Blockchain technology is currently a much-discussed topic: Bitcoin, Libra, smart contracting to name just a few buzzwords everyone is aware of. The technology has the potential to disrupt traditional industries and Germany intends to play a pioneering role in this new emerging era.

Blockchain Economy in Berlin

Numerous blockchain start-ups have settled in Europe’s crypto capital Berlin. Due to infrastructural and regulatory conditions, Germany and Berlin in particular are an ideal location for companies in the blockchain industry, many of which already operate and conduct research there. A lot of them are working on blockchain-based solutions for accelerated and safe document dispatch, smart contracting or creation of digital identity. Investors from all over the world are financing Berlin-based blockchain start-ups, some of them even already through crypto investments.

The Berlin ecosystem seems to embrace the new technology. Several restaurants, bars, retailers and boutiques already accept virtual currency as means of payment. Even large German companies are also taking advantage of the technology. For example, Daimler and automotive supplier Duerr have recently completed a transaction via the blockchain-based platform Marco Polo, which enables processes to be significantly simplified and accelerated through smart contracts (press release).

The Current Regulatory Environment

In Germany service providers offering, e.g. the exchange of cryptocurrencies in other cryptocurrencies or in legal currencies typically require a permission of the German Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) to operate as financial service providers. They also have to comply with anti-money laundering regulations. The much discussed decision of the Berlin district court of last year [1] in which the court held that a bitcoin trader was, despite the lack of having obtained a permission to perform financial services, not criminally liable, has not changed this regulatory environment. The court made it clear though that it disagreed with the BaFin’s classification of Bitcoin as financial instruments which would have formed the basis for a criminal conviction in the given case. The court pointed at the German legislator’s competence and task to adopt the rules forming the basis of criminal liability. The decision added to the complexity of the legal framework which, in particular, entrepreneurs and investors currently have to navigate.

All of this underlines the need for more transparent regulation of the sector. At the moment, a draft legislation is being contemplated in Germany (German law to implement the directive changing the fourth EU-Anti money laundering directive) which would extend the mandatory requirement to obtain permission for providing financial services also to crypto assets that serve investment purposes as well as to wallet providers which deposit, manage or secure private cryptographic keys for crypto assets.

The German Government’s Blockchain Strategy

The German Federal Government has recognized the great potential of blockchain technology in its recently adopted blockchain strategy (Please find here a convenience translation of the German Government’s blockchain strategy). According to the government, this makes Germany one of the first countries to unveil a blueprint for taking advantage of the opportunities that blockchain technology offers and for harnessing its potential to advance digital transformation. According to this strategy, blockchain innovation will be heavily promoted, supported and funded and investments initiated and attracted. In particular, the development of blockchain technology in the financial sector will be supported by liberalizing German law in order to facilitate electronic securities. Public offering of certain crypto tokens will be regulated and legal certainty for trading platforms and crypto depositories shall be ensured.

The strategy prospects a clear regulation for crypto-currency business models in the financial sector which should add predictability and reliability for entrepreneurs and investors. To further support innovation, the German Government promotes an “Industry 4.0 Regulatory Testbed”. Start-ups shall be able to develop and test their products, especially those revolving around smart contracts, in an experimental, less regulated environment.

The governmental authorities furthermore intend to act as role models by integrating blockchain technology into their processes. Personal appointments with the authorities, for example, are planned to be replaced by electronic proof of identity. The government is also making special efforts to subsidize climate-friendly and sustainable projects. Plans include the introduction of corporate blockchain bonds and shares (as opposed to the current regulation stipulating that bonds/shares must be in paper form). That could even lead to the introduction of new corporate forms with corporate shares in token form.

However, the German Government plans to work at European and international level to ensure that stablecoins will not become an alternative to state currencies.

Pre-commercial companies can apply for subsidies from the Federal Ministry of Economics and Energy. In particular, since 18 October 2019 there is a call for subsidies with the focus on "Secure digital identities". According to the strategy paper, further subsidies will follow.

Conclusion

Berlin is the current hub for the new blockchain technology in Europe and Germany is setting the course to maintain this leading position in the future. The planned regulation of this new emerging sector will lead to a considerable gain in public trust and growth opportunities which will likely attract more investors and entrepreneurs.