Following the introduction of national regulations such as the Electronic Securities Act (eWpG) and the Regulation on Crypto Fund Units (CryptoFAV), the securities industry is now looking ahead to expanding its range of business models under the Markets in Crypto Assets (MiCA) Regulation). And with the ECB trials for DLT infrastructure in interbank settlement, there are further opportunities to make tokenised assets marketable.

The message for banks is clear: if you want to be at the forefront, you have to participate in the development of market infrastructure and standards. In the „European DLT & Digital Assets Study 2024“, the consultants from ZEB conducted a survey on how financial services providers are positioning themselves for these developments. „Banks have so far been hesitant when it comes to crypto assets because there was no end-to-end regulation and there was a lot of room for interpretation when it came to ensuring regulatory compliance,“ says ZEB partner Julian Schmeing in an interview with Börsen-Zeitung.

It is important to be aware that many tokenised financial instruments have a Mifid II component. In other words, you must have licences in the old and possibly also in the new world. The first start-up, One Trading, recently received a Mifid II derivatives licence to trade crypto-derivatives (futures on Bitcoin and Ether). „It is often overlooked that products that fall under the definition of financial instruments according to Mifid II, such as security tokens, are not directly affected by Micar and that we can rely on an established regulatory framework.," says Schmeing.

Based on the study, Schmeing distinguishes between three types of banks in their approach to digital assets: 5% are leaders with a clear positioning, their own DLT infrastructure and do more than just brokerage and custody. Then there are the hesitant institutions without a roadmap, whose share fell from 80% to 60%, and finally the so-called followers, who have or are planning a basic offering and make up 35%. „Over the last twelve months, however, the topic of digital assets has risen to the top of the agenda even among the hesitant institutions. There is a certain correlation with the development of the Bitcoin price. As soon as something positive happens there, the willingness to take a serious look at the topic increases - and nobody wants to miss out on a trend.“

The degree of sourcing is important for implementation, that is, how deep the value chain is built, says Schmeing. Recently, some institutions have gone through partners such as Bitpanda and the Stuttgart Stock Exchange for crypto trading, which, as a B2B2C business model, keeps costs low in the short term. Schmeing is only partially in favour of such as-a-service services: „Depending on the business model, setting up and operating financial market infrastructure is a core task of banks. That's okay as an introduction, but if you want to move into digital assets for the long term, you have to build the value chain on your own infrastructure. Whereas a single use case does not usually justify an investment.“

With the introduction of MiCA and the ongoing ECB trials for the settlement of a wholesale CBDC via DLT infrastructure, the securities business is moving firmly in the direction of tokenisation across the entire value chain. New issues are one thing, but what will happen to the legacy business? Schmeing expects this to be tokenised step by step according to the asset class. „Typically, large-volume transactions such as covered bonds and promissory notes are likely to be the first. The mass tokenisation of shares is still a long way off, as this market is already functioning well, which means that a transformation hardly makes sense.“

According to Schmeing, two aspects remain challenging for crypto asset service providers (CASPs) in the new, regulated world: firstly, the implementation of the Travel Rule, which stipulates that the sender and recipient of crypto transactions must be identified and verified – even for the smallest amounts. The Travel Rule was introduced by the Financial Action Task Force (FATF) in 2012 and is part of the canon of money laundering prevention – and this requires compliance. The problem: „There is still no clear industry standard for practical implementation – and it all has to be fully implemented by the end of 2024.“

The other aspect is the so-called DAC8 regulations. This concerns the tax reporting of crypto income. „This is an elementary part of digital asset business models and is often put off until later in the implementation process. It was decided at OECD level that such income must be reported to the authorities in an orderly process. And this is to be gradually introduced from 2026.“

VASPs will therefore be subject to extensive reporting obligations. With DAC8, in addition to the recipient and asset class, the type and amount of the transaction must also be reported – there is unlikely to be a loophole. It is to be hoped that there will be no double reporting, and that operators will not have to report the same data to different authorities. After all, with all due regard for compliance, regulatory overkill must be avoided – also because regulatory costs are ultimately always paid for by the customer. Rising bank fees should be a warning signal.

Schmeing has observed in his consulting practice that regulation and official structures are decisive factors when choosing a location in the digital asset sector. Many projects are currently being located in Austria and not in Germany. Germany's neighbours have held back with their own legislation and prepared themselves directly for the EU regulation, which means that they are now in pole position for digital asset relocations together with France. If the trend continues, Germany will have a problem as a financial centre.