Germany to Allow Institutional Investors to Dabble in Crypto

Spezialfonds Background

Germany’s upper house of parliament — Bundesrat — approved the bill proposed by the lower house Bundestag in April. Under the legislation, institutional fund managers — known as Spezialfonds — can dedicate up to 20% of their portfolio to Bitcoin and other crypto-assets.

The new law will apply to both existing and new Spezialfonds. It’s estimated about 4,000 existing institutions are already eligible to begin investing in crypto assets.

The act, which aims to make Germany an attractive investment fund location, also introduces a new type of Spezialfonds — the development promotion fund.

What are Spezialfonds?

Spezialfonds (special funds) are institutional funds unique to Germany and designed specifically for capital markets as opposed to individual investors. Spezialfonds emerged in the early 1990s and caught on due to their flexibility with liquidity, borrowing, and portfolio diversification.

Investors love Spezialfonds due to the professionalism in their management, security, tax advantages, easy reporting and expert liquidity management.

Spezialfonds are similar to Luxembourg’s Special Investor Funds (SIFs) and Ireland’s Qualifying Investor Funds (QIFs).

Now, Spezialfonds will allow institutions and their clients to invest in cryptocurrencies without the hassle of dealing with exchanges and keeping abreast with crypto’s day-to-day, unpredictable market dynamics.

Germany and Cryptocurrency

July’s development follows Germany’s move in January 2020 to allow banks to store and sell cryptocurrencies. The lower house, Bundestag, passed a bill in October 2019 allowing banks to legally store and sell cryptocurrencies to investors.

The bill amended a clause in the EU’s Anti-money Laundering Directive that forbade banks in the Eurozone from dealing directly in cryptocurrencies. It allowed banks to treat crypto just as they would stocks and bonds and avail it to both retail and corporate investors.

It also directed exchanges and generally all crypto custodians to obtain a license from the Federal Financial Supervisory Authority (BaFin).

This June, BaFin greenlit Coinbase — the US’s biggest exchange, to start crypto services in the country. That was the first such license to be issued in Germany.

Even then, Germany, which is the fourth biggest economy, is already crypto-friendly, with the second biggest number of Bitcoin nodes being hosted in Germany, per Bitnodes. Also, Germany is home to 57 Bitcoin ATMs, with the western city of Dusseldorf having the highest number at 12. In other words: It’s very easy to buy Bitcoin in Germany.

How Germany Defines Crypto

Germany officially recognized cryptocurrencies as financial instruments in March 2020. BaFin, the country’s financial regulator, released new guidelines defining crypto as:

• A digital representation of value
• Not issued by any central bank
• Not linked to any currency defined by law
• Not possessing the legal status of a currency
• Accepted as a medium of exchange
• Can be stored, transferred or traded electronically

In addition, crypto custodianship was defined as:

• Taking crypto-values into care on behalf of third parties
• Storage of customers’ crypto values in a collective inventory with the customers themselves not knowing the cryptographic keys used

A raft of institutions across Germany have so far filed for the crypto-custodian license, including and the country’s second-largest stock exchange, Börse Stuttgart.

Germany’s Biggest Bank to Venture in Crypto

Germany’s biggest bank and one of the most influential banks in the world, Deutsche Bank, is also exploring delving into crypto. In December 2020’s World Economic Report, “Crypto, What Is It Good For?”, the bank reveals its plan to launch a “fully integrated custody platform” for clients and provide “seamless connectivity to the broader cryptocurrency ecosystem.”

The bank also adds that it will provide a “secure and connected bridge” between crypto and the traditional financial world, as well as consolidate crypto and Fiat assets in one easy-to-use interface.

Deutsche will also feature a crypto custody platform that clients can access in three stages:

• Insured and secure crypto storage on behalf of institutional investors
• Enable clients to buy and sell crypto assets by partnering with third parties such as brokers, issuers, and exchanges
• Provide services such as taxation, lending, staking and voting
• Provide a full-suite issuing and trading platform fully compliant with KYC and AML guidelines

What it Means for Crypto

The new measure is a big deal for Germany and cryptocurrency. As institutional investors across the country invest part of their portfolio in crypto, it will buttress Germany’s place as a global investment hub.

Crypto analysts already predict the new legislation will unleash billions into the crypto market. Per financial newspaper Boersen Zeitung, analysis by Distributed Ledger Consulting CEO Sven Hildebrandt depicts as much as €350 billion (approx. $425 billion) entering the market. That’s about a fifth of the €1.87 trillion tied up in about 4,000 Spezialfonds in the country.

In addition, the measure further legitimizes crypto. As a major economic player on the world’s stage, letting one of the biggest investment vehicles in the country invest in crypto is huge. It’s an important step for crypto’s ‘mainstream’ acceptance, especially at a time when another major economic player, i.e. China, is shunning the asset class.

Final Words

Germany’s move to allow Spezialfonds to invest in crypto is good optics for the industry, especially in a time when it’s taking a hit in terms of price. Germans who are risk-averse and would rather avoid the vagaries of the crypto market can more predictably invest in the new asset class and participate in the revolution.