7 months ago
Frankfurt School Blockchain Center Head Philipp Sandner on the German blockchain landscape, the newly passed law on cryptocurrencies and what Germany needs to become a blockchain powerhouse.
Philipp Sandner is Head of the Frankfurt School Blockchain Center at the Frankfurt School of Finance & Management (FSBC). Launched in February 2017, FSBC and is a think tank and research center that investigates implications of blockchain technology for companies and their business models. Besides the development of prototypes, it serves as a platform for managers, startups, technology and industry experts to share knowledge and best practices.
Please tell us a little about yourself and what are you up to right now in the blockchain space.
We are frequently hosting crypto summer schools and certified blockchain expert seminars as well as blockchain conferences and seminars.
We also drive education in the blockchain space. Recently, we launched the Blockchain Academy where we have 20 hours of online videos, which we made available in multiple courses. The best ones are “Blockchain Adoption, Innovation and Regulation” and “Tokenization: From Crypto Assets to Euro-on-Blockchain.” We have participants from many countries since our strategy is to select the best lecturers to help onboard people to blockchain, DLT and crypto assets.
As someone with a very strong finance background, what do you think of open finance, finance 3.0 and decentralized finance? Could they thrive in highly-regulated markets such as Germany and the EU?
It’s not easy. Regulation is in place, and we see with the banks that they partly suffer because of excess regulation. But technological development can help overcome these regulatory burdens. That is the regulation part.
The other part is the movement of “open source.” Take Linux, all Github repositories, cryptocurrencies as examples. Open source is a huge trend and it will grow further. But it is also a philosophy: you can appropriate value through all kinds of tactics and capabilities but not through closed systems anymore. With this, we are in the world of “open finance.” Decentralized finance – DeFi – is the most advanced type of open finance. Not just payment APIs, but an interconnected set of smart contracts that are plugged together like a house made of LEGO bricks.
Both worlds – regulation and open finance – need to be integrated. In unregulated countries, with non-existent or un-enforced rules, DeFi can thrive. But in a highly institutionalized country such as Germany, which also has the capability to enforce its rules, startups and individuals cannot do whatever they want. So it will be interesting to see how DeFi might be adapted slightly: I could imagine that MakerDAO launches a Dai-like euro to comply with payment rules and maybe the e-money regime. Also, I would guess that DeFi services will need to comply with KYC/AML rules in the future. If DeFi actors do not comply with these rules, they will have difficulties becoming really big in highly institutionalized countries – that is, all of Europe, North America and parts of Asia.
What are the impacts of the newly approved law on the German blockchain industry – foreign players and local players alike?
With the new “crypto license,” BaFin – Germany’s financial market authority – has created a new type of license that companies need to receive by Q4 2020 to be allowed to address German customers with crypto services. So far, there are about 800,000 German Bitcoin owners. This license applies to FinTechs, startups, larger banks, larger exchanges and of course all crypto exchanges, like Binance and Coinbase. These companies need to apply for the license in 2020 to continue to address German customers.
Part of the license will probably be a tech due diligence, with BaFin demanding some kind of “technological opinion” about the tech involved. The Swiss financial authority FINMA requires the same. This requirement will be a bottleneck if dozens of applying companies – say more than 100 – were to need due diligence at the same time.
But once market participants have received the license, crypto assets can become institutional-grade. And this is necessary for the adoption of crypto assets in the next step: institutional investors having the technological and regulatory infrastructure to invest funds on behalf of third parties. This technological and regulatory infrastructure is currently being built and will exist in Germany as of Q1/Q2 2020 when the license and its details materialize.
Volume-weighted, Bitcoin has a market share of 80%. Ethereum a further 10%. So, by objective numbers, we can summarize that Germany is preparing rules that allow Bitcoin and Ethereum to become institutional-grade as of Q2 2020. You can illustratively also call it the “Bitcoin/Ethereum driver’s license” that all companies – startups, banks, crypto exchanges – have to obtain to address German customers.
Could this law pave the way for Germany to become a blockchain powerhouse?
Yes and no. Germany is front-running currently and seeks to provide legal certainty for companies. However, Germany is not alone. Switzerland and Liechtenstein also drive this development in Europe. These countries are leading in comparison to other European countries. I think we can say that this pole position is valid even compared to Asia and North America.
But the market is very dynamic and can change very quickly. In the short term, Germany may have the chance to become a powerhouse on blockchain, but there is no guarantee that this position will holds in the midterm or long run. So Germany should not rest and needs to further develop its institutional setup for blockchain technology.
Here is an interesting artifact: When China’s president held his speech about blockchain some weeks ago, Bitcoin’s market capitalization jumped overnight by 35%. When Germany now proposed and is installing its progressive regulation, you cannot see a significant market reaction. Maybe such news doesn’t spread so quickly? Maybe “Crypto Germany” is not so relevant when compared to “Blockchain China”? Maybe the Chinese president held a better speech than Germany’s government? Maybe Germany did bad PR? Or maybe it’s because Germany’s ministries and authorities mainly communicate in German, and all these new laws are not transmitted to the world or lost in translation? We will see.
What are the law’s implications for open-source projects and protocols, such as DEXs and all other DeFi projects?
The law will be the ground on which companies and startups will develop business models. It will be a ground on which crypto assets and DLT as a whole can flourish. It attracts investments, human resources etc. But what companies will exactly do with such assets is subject to other regulatory frameworks.
Example: as of 2020, “traditional” crypto assets such as Bitcoin and Ether are properly regulated. But security tokens underlie securities law, where traditional rules apply. Consequently, we might see promising developments in companies handling Bitcoin and Ether, but that may not necessarily hold true for other crypto assets such as security tokens.
The same logic applies to decentral exchanges – DEXs – etc. Other regulatory frameworks might apply, such as the regulation for trading assets, so that they might not develop as well as “basic” Bitcoin trading.
But Börse Stuttgart, a decades-old traditional exchange, launched a crypto trading app in Q2 2019 for retailers and gained more than 50 thousand new clients in half a year. And this was just the starting point: Börse Stuttgart will expand its app to all of Europe and also launched a “crypto segment” for institutional investors. Additionally, we can expect them to launch a “security token segment” in Q3 next year. To summarize, we see a high level of progress on the business model of traditional centralized exchanges.
However, not all types of crypto assets are covered by the new German law. For example, it remains unclear how to view MakerDAO and the Dai. Dai is a stablecoin, but not a “full-fledged” tokenized US dollar so far. So this might lead countries to block the Dai. But according to rumors, MakerDAO is currently thinking about getting Dai under an e-money license – which would then be legal in Europe.
The most important point though is that the new rules bring blockchain to the top of the agenda, which attracts financial and human resources and provides an incentive for people to deal with blockchain technology. This boost is what’s most important.
Some leaders in the German blockchain industry proposed a blockchain-based euro. What would it mean for Germany and Europe?
This is a huge topic and indeed the German Association of Banks also called for a digital euro. With Commerzbank, CashOnLedger and Monerium we now have three companies in Europe that provide the euro-on-blockchain with an e-money license. Their digital euro is not just a stablecoin – it’s a tokenized euro. But issued and traded on a blockchain system. A digital blockchain-based euro will enable smart contracts with the euro flowing through it. The possibilities are endless: machines start payment to each other, chemical silos start factoring invoices, sensors deliver data through an escrow smart contract against payment. The euro-on-blockchain will be of crucial importance for the digital transformation of the manufacturing – Industry 4.0 – new mobility, logistics/supply chain and – with some delay – healthcare.
We at the Frankfurt School Blockchain Center have a fascinating project where we connect machinery to a euro-on-blockchain network to leverage pay-per-use business models for machines.
What do you think of China planned digital currency, Digital Currency Electronic Payment – DCEP? What should Germany, in particular, and EU, in general, do in terms of policymaking to compete with the Chinese DCEP?
Currently, the Chinese DCEP is the central bank digital currency project that is closest to a market introduction. The Swedish central bank has been exploring the issuance of its own central bank-backed digital currency for more than two years. However, China seems to be more advanced and has announced plans to issue the digital yuan in the near future. Even more: they will use blockchain technology for this project and intend to reach 300,000 transactions per second. This application demonstrates the tremendous potential of blockchain technology.
From our perspective, a central bank-issued digital euro makes sense. Central banks around the world are analyzing and exploring this topic. However, the private sector will act more quickly and – as mentioned – projects to tokenize the euro already exist. There are companies that already provide market-ready solutions for industrial companies to use the euro-on-blockchain for their projects. Such a digital blockchain-based euro has tremendous potential, for example, if we think about the machine economy.
However, we have to keep in mind that this e-money constitutes commercial bank money and not central bank money. Even if both kinds of money represent the euro, one difference is highly relevant: In the case of bankruptcy of financial institutions, commercial bank money can potentially default, whereas central bank money is a claim to the central bank, which cannot, by definition, go bankrupt. Even if this difference seems nonessential in times of economic and financial stability, it becomes highly relevant in times of crisis.
The European Central Bank might also provide a digital euro, but only at a later stage. It is not guaranteed that this central bank-issued euro would be issued on a blockchain system. Because of existing solutions with digital commercial bank money, a quick response by the ECB is not urgently necessary. Think Paypal: Paypal also handles billions of transactions. It also works nicely with commercial bank money and shows that central bank money might not inevitably be necessary to get started.
What else should Germany do to become a blockchain powerhouse?
I propose the following priorities: First, there is the “Urkundenpflicht” – obligation to document – in Germany, a requirement that securities must be printed and signed on paper. Real physical, touchable paper. Due to the evolution of security tokens, securities have to become dematerialized. So we need to change the law to remove this paper-based requirement. Without this change, security tokens cannot thrive.
Fortunately, the Ministry of Finance of Germany is starting to address the topic and plans to propose new rules in coming months for a specific class of dematerialized debt instruments. However, this can only be the beginning, and the development has to increase in speed.
Next, financing for blockchain startups has to become easier. We have great blockchain startups in Berlin, Munich, Frankfurt and Hamburg. Thanks to the new crypto law, we will soon have legal certainty. From a company perspective, technology and regulation are then set up. But one issue remains unsolved: financing.
Most startups suffer liquidity shortages since budgets are not provided by larger organizations, such as banks or industrial corporations. Support is not even offered by the public sector in the form of grants for research and universities.
This has to be the next step: decision-makers need to provide funding. The typical issue in companies is that in companies’ boards are staffed by experienced managers who are not digital natives, are overloaded with regulatory burdens and do not have the time to deal with blockchain technology. As blockchain technology is not easy to understand, this issue becomes a bottleneck. Decision-makers need to educate themselves to make decisions on budgets.
Germany is now front-running with respect to crypto assets and blockchain technology. However, Germany is an EU member state and needs to comply with EU regulation. Unfortunately, with blockchain, the EU is only moving slowly, so that Germany was “forced” to move forward and introduce its own rules. We cannot wait.
But there is a risk of disintegration if any EU Member State introduces its own rules. From our perspective, it is desirable to move ahead. Somebody has to take the leadership, considering the tremendous benefits of blockchain technology – especially when the environment, the EU, is moving a little bit slowly. The opportunities of blockchain are there, and we have to act to realize them. We don’t have time to lose.
Thank you for sharing this!
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