Institutional investors in Germany can now invest up to a fifth of their assets in cryptocurrency, but managers are expected to be cautious as they consider the dangers of putting client money in the ultra-volatile asset class.
The new rules, which went into effect at the beginning of July, come as Germany’s financial watchdog BaFin tries to strike a balance between its concerns about cryptocurrencies‘ highly risky and speculative nature and also their desire to boost the development of new technologies that could have a significant influence on financial services.
According to the BVI, the trade group representing German asset managers, assets held in Spezialfonds, which are only open to institutional investors and not to the public, totalled slightly over €2 trillion at the end of March.
While these funds have the potential to invest billions of euros in cryptocurrencies, the investing industry as a whole has been wary of making major investments in coins like bitcoin and ether, which have far larger price ranges than traditional securities like equities and bonds.
The Concern of Germany over cryptocurrency investment
Regulators in the United States, the United Kingdom, and Germany are also concerned about the possibility of illegal activity in uncontrolled or poorly supervised crypto organizations. According to Klaus Stiefermann, managing director of the ABA, which represents business pension systems, these concerns could reduce interest from retirement funds.
He said that because companies are accountable for the pension promises they make to their employees, they are cautious investors. When it comes to cryptocurrencies, he anticipates company pension plans to operate with caution.
The adjustment in allocation guidelines came as the German government unveiled a slew of digitally-focused financial industry measures. Last month, authorities gave corporations permission to use blockchain technology, a form of distributed ledger that underpins currencies like bitcoin and ether, to issue debt instruments. A similar initiative to reduce paperwork and improve efficiency across the industry will be extended to funds in the future.
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Angelo Lercara, a Munich-based partner at Dechert said that BaFin has been quite active in giving recommendations and has established a reputation internationally as a regulator that knows both crypto assets and distributed ledger technology.
Officials have also introduced a new legislative framework for asset managers in Germany, which will exclude them from the same laws that apply to banks. According to the BVI, which applauded the shift, more than 700 investment businesses have been removed from banking regulations.
However, the group warned that around 17 of its members would now be subject to a more complicated set of regulatory requirements. Thomas Richter, BVI Chief Executive, said that the goal was to simplify the prudential regulation. Instead, they are in for a difficult start.