Last week, a Bitcoin ATM was briefly installed at Berlin’s Brandenburg Gate. It didn’t actually work, but that wasn’t the point. The cryptocurrency companies who put it there were pressing Germany’s politicians to create clear, reliable guidelines for the sector, which currently has a reputation for lawlessness and greed.
Around the world, financial regulators are trying to understand and rein in the newfangled cryptocurrency markets. But attempts to impose existing rules have mostly failed, and badly.
In the meantime, Initial Coin Offerings (ICOs, see glossary) continue to flourish. Analysts at Coinschedule, an ICO tracking service, estimate that startups have raised $21.4 billion (€18.8 billion) this year through new capital rounds, triple the amount of 2017. But four out of five ICO startups fail, and scandal and fraud have badly burned investors, including some in Germany.
New regulations, particularly for minimum contractual standards, are sorely needed, said Felix Hufeld, head of German financial regulator BaFin. “We don’t want to stifle innovation, but at the same time we have to defend ourselves against risks” such as money laundering, he told Handelsblatt.
New laws slow in coming
Although the German government sees the need to regulate ICOs and cryptocurrencies, insiders say Berlin won't produce new legislation anytime soon. Various federal authorities are looking at the issue but many questions remain, one financial markets supervisor said.
European bodies have joined the charge. A joint initiative by Germany and France discussed cryptocurrency regulation for the first time at the G20 finance ministers’ meeting in Buenos Aires last March. ESMA, the European Union's securities regulator, will report on the matter to the European Commission by the end of the year.
There are numerous obstacles to forging a regulatory framework, not least the eagerness of certain smaller states such as Malta and Cyprus to attract cryptocurrency investors. Tighter regulation is not necessarily what they want.
If the EU fails to find a pan-European solution, Germany may go it alone. In a statement, the finance ministry said the international nature of cryptocurrencies meant supranational solutions were best, but that it was assessing possible solutions at the national level.
There is also considerable demand for regulation within the sector itself, where players complain of chaotic conditions. Consistent laws throughout Europe would help to compete against American and Asian companies, who have surged ahead in the cryptocurrency business. But no one expects fresh measures before next year’s European parliamentary elections.
Germany's crypto scene has been shaken by a scandal surrounding Envion, a Berlin Bitcoin firm that raised €100 million to mine cryptocurrency with green electricity. The company is mired in legal battles after failing to deliver the goods, while investors are left with almost nothing.
A Berlin court muddied the waters further by ruling that cryptocurrencies should not be seen as accounting units. The judgment canceled out initial BaFin guidelines, meaning that cryptocurrencies can trade freely without official permission. For Mr. Hufeld, the BaFin president, this means “investors now have only minimal rights. I can only advise private investors to steer well clear.”
Meanwhile, a fundamental debate rages about what cryptocurrencies are. Some companies define them as “donation receipts,” others as dividend payments or fees for future services. Some experts have criticized BaFin for failing to come up with a clear definition, in effect shifting the legal responsibility to individual investors.
No one quite knows what future ICO regulation will look like. A strict model would treat ICOs like stock-market flotations, with tough reporting and approval requirements. But some fear this would kill off easy credit flows to startups, a great strength of ICOs.
Germany is not alone in grappling with these issues. Liechtenstein recently passed some of the world’s first blockchain legislation. Japan has instituted a system of Bitcoin self-regulation, while in the United States, regulatory bodies are squabbling over legal definitions of cryptocurrencies.
Handelsblatt reporters Andreas Kröner, Felix Holtermann, Yasmin Osman, Martin Greive, and Dana Heide contributed to this article. Brían Hanrahan adapted it into English for Handelsblatt Global. To contact the authors: [email protected], [email protected], [email protected], [email protected], [email protected]