We have a reputation for building successful businesses in the US and when we set out to build a liquidity solution for security tokens, it was the launch in the US that we had firmly in sight.
However, the United States has been unable to support its development without a regulatory framework to facilitate the digitization of assets and a service model that can take advantage of blockchain technology. This has never been the place to build innovative blockchain technology.
Instead, we went to Germany to find business. It wasn’t just us. Thanks to his BaFin stance as a financial market regulator, Germany is home to a vibrant blockchain his ecosystem, surprisingly ahead of the US.
Coordination with regulators is far from perfect, but at least the regulatory process is converging. German authorities have consistently worked towards the goal of justifying the digital asset situation and integrating it into financial markets. Today, BaFin has become a world leader in applying existing financial market laws to cryptocurrencies, putting Germany at the forefront of developed countries adopting cryptocurrencies and decentralized finance (DeFi).
Changes to the German Banking Act introduced in 2020 bring crypto assets into line with traditional securities. The move provided clear direction to the market and meant that service providers needed to obtain licenses. This was a requirement that elevates crypto providers and creates parity with traditional financial players.
This approach by BaFin has brought significant benefits to the German financial sector. By nailing its color to the mast and classifying cryptocurrencies as financial instruments, BaFin has provided innovators with the clarity and confidence they need to build their projects.That is why Germany take the lead In light of progressive tax laws and forward-looking fiscal policies, cryptocurrencies and blockchain technology will enable the largest funds and asset managers to keep digital assets on their balance sheets.
of the regulator set medium-term goals (which will continue until 2025) will extend regulation to DeFi with the aim of protecting market participants from undue risks. , has carefully stipulated that regulation needs to be adjusted to make it appropriate, but it is clear that DeFi does not have regulatory latitude. And it matters. This technology has the potential to overhaul the entire financial system. Competing with traditional financial markets requires good and specific regulation.
While BaFin has made strides toward understanding and encouraging advancement of the technology, the SEC has released a series of statements lacking specific guidance on how it views blockchain-based models. At the heart of the confusion is the inability to determine whether a digital asset is a security.
In the United States, the Howey test sets the standard for what constitutes financial security and what does not. Transactions that Howey deems to be “an investment of money in a general enterprise with a reasonable expectation of profit from the efforts of others” are “investment contracts” and qualify as securities.
If classified as a security, digital assets are subject to federal securities laws, fall within the scope of the SEC, and must be traded through a stock exchange or an SEC-registered broker-dealer. This eliminates unregulated cryptocurrency trading platforms and greatly hinders protocols using tokens not designed as investment vehicles.
Both past and current SEC chairmen have been cautious about this matter, hinting that regulators consider all digital assets (other than Bitcoin) to be securities, but are far from actually confirming that. have been avoided.
The impact of this approach was to drive innovators out of the United States into well-regulated markets where there is less risk of derailment or immediate closure of projects by regulators.
However, the tide is turning and the SEC is making great efforts to better understand the cryptocurrency industry.it is international DeFi Working Group Within IOSCO, to “further explore the market integrity, investor protection and financial stability risks of DeFi” DeFi report It was published earlier this year.
Two bipartisan cryptocurrency bills were also introduced this year. Lumis Gillibrand Responsible Financial Innovation Act and the Digital Goods Consumer Protection Act 2022Digital assets are a touchy topic in an election year, and while neither is likely to pass, they show a growing understanding among lawmakers about the issues facing cryptocurrency regulation in the United States. increase
Both bills work to establish jurisdiction between the Commodity Futures Trading Commission (CFTC) and the SEC. Unfortunately, the need to clearly define which digital assets constitute security is a feat, and both bills are supposed to apply Howey by default, so neither is the solution they provide. .
DeFi’s regulatory blueprint
Just as the DeFi industry is split between regulated and unregulated, so too are the gaps between national regulators. The SEC and BaFin’s different approaches are just two of his examples of situations that are routinely unfolding around the world.
Never before has the influence of regulators in support of development been so evident. Innovation is advancing rapidly, and regulators who fail to understand the technology, support its development, and properly regulate it pose serious risks to economic growth.
Visionary regulators such as BaFin have been successful because they sought to understand the potential of the technology. By engaging entrepreneurs and innovators of all sizes, as well as large corporations, BaFin has developed a broad understanding and position that can be applied for years to come.
If the SEC wants to understand the future of DeFi in the U.S., it can take a look at the German use cases and how they operate in practice. It will find a full-fledged regulatory blueprint to follow.
Philipp Pieper herd, a DeFi platform regulated under BaFin in Germany. He participates in the Digital Finance Forum, which advises the German Finance Minister on the future of financial markets.
Opinions expressed in commentary articles on Fortune.com are solely those of the authors and do not reflect the opinions or beliefs of the authors. luck.
more must read Commentary issued by luck:
sign up for Features of Fortune Subscribe to our mailing list and never miss our biggest features, exclusive interviews and surveys.