The German government has passed a comprehensive national blockchain strategy. Together with many others from the German blockchain industry, we have been awaiting this strategy with great expectations.
Believing in the tremendous disruptive power of distributed ledger technologies, we hope that this strategy will foster a profound as well as an all-encompassing digital transformation within the capital markets in Germany and beyond.
Here is our take on the key aspects of the German blockchain strategy:
1) Legislation for blockchain-based electronic bonds:
Already before the end of this year, the Federal government plans to readjust the German civil securities law to stipulate blockchain-based bonds. In the future, digital securities, which can be issued and transferred without central clearinghouses, will be treated in the same way as analogous securities. Bonds will not need to be incorporated in a paper form anymore but can be easily issued and transferred via blockchain technologies. German parliament member Thomas Heilmann, one of the driving forces behind the blockchain strategy and the political blockchain movement in Germany told Coindesk: “The home of the emerging token economy will be in Germany, just as Silicon Valley became a hotspot for previous innovations.”
Being the first company to receive the approval of the German Financial Market Authoritiy (BaFin) for the Security Prospectus of a token-based bond for real estate investment, we obviously welcome this proposal. We see it as a huge chance to turn Germany into a relevant global capital marketplace. These blockchain-based bonds can be used in order to raise capital in a more cost-effective and flexible way, while at the same time provide investor protection under German and European law.
The financial sector is in dire need of digital innovations and blockchain technologies have proven themselves as capable of fostering these innovations. We believe that the advantages we have facilitated for our blockchain-based financial product should apply to all investment opportunities in the future in order to create a more effective, transparent and accessible financial industry.
2) A state-run blockchain infrastructure: Bundes-Chain
The Federal government aims to research the implementation of a state-run blockchain infrastructure, already referred to as the Bundes-Chain. It should be used for the digitization of the German administration, exchange of information between private, public as well as research institutions and many more. The mentioned use cases include a smart-contract register for the energy sector, validation of documents and certificates as well as a platform for CO2 data.
Further, the Federal government plans to facilitate the secure storage and management of digital identities, not only of citizens but as well of machines, on this state-owned blockchain infrastructure. The privacy of the data should be maintained via so-called Zero-Knowledge Proofs, which allow data to be verified without revealing that data itself. Like this a cashier at the supermarket, for example, could know that the person holding the ID card is of legal age to buy alcohol — without simultaneously getting his/her name, address and date of birth revealed.
We consider these steps very ambitious with lots of detail work still to be done. The discussion about a state-run blockchain infrastructure goes into the right direction, however, we are not sure whether it needs to have its own infrastructure. We could also image the role of the state to be one that runs its own nodes in an open and public blockchain network.
3) Standardization and interoperability
The Federal government pursues the standardization of interfaces. It points out that using standardized interfaces will make it easier for companies, civil actors and research institutions to enter the market. Interoperable standards should therefore be required on a European and international level, as they form the basis for the linkage of different blockchain applications, according to the blockchain-strategy.
We highly appreciate this approach, since we also see considerable advantages in standardization and in open source projects. Therefore, we have developed our Security Token using the ERC-20 standard on the Ethereum network. Proprietary software and isolation that still predominate in the administrative and financial sector do not fit into the decentralized finance movement.
4) A digital euro on the blockchain
While recently the main media attention has been on national states trying to ban Facebook’s Libra project, we are glad to see that this debate has not damaged the ideas of cryptocurrencies as a whole, but in fact has lead to a rethinking within the German government. While insisting on monetary policy to be a task assigned to the state and not to the private sector, the German government has chosen for a more constructive approach on that matter: Creating an alternative to Libra with a Europe-wide cryptocurrency.
The idea is that next to paper money, the European Central Bank as well as national central banks could introduce a blockchain-based Euro. With the E-Euro users could leave Euro deposits with the European Central Bank (ECB) and receive E-Euro in return. Private banks could serve as custodians for those deposits. For the first time, however, the user would have the freedom to decide whether to store his savings himself or to use the custodial wallet services of a bank for this purpose: Self-custody by default.
It is not up the Federal government to take this step, but the German central bank “Deutsche Bundesbank” in collaboration with the ECB. To our knowledge, there are already talks between the Federal government and the Bundesbank and as well as with the President of the European Commission, Ursula von der Leyen, in order to sound this option.
As for us, we put big hopes into the E-Euro. But we don’t believe banning Libra with increased legislation is the right approach. Instead, Germany and Europe as a whole should build a better version of digital cash using blockchain. If the ECB was to issue its own digital currency, it would eclipse Libra its current mass market appeal and unique perceived benefit.
The E-Euro could also bring new benefits to the investment industry. Once compatible with common cryptocurrency wallets, it can be used as simple as Bitcoin or Ether. Investors worldwide could use the E-Euro as their preferred currency to buy into security token investments (skipping the exchange from fiat to crypto). If done right, the E-Euro could open the gates for a new dimension of token-based trading and investment.
5) A blockchain-based public corporation
The German government has identified new opportunities with the use and application of blockchain technology in the area of corporate law and will carry out comprehensive research projects by next year. A reform of the corporate law could allow for shares to be digitized and registered similar to electronic securities, which can bring considerable simplifications as well as new features for corporations.
We carry big hopes for this approach, as we see a lot of advantages from the implementation of blockchain technology in that regard: Faster and legally secure incorporation, easier equity procurement and employee share ownership. As for the ladder, the high costs and legal complexity of transferring shares under German law are the main reasons why employees do not hold of their company. Instead, companies use so-called virtual shares or phantom stock programs. These agreements, which are not specifically regulated by law, replicate equity participation but do not achieve the same status as genuine corporate participation. Vesting mechanisms should be able to be implemented automatically. These are particularly important in the case of employee stock ownership plans because employees earn their share over a certain period of time. Digital shares do not only enable very small transactions of shares but also allow the automation of allocation.
In addition, we propose to create an alternative blockchain-based commercial register. Founding a company should be faster and easier, especially for people who are not based in the country. The identification process could be facilitated by the same digital identities that the government suggested. Estonia has already demonstrated that this is possible and has met great international interest with its e-residency.
6) Open Questions
The blockchain strategy reads itself like a colorful flower bouquet full of great and innovative ideas with a total of 44 measures to be implemented.
We will judge the government by its actions, not by its visionary position papers. Only a quick realization of the strategy will create added value for the German blockchain industry and send the right signal to the world. German politicians should be aware of the fact that other states also working on blockchain regulations. We propose that the above steps be implemented on an ongoing and continuous loop of small legislative bundles. This should not involve too much regulation, but rather the provision of a secure legal framework that promotes the booming blockchain industry.
Fundament Securities would like to make a contribution to endeavor of the German government by building the financial markets of the future while applying German and European regulation.
At Fundament Securities we provide legal, technology and distribution services to tokenize investment and raise capital.