future, insiders therefore think it conceivable that Germany will end up pushing ahead with its own regulations on the subject of ICOs. This has already happened in other areas in the past, such as the regulation of high-frequency trading or the prohibition of certain short sales.
Since cryptoassets and the blockchain technology behind them are global phenomena, Germany is “primarily striving for an international and European approach,” explained the Federal Ministry of Finance. “Nevertheless, it is constantly being examined whether and to what extent there is also a need for national adaptation.
In the cryptographic industry itself, many would like to see uniform European rules. The current fragmentation of special regulations in small states such as Gibraltar, Malta, Liechtenstein and Monaco will not advance the industry, says Nina.
In the crypto industry itself, many people want uniform European rules. The current fragmentation of special regulations in small states such as Gibraltar, Malta, Liechtenstein and Monaco will not advance the industry, says Nina Siedler of the Blockchain-Bundesverband. “In order to be able to stand up to the American and Asian markets, we absolutely need a uniform legal framework in Europe”. However, Siedler does not expect that this will succeed before the European elections in May 2019 and the subsequent appointment of a new Commission President.
The pressure to act is enormous. “In the crypto sector, the German market is regarded as fair game because there is supposedly nothing to fear from German supervision,” says Siedler.
One of the biggest ICO scandals has occurred here in Germany. The Envion team in Berlin promised to produce crypto currencies with green electricity and collected 100 million euros in a virtual IPO. But the company did not actually do business – and is now sinking into a whirlpool of complaints and accusations of fraud.
In addition, the Berlin Supreme Court recently ruled that trading in crypto currencies such as Bitcoin or Ethereum is not subject to permission in Germany. The Bafin, which had classified crypto currencies already some time ago as units of account, spanned thereby its area of responsibility.
Bafin acts “much too passively”
If Volker Brühl is in charge, then he urgently needs to be expanded. The Bafin is still “far too passive”, criticises the head of the Center for Financial Studies at Frankfurt’s Goethe University. The crux of the debate is above all the question of the legal quality of the so-called tokens that companies spend on ICOs.
So far this is usually unclear. Some are declared by the providers as donation receipts, others promise access to the planned service or even dividend payments. From Brühl’s point of view, the letter of advice the Bafin has published on the subject is not helpful. “Ultimately, it only states that tokens can be financial instruments or securities and therefore a case-by-case examination is necessary. Market participants must therefore clarify for themselves whether they are subject to supervision, which is unsatisfactory. The judgement of the Berlin Court of Appeal, for example if it were to be adopted by the Federal Administrative Court, meant that the Bafin approach could no longer be maintained anyway. Now, at the latest, is the time for politics.
But what could an ICO regulation look like in concrete terms?
Brühl pleads for the strictest possible regulations, analogous to securities supervision. The model would then be the process for IPOs, i.e. classic IPOs. All prospectuses, whitepapers in industry jargon, would then have to be reviewed and approved by the supervisory authority. The providers are liable for false information.
For many in the industry, however, such total regulation would be a horror vision. After all, one of the advantages of ICOs is that, unlike bank loans and traditional IPOs, young companies can easily make money.
Nina Siedler of the Blockchain Association sees only a limited need for action: “Above all, the question of which token falls under which supervisory regime needs to be clarified. Share-like “security tokens” should be regulated more strictly than “utility tokens”, which merely grant access to a planned service. In the view of settlers, new rules must be created for tokens that are more difficult to classify – for example in mixed forms or in non-profit projects.
While debates are taking place in Germany, other countries are making progress in the legal containment of the crypto world. In Liechtenstein, the government has presented one of the world’s first blockchain laws and wants to introduce the new legal concept of “value right”. In Japan, the industry is to supervise itself in the future by state-sanctioned “Crypto-IHK”.
But there is not unanimity everywhere, as a prominent example shows: In the USA, the supervisory authorities are even arguing among themselves about the true nature of virtual assets.