Germany paves the way for DLT securities
The German government’s new blockchain strategy encourages the development of electronic securities and strikes a positive tone for DLT implementation across several sectors in Germany, including financial services. With this strategy, the government intends to give impetus to further growth and legal certainty for distributed ledger technology.
Germany’s blockchain strategy
Following a consultation in March 2019, the German government has now adopted its national blockchain strategy (only available in German) comprising 44 measures which are intended to promote blockchain technology in Germany.
In its strategy, the German government recognises the potential of the technology and aims to further strengthen Germany’s leading position in this area. It confirms that its aim is to pursue a regulatory policy that incentivises investment, supports innovation and ensures stability and so contributes to inclusive growth that is in line with the government’s sustainability goals.
Nevertheless, the principle of a technology-neutral approach remains the guiding principle. Due to the high speed of technological development, the strategy will be reviewed and developed at regular intervals.
Concrete legislative measures for financial markets
Several concrete legislative measures are included in the strategy paper with respect to fintech and specifically DLT applications in finance.
Although recognising that pan-European legislative efforts are desirable, the German government is keen to establish national legislation that will serve as an interim solution to provide for more legal certainty until a joint European framework for DLT is agreed.
These measures include:
- Implementation of electronic securities
As previously trailed in a March 2019 key issues paper, the new strategy announces the reform of German securities law to allow, at first, electronic bonds (Schuldverschreibungen). The current legal framework in Germany requires a paper-based document (Urkunde) for these securities. The reform would end this requirement, allowing those securities to be issued completely electronically, e.g. on a blockchain.
Electronic securities will be introduced in stages. Electronic bonds are likely to be introduced by the end of 2019, while the digitisation of equity products and investment fund units at a later stage is also being considered. A public consultation process has started, in which Linklaters has participated.
- Regulatory framework for ICOs and digital debts
The government also plans to publish a draft law on the regulation of the public offer of certain crypto tokens. This would introduce concrete regulatory requirements for ICOs in Germany.
Under the proposals, a public offer of tokens could only be made in Germany if the provider has published an information sheet (likely comparable to a PRIIPs KID) which will require the approval of the Federal Financial Supervisory Authority (BaFin) to enhance investor protection and legal certainty regarding the regulatory requirements for such offers.
- Legal certainty for trading platforms and crypto depositories
In the strategy paper, the government emphasises its plans to tackle questions about AML and KYC requirements in the crypto space by implementing the provisions of the fifth Anti Money Laundering Directive which relate to crypto assets. Here, the draft implementing law suggests a licence requirement for certain crypto custody services.
Overall, the strategy paper displays the German government’s intention to provide a clear legal framework for DLT and additional protection for retail investors in the crypto sphere.
Continued resistance to stablecoins
Despite the overall positive attitude towards blockchain technology, the government raises concerns about stablecoins (crypto assets whose value is backed by e.g. fiat currencies) and suggests that the current e-money regime should be sufficient to bring them within the scope of regulation.
The government intends to work on a European and international level to ensure that stablecoins will not challenge the sovereignty of government currencies. To emphasise this stance, Germany and France also recently published a joint statement on Libra, the currency envisaged by Facebook. In this statement they:
“reaffirm their willingness to tackle the challenges raised by cryptocurrency and so-called stable coin projects: financial security, investor protection, prevention of money laundering and terrorism financing, data protection and financial and monetary sovereignty.”
Further areas of specific interest
The strategy paper considers a variety of potential applications for DLT and declares a general intent to further analyse and deepen understanding for the use of the technology especially in the energy and logistics sectors, and for smart contracts and digital identities.
- Energy sector: The blockchain strategy announces a pilot scheme for a blockchain-based smart meter implementation in the energy grid and envisages the establishment of a database for smart contract templates for use in the energy sector.
- Logistics sector/Smart contracts: The government is encouraging an “Industry 4.0 Law Testbed”, using a test environment that enables companies to develop and extensively test secure digital business processes. The research projects around this project aim, for example, to clarify legal issues relating to the negotiation and execution of contracts between machines using so-called smart contracts based on use cases from the areas of logistics and production.
- Digital identifiers: The government is piloting blockchain-based digital identities and evaluating other suitable applications such as the blockchain-based procedures for keeping public registers for civil status, registration, passports and ID cards as well as for foreign registration.
Overall, the aim is to foster standardisation, transparency and interconnectivity not only for financial markets but across various industries with the help of further research and specific projects.
Germany is getting serious about DLT implementation
To sum up, the adoption of a national blockchain strategy by the German government is a positive sign for the development of DLT in a number of industries, especially the finance sector. The plan to enact legislation that integrates DLT-based solutions into the German legal framework shows that the German government recognises the potential of DLT as an innovative technology.
What happens next?
In the short term, we are awaiting the implementation of AMLD5 into German law (read our previous blogpost for more). This will most likely include a new licensable financial service in the form of crypto custody business. However, many details are still being debated. For example, we do not currently expect the proposal that crypto custody services should be ringfenced from other licensable services will become law.
Going forward, the blockchain strategy underscores that Germany sees itself as a leading market for innovative products that at the same time aims to provide a reliable legal framework. The legal road seems to be paved for DLT to go mainstream.