Introduction and Overview of Digital Assets Regulation for Financial Market Participants in EU and Germany

In our dialogue with line and project managers in financial institutions we often find a high degree of uncertainty related to relevant regulation when starting to engage in digital assets. A wide range of documents is readily available, but a lack of structure often leads to situations where people focus on less important or outdated information and start to build their repository of relevant information from scratch and based on “trial and error”. This insights aims to give an overview about governing bodies, “trend setters”, and their most relevant publications at the time of writing.

Digital assets and in particular crypto currencies, and their interface to retail investors in form of exchanges and lenders have experienced an extremely rough 2022. Simultaneously this intensified the legislation discourse and accelerated the introduction of regulation of digital assets. It seems that finally the development of a legal framework for the issuance, custody and trading of digital assets is taking shape in 2023 and is becoming a foundation, on which institutional investors and traditional financial institutions are building their digital asset strategy.

As with any financial legislation cobweb, the incoming legal framework is driven by multiple layers of regulatory and supervisory authorities, non-governmental institutions, and standard setting bodies. The additional layer of already existing legislation in Germany adds more complexity and raises the question as to how the EU framework will change the landscape here.  Having a good grasp on the groups of entities that influence the ever-evolving legislation of digital assets, creates the base for understanding of the structure that will shape their regulatory framework in Germany and the EU.

In order to steer organizations in the right direction, decision makers in financial institutions must stay up to date on the most recent developments in their field. Having a good grasp on the various regulatory institutions and their influence on the digital assets space can help project and product managers to anticipate and prepare for changes that may impact their day-to-day business and consequently their long-term strategy. Team leaders and project managers must be constantly aware of sources of up-to-date and trustworthy information on new trends to stay ahead of the curve and maintain a competitive edge in the digital asset market.

The following gives an overview on the different groups of stakeholders and their roles in the process of regulating the digital assets market in the European Union and Germany.

1. Financial regulation adoption and the legislative bodies of the EU

The EU Commission proposes new legislation after consultations with the market and introduces new regulation bills and directives. These are in turn are debated and reviewed by the two legislative bodies of the European Union – the European Parliament and the Council of European Union. DLT Pilot Regime vote took place in March 2022 (will come into force this year) in the European Parliament and comes into force March 2023, whereas the MiCA regulation was passed by the European Parliament on 20^th April (it will come into force 20 days after the vote and will start applying after the usual 18 month transitional period).

Where to follow the latest in relation to the adoption new regulation in digital assets:

• European Commission – https://tinyurl.com/yh985js7
• European Parliament – https://tinyurl.com/2p9y7xmt
• Council of European Union – https://tinyurl.com/yvnpsu58

2. Independent EU authorities with supervisory mandate

EBA (European Banking Authority), ESMA (European Securities and Markets Authority) and EIOPA (European Insurance and Occupational Pensions Authority) are independent agencies that operate at arm’s length to the EU institutions and ensure the effective regulation and supervision of digital assets related activities of financial institutions.  Currently, since EU level legislation as MiCAR and the DLT Pilot Regime have not yet been enforced, these authorities are in a preparational phase, regularly publishing opinions and technical advice concerning digital assets.

• European Banking Authority (EBA) – https://tinyurl.com/3rmhz69a
• European Securities and Markets Authority (ESMA) – https://tinyurl.com/ykxm89vd
• European Insurance and Occupational Pensions Authority (EIOPA) – https://tinyurl.com/yeyw2apv

3. Standard setting organizations (EU and beyond)

The EU regulatory bodies, as well central banks on local and the ECB on a Eurozone level work closely with several standard setting organizations that guide and influence the agenda, to some extend the process and priorities of the digital assets’ regulatory framework.  The Bank of International Settlement set the baseline for prudential regulation (Basel Committee (BCBS) and financial stability. The BIS’s Committee on Global Financial System (CGFS) and the Committee on Payments and Market Infrastructures are hugely informative to the trends in digital assets, as they are forums of central banks and financial authorities in Europe and give direct recommendations for the EU for regulatory decisions.

The Financial Stability Board (FSB) works closely with the World Bank and International Monetary Fund to identify risks and promote policies and standards for financial stability. The EU is represented by the European Commission and the European Central Bank (ECB).

The International Organization of Securities Commissions is forum of securities regulators from 120 countries. IOSCO has published guidance papers and identified concrete aspects of digital assets regulation that need to be addressed (custody, trading platforms and disclosure). IOSCO has also created a Fintech Network, that is specifically focusing on the high standard of regulation in financial services.

Financial Action Task Force (FATF) is focused on Anti-Money Laundering (AML)  and counter-terrorist financing (CFT) standards. FATF has over 200 jurisdictions as members and has increasingly been involved in guiding the forensics of digital asset transactions and regulation digital assets service provides virtual asset service provides  (VASPs) as per FATF.

• Bank for International Settlements (BIS) – https://tinyurl.com/ptmfdtka
  • Basel Committee on Banking Supervision (BCBS) – https://tinyurl.com/4j6kzmbx
  • Committee on the Global Financial System (CGFS) – https://tinyurl.com/3t7n7hs5
  • Committee on Payments and Market Infrastructures (CPMI) – https://tinyurl.com/23aatv4p
• Financial Stability Board (FSB) – https://tinyurl.com/2b8jvrrs
• International Organization of Securities Commissions (IOSCO) – https://tinyurl.com/yc6xrutp
• Financial Action Task Force (FATF) – https://tinyurl.com/28e4yrzn

4. Regulatory bodies and advisory bodies in Germany

The primary regulatory bodies responsible for the regulation and supervision of digital assets are  the Federal Financial Supervisory Authority (BaFin) and the German Central Bank (Deutsche Bundesbank). As the national competent authority (NCA), BaFin is the supervising the trading and custody of digital assets and is the crypto asset custody licensing body. Deutsche Bundesbank is responsible for overseeing payment systems and ensuring the stability of the financial system. BaFin is the crypto asset custody licensing body. The MiCAR, DLT Pilot Regime, and new AML regulation will go through the transposition process of transferring EU law into German legislation most likely in 2023.

• Federal Financial Supervisory Authority (BaFin) – https://tinyurl.com/yjx3nrbh
• German Central Bank (Deutsche Bundesbank) – https://tinyurl.com/33hxanm2

5. Non-governmental trend setters in the digital assets space in Germany

Since the publication of the German blockchain strategy, there have been increasingly active non-government independent organizations participating in the advocacy, policy engagement and education around digital assets. Most prominently, the Blockchain Bundesverband and Bundesverband Bitcoin represent the interest of blockchain digital asset companies and the crypto community, respectively. Furthermore INATBA is an international association that promotes the blockchain and distributed ledger technology. Germany is represented by several financial institution and fintech companies. Last but not least, the Frankfurt School Blockchain Center has played a pivotal role in the popularization of digital assets and their benefits and has made efforts to bring quality education on the topic at a zero cost.

• German Blockchain Association – https://tinyurl.com/3bt9vdhr
• Bundesverband Bitcoin – https://tinyurl.com/yn5dsncd
• INATBA Association for Trusted Blockchain Applications – https://tinyurl.com/4wwchnzx
• Frankfurt School Blockchain Centre – https://tinyurl.com/5n8kjh7n

Navigating the multiple layers in digital asset regulation requires a collaborative and adaptive approach. Policymakers and regulators must engage with stakeholders from across the ecosystem to ensure that the regulatory framework is fit for purpose, promotes innovation and growth, and protects users and investors alike.

Be Shaping The Future, Germany understands the complex regulatory landscape of digital assets in the EU and Germany, and we recognizes the importance keeping up-to-latest developments, in order to provide the best short and long term advise to our clients and help them shape their strategy in a new and exciting asset class.

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