Germany introduces new rules for crypto funds | Goodwin

Germany has introduced a new regulation on cryptocurrency funds (Ordinance on Kryptofondsanteile – KryptoFAV), which allows fund managers to issue fund units electronically instead of on a physical basis. The new rules come less than one year after the Fund Investment Act (Fund Standards Act) allowed institutional investors to invest in cryptocurrencies. With these regulations, Germany has taken a leading role in the EU in the regulation of crypto funds, which makes it possible for both fund sponsors and professional investors to utilize modern technology in their investments.

New regulations on cryptocurrency fund units

The regulations on crypto fund units allow fund managers to issue units in equity funds (Special ability) or individual unit classes also as crypto fund units.

Crypto-fund units are defined as electronic fund certificates (electronic antieilscheine) which is registered in a crypto-securities register (§ 1 sentence 2 KryptoFAV). Crypto-fund units require fewer intermediaries, and thus lead to a reduction in transaction costs and time to market. The content of KryptoFAV, which mainly consists of only three paragraphs, can only be fully understood by the corresponding application of the Electronic Securities Act (Law on electronic securities. eWpG) (Section 2 KryptoFAV).

A key element in eWpG is the recording of digital securities, where the requirement for paper documents no longer applies. Instead, they are entered in an electronic securities register. A special form of this register is the cryptocurrency register. It is usually based on distributed ledger technology and is operated by the Depositary, or another entity appointed by the Depositary with authorization for the cryptocurrency register (Cryptocurrency register management). The draft regulation initially envisaged that only one depositary (with a full license) would be allowed to keep the register, which triggered fierce criticism from fund managers. The final regulations now open the door for other units, with an authorization for the cryptocurrency register (§ 3 KryptoFAV). So far, BaFin has given only four such authorizations. Therefore, there is still great potential for young, innovative companies.

The new opportunities opened up by KryptoFAV ​​also present challenges for fund managers. For example, the depositary still has a gatekeeper position. It formally decides whether and which entity is to be appointed as the registrar of cryptocurrencies. In practice, however, there are ways in which fund managers can influence this decision in advance. Other examples relate to the procedure for obtaining authorization for cryptocurrency registers, to the requirements for prudent register management and liability issues in the event of a breach of these requirements.

Professional investors and cryptocurrencies

In August 2021, Germany passed a law to strengthen the nation’s reputation as a German Fund Location Act. It allows certain domestic special funds – a type of fund specifically used by institutional investors – to invest up to 20% of their assets in cryptocurrencies. The amount available as a result theoretically amounts to up to 350 billion euros. There is another great potential here that has not been exploited so far. In practice, German institutional investors are heavily regulated and therefore need time to adapt their internal processes to this new investment opportunity. However, experts in the German fund world expect the new quota to be used in the medium term (over the next five years) at a single-digit percentage. Given the investment volume of German special funds, this is a market with massive growth potential.

Definition of cryptocurrencies

Crypto-assets, within the meaning of German law, are defined as:

• Digital representations of value, that;
• Is not issued or guaranteed by a central bank or a public authority; and
• Does not have the legal status of currency or money; but
• Is accepted by natural or legal persons;
  • Based on agreement or actual practice;
  • As a means of exchange or payment; or
  • Used for investment purposes; and
• Can be transferred, stored and traded electronically.

This definition includes not only the full range of well-known cryptocurrencies (also referred to as payment tokens) such as bitcoin, ether, XRP, etc., but also so-called security or investment tokens, such as token-based bearer bonds (Debtors’ debt write-offs). According to the explanation given by the German legislature, the definition does not include symbols of use (mainly electronic vouchers for the collection of goods and services) “as long as they are not used for investment purposes”. What that really means, however, has not yet been finally answered. The definition of crypto assets explicitly excludes e-money and certain monetary values ​​under the German Payment Services Supervision Act (Payment Services Supervision Act).

Outlook

Although this development in German law is exceptionally progressive, especially compared to other EU member states, this is by no means the end of the story.

The digitalisation of the fund market has only just begun. Another major step is already on the horizon: the European legislator has just agreed on the regulation of crypto-asset markets (MiCAR). MiCAR is intended to create a unified legal framework for the issuance and trading of cryptocurrencies. As the situation is today, the regulation will also change the definition of cryptocurrencies in Germany.

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