Rohan MathawanWhen Germany introduced the Fund Locations Act in April, bitcoin investors and enthusiasts were thrilled. The bill brought a new dawn in Bitcoin investments carrying hope for a bright future of the virtual currency market. The Act was passed by Bundestag, The German federal parliament, on April 22nd, coming into effect On July 1st.
Now, what does the bill entail? You are probably wondering; what effect will it have on the bitcoin market and its price? In this article, we will answer these questions and more.
What Act Entails
Essentially, the new law allows domestic special funds (Spezialfonds) to invest up to 20% of their portfolio in crypto assets. Spezialfonds are open-ended and regulated funds limited to institutional investors such as corporations, insurance companies, and financial institutions. This means that they are not open to the general public. There are no special funds equivalent in the US. However, the funds are likened to the Luxembourg base Qualifying Investor Fund and Ireland’s Qualifying Investors Funds.
The legislation covers about 4000 existing investment funds, holding about 1.88 trillion euros ($2.23 trillion). The 20% allowed for crypto investment translates to about $446 billion. This represents about two-thirds of the current bitcoin total market cap. The law, drafted by the Ministry of Economic Affairs and Energy and Ministry of Finance, signifies Germany’s interest in crypto regulations. Some sites that provide long term crypto predictions have already taken this news into account and went as far as to predict for Bitcoin to hit a new ATH by the end of this year.
A New Dawn For Institutional Bitcoin Investment
Initially, the alternative investment funds were not allowed to invest in volatile markets. Besides new legislation, Germany has passed electronic securities law (eWpG). This law will open the Fintech and digital assets space and enable digital securities. With proper legal conditions, these regulations will allow institutional investors to diversify their portfolios in the volatile and liquid Bitcoin market.
The effect of the new regulation is not yet certain. On one hand, it could open a large capital inflow into the crypto space. This could boost bitcoin demand and thus price increase. But, on the other hand, skeptics view the bill as an establishment of regulation in the crypto industry.
According to Decrypt, Distributed Ledger Consulting CEO, Sven Hilderbrandt, terms the move a massive step up. He opines that spezialfonds investment vehicles will spur growth in the cryptocurrency market. In fact, Hilderbrandt has been at the forefront of lobbying for bitcoin regulations alongside Asset Management Association – BVI.
The entry of the funds in the market adds tools to institutional investors to get a piece of the digital assets without necessarily buying actual cryptocurrencies or dealing with digital wallets or crypto exchanges. The investment vehicle boosts great flexibility, and less diversification and liquidity restrictions. In addition, the funds are less restrictive in leverage and borrowing. Putting in place robust regulations safeguards the industry’s boosting the investors’ confidence.
The Immediate Effect On Bitcoin
If the funds invest 20% of their holding into the crypto space, about 350 billion euros ($414) billion could flow into the cryptocurrency market. While the firms might not invest the maximum amount right away, the initial investment will still be in billions.
For instance, if the funds decide to kickstart the new venture by investing in one percent of the fund’s allocation to digital currencies, the impact on the market would be massive. To put this into perspective, the bitcoin market cap is roughly $593 billion as per Coin Market Cap. Ideally, $400 billion could enter the Bitcoin market. This is a large proportion of the total bitcoin value and would shake the whole market.
Will This Spur Institutional Adoption In Germany?
According to the head of the association for alternative investment (BAI), Frank Dornseifer, the law will go a long way in enhancing German capital market digitization. In fact, he terms the move as “pragmatic.”
Besides the new law, Germany has enacted many regulations that will spur growth in crypto adoption when implemented. For instance, Germany’s Financial Watchdog (BaFin) has offered a CoinBase license to provide crypto custodial service in the country. Moreover, BaFin has given SwarmMarket DeFi startup a license to operate their security exchange and crypto businesses in Germany.
At the start of 2020, Germany passed a law allowing banks to buy and sell cryptocurrencies. In fact, BaFin, the financial regulator, recognized cryptocurrencies as financial instruments. As a result, the first Bitcoin exchange-traded fund ETP was listed on the German stock exchange by the ETC group. Additionally, Deutsche Borse Group, a stock exchange operator, acquired Crypto Finance AG.
These developments have created the path for other crypto-based investments. There has been a massive increase in Bitcoin ETP on the exchanges. According to Iconic Holding, head of Crypto ETPs, the demand for crypto assets is massive, with assets under management hitting $4 billion in a short period. With new investment in digital assets, the spezialfonds will become massively bigger.
Without a doubt, something is cooking the german crypto industry. These progressive regulations will go a long way in enhancing cryptocurrencies adoption. For instance, they promote partnerships between the Crypto custody providers and German Banks.
The laws will provide more freedom for investors to venture into crypto investment. However, we can’t overlook the possibility of Germany gradually restricting the industry with mandatory requirements such as knowing your customer (KYC) and other similar requirements.
Incentivize for Other European Union Countries To Follow Suit
The news allowing Spezialfonds to invest in bitcoin was received with great enthusiasm. For instance, US-based Wealthy Colony founder Joseph Hagan said the law was a massive development since institutions and corporate investors are historically disadvantaged in crypto coin investments.
Other European countries will likely follow suit and allow institutional investment funds to venture into cryptocurrency with set regulations. The move would result in a gargantuan amount of money flowing into the cryptocurrency market. As a result, the price of Bitcoin and other cryptocurrencies would proliferate to new highs. According to Deutsche bank, bitcoin investment can’t be overlooked. In fact, the bank has begun institution investment in crypto-assets with fears of USD inflation in the future.
Final Words
The new law will boost the influx of German capital into the cryptocurrency industry. In addition, it is expected to spur a wave of crypto trading regulation across Europe and interest in bitcoin adoption. With these massive, we could be looking at another massive cryptocurrency bull run.