In these two episodes, we are exploring the latest post-trade developments in the fast moving area of digital assets with a special focus on key milestones in France and Germany.
Part I – Digital assets and the new German Electronic Securities Law
I am Alan Cameron and I would like to welcome you to this Thinking Aloud podcast brought to you by BNP Paribas Securities Services. In these podcasts we delve into the details of the post-trade world, in this edition we are going to be talking about digital assets and what is happening in Germany in particular. I am lucky enough to be joined by Kurt Zeimers, Kurt is responsible for our asset manager franchise in Germany and is a core member of our global working team on digital assets.
Welcome Kurt and can I begin by asking you how do digital assets impact your day-to-day responsibilities in Germany.
I am responsible for the go-to-market strategy for the client segment asset managers in Germany. This also includes regulatory watch. Since 2019, I am closely following all regulations on Digital Assets from a German perspective.
It all started with the transposition of the AML5 Directive into German law, which included for the first time a regulation for crypto-currencies. I am also a member of different working groups of market associations of banks and asset managers where we discuss those regulatory changes on digital assets and these are one of the major topics of these market associations.
So, we often hear that Germany is one of the leading countries in Europe when it comes to the regulation for digital assets. Can you tell us a little bit about that and what the latest regulatory changes in Germany are?
First I would like to explain what the term “digital assets” means. On the one side, we have the crypto-currencies and other unregulated tokens, such as utility tokens for example and on the other side, we have security tokens which are regulated and which might be considered as financial instruments under MiFid II and as securities under local civil law, such as the “Custody Act” in Germany. Both types of digital assets follow different national and European regulation.
So what are the latest regulatory changes in Germany?
It all started 2 years ago, in May 2019, when the Ministry of Finance has published a draft law on the new financial service of crypto-custody for crypto-currencies. This was triggered by the local transposition of the AML5 Directive into German law.
Then in Sept 2019, the German government has published its Blockchain strategy. One objective of this strategy was to introduce digital securities issued on a DLT into German civil law.
Then In Jan 2020, crypto-custody of crypto-currencies becomes officially a financial service supervised by BaFin and in June this year, the Electronic Securities Act entered into force which allows the issuance of digital bonds on the Blockchain, without the need of a global certificate, which was so far always required for the issuance of securities in Germany. And In August this year, a Draft regulation with the details for the registrar services for digital bonds has been published and in Sept 2021: a Draft regulation on the issuance of funds shares on a DLT has been published. The last two regulations will enter into force probably until the end of the year at the latest.
So can you help me understand then how this is impacting our clients and the industry? How are our clients, and indeed the broader industry, reacting to these regulatory changes?
Buy side clients, so asset owners such as insurance companies or pension funds and asset managers are keen to better understand the new regulation and the impact it might have on their investment activity. As a market leading depositary in Germany, we act as their trusted advisor and as a thought leader in the fund industry we are closely following those changes in all major European countries and also in APAC and the US. Some of our asset manager clients are already working on first Proof of Concepts or even live experiments and want to invest into digital bonds with underlying real assets or tokenized private capital assets.
We also see asset manager’s demand for funds shares issued on a DLT to change the way their funds are distributed, similar to what we can observe in France and in Luxembourg. We see also that CSDs are working on digital issuance of investment products based on DLT technology together with issuers and market participants, especially for retail structured products. We are also seeing many experiments with CBDC or stable coins, mainly in France as the German Bundesbank is not open to those kind of experiments in contrast to the Banque de France
Every time we talk about digital assets things seem to be changing and changing very quickly. How do you see things evolving in the near future?
Currently each country issues a local regulation on crypto-custody, on digital assets service providers, on security tokens, etc. So Germany, France, Luxembourg, Switzerland and Liechtenstein are clearly leading in Europe. At an EU level we will see a harmonization of regulation in the next 3 years. The EU commission has already published a Digital Finance Package with 3 different draft regulations:
- First, a pilot regime on DLT capital markets. It will introduce a sandbox regime for CSDs and MTFs to allow the market participants to test the trading and settlement of DLT financial instruments
- Second, the change of the MIFID II directive with the introduction of a definition of financial instruments issued on a DLT and
- And third, the MICA regulation, MICA stands for Markets in Crypto Assets. The EU wants to impose a harmonized regulation on crypto-currencies
But we will see also the industry will have to work on standards for the trading and processing of digital assets. Without common standards for digital assets and the DLT platforms facilitating their issuance, trading, custody and settlement, market participants will struggle to interoperate.
We will also see in the coming years an extension of OTC traded digital assets to stock exchange listed digital assets and the evolution of a secondary market. In addition, the ECB will work on the introduction of a digital EUR, however it will look like and we will also see many new projects in the area of Decentralized Finance (also called DeFi) such as lending and staking of tokens. DeFi’s objective is to build a capital market ecosystem on a DLT environment that does not rely on central intermediaries.
That all sounds very exciting. How will that impact our clients?
With the introduction of digital assets, the capital markets will become even more complex and the investment processes and the risk management need to be adapted accordingly, therefore I think we will see institutional investors and asset managers asking for a one-stop solution, i.e. a global custody provider which offers services for both traditional securities and digital securities which can be issued all over the world in all the different countries and asset classes they want to invest in.
Finally, the introduction of fund shares on the DLT will have a major impact on the way Fund distribution is working today. This can be observed already today with the arrival of new global platforms (being it Fintechs or legacy service providers) offering services for the distribution of tokenized funds and the maintenance of the registry of the investors.
Kurt, this has been really interesting, thank you for sharing your insight with us. This has been a BNP Paribas Securities Services Thinking Aloud podcast, I hope everyone listening has found it as interesting as I have, and there are many similar podcasts available on our website. Thank you for joining us.
In this episode Kurt Zeimers joins Alan Cameron to discuss digital assets and recent changes in the German regulatory environment and the impact these changes are having on asset managers and asset owners.