Published: July 5th, 2021
A new German law that could potentially pump up to $415 billion into the crypto market took effect on Thursday, July 1. Introduced in April and ratified by parliament soon after, the regulation allows "Spezialfonds," or special funds to commit up to 20% of their portfolios to crypto.
Germany’s Fund Allocation Act, which was introduced in April and approved by the Bundestag soon after, took effect on Thursday, July 1. The law opens the door for spezialfonds, or special funds to invest up to 20% of their portfolios in virtual currencies.
Based on the total assets under management of such funds in the country, the cryptocurrency market could potentially get up to €350 billion (approx. $415 billion) if every Spezialfond decides to channel the full 20% into crypto.
Sven Hildebrandt, the CEO of Distributed Ledger Consulting (DLC), a Germany-based blockchain consultancy, said the law is a huge deal for the crypto industry. He said more than €1.2 trillion (approx. $1.8 trillion) is invested in spezialfonds and now 0% of that wealth is invested in crypto because the law previously did not allow it.
Put in context, the Bitcoin market cap is about $665 billion, while the entire cryptocurrency market capitalization stands at about $1.44 trillion.
Spezialfonds are a popular institutional investment tool in Germany and the new regulation is seen as a big boost to the Bavarian country’s position as a financial investment epicenter. Market analysts think the regulation would also further legitimize the crypto asset class.
The new law applies to existing spezialfonds, which is the largest institutional investment tool in Germany, and any new funds put together by institutional investors. Such investments might include funds from financial institutions, insurance companies, and pension funds.
This latest regulation opens up Germany for enhanced dealings in the virtual currency sphere. At the beginning of 2020, the country ratified another law that allows banks to store and sell cryptocurrencies.
Consequently, ETC Group, a financial services company that specializes in exchange-traded commodities (ETCs), launched a Bitcoin exchange-traded product (ETP) on the German Stock Exchange in 2020.
The move came only months after the Federal Financial Supervisory Authority (BaFin), the German financial regulatory authority, classified virtual currencies as financial instruments.
Germany’s match towards creating increased flexibility in the crypto industry could not have come at a better time. The financial wealth of the country and its population has marked a steady growth in the recent past even with the historically low-interest rates. In 2020, private financial assets surged almost 7% to almost €7 trillion (approx. $8.3 trillion).
The figure above includes cash, securities, claims against insurance firms, and bank deposits. Besides, DZ Bank economists foresee the financial assets of German households increasing to almost €8 trillion (approx. $9.5 trillion) by the end of 2022.
Hildebrandt thinks these developments are good news for the virtual currency market. He said that if one-fifth of that wealth associated with the 4,000 open-end domestic special funds are channeled into crypto, the potential inflow into the market would almost double the current figure.
The clamor for elaborate inclusion is getting louder among industry insiders and enthusiasts. Frank Dornseifer, the managing director of the Federal Association of Alternative Investments (BAI) of Germany, said the new law should apply not only to spezialfonds but also to other groups of financial options. In particular, he would want to see public funds included because they unnecessarily keep a portion of private capital away.
Meanwhile, Deutsche Börse AG, a marketplace organizer for trading shares in Germany, has acknowledged the immense interest that the virtual currency market keeps drawing. The firm’s spokesperson said there is an increasing interest in crypto trading not only from institutional investors but also from retail investors.
The firm has repositioned itself to reap the benefits of this growing fascination. It recently acquired the majority stake Crypto Finance AG, a Zurich-based digital assets trading, storage, and investment services provider.
The spokesperson said the firm’s move was informed by the recent happenings in the legal and regulatory scene. He stressed that several legal changes have recently come into effect. He added that most if not all of these changes allow individuals and institutions to issue virtual currency securities in Germany. He cited the particular new law that allows domestic special or alternative investment funds to add virtual currencies to their portfolios.
He said that okaying spezialfonds to hold virtual currencies introduces increased certainty. The spokesperson added that the virtual currency industry and governments should do more to implement such laws because they secure all parties involved. Where regulations are straightforward, civil law gets more defined, he added.
Germany’s Fund Allocation Act, known to locals as the Fondsstandortgesetz legislation, was drafted by personnel from Germany’s ministries of Finance, and Economic Affairs and Energy. The portfolios are headed by Olaf Scholz and Peter Altmaier. Scholz is a former secretary-general of the Social Democratic Party (SDP) while the latter is aligned to Angela Merkel’s Christian Democratic Union (CDU).
The bipartisan working relationship that saw this regulation assail the required stages with ease shows just how seriously the German governmental apparatus has come to value virtual currencies.
The law and its impending implementation follow an earlier resolve by the country to permit banks to trade or store virtual currencies from January 1, 2020. The move, which industry players lauded as heroic, inspired several partnerships between crypto custody service providers and German banks.
In particular, WEG Bank, the Ottobrunn-headquartered public-owned commercial bank set up a crypto-related business using its FinTech division known as TEN31. The unit partnered with Tangany, a Munich-based white-label virtual currency custody provider, to offer cryptocurrency custody service solutions to its customers.
Most organizations that went into such partnerships said doing so was the next logical step in aligning with the market needs and expanding their product portfolio. The new regulation coupled with the safe and reliable storage services that are now accessible would convince many spezialfonds to direct the permitted portion of their holding to virtual currencies, Hildebrandt said.