Even as regulators around the world crack down on cryptocurrency exchange Binance, German institutional investors may soon be able to get a taste of the burgeoning digital asset space.
BaFin, the German financial watchdog has rolled out new rules which will enable German funds targeted at institutional investors to allocate as much as a fifth of their assets to cryptocurrencies, but managers are expected to take a cautious approach at the offset.
The new rules, enacted at the start of July, come as German regulators try to balance concerns over what have been described as “highly risky and speculative” cryptocurrencies with the desire to encourage innovation in new technologies that could have a significant effect on financial services.
But given the size of assets held by Spezialfonds, German funds open only to institutional investors and not retail, even a small allocation could have a sizeable impact on the cryptocurrency markets.
According to data from BVI, a trade association representing German asset managers, Spezialfonds held some US$2.38 trillion in assets at the end of the first quarter of 2021.
For reference, the total market cap of all cryptocurrencies was estimated at just US$1.4 trillion, based on data from CoinMarketCap.com, a cryptocurrency data website.
But even though Spezialfonds are not accessible by Europe’s retail investors, they’re not completely locked out of participating in cryptocurrencies because there is a large selection of exchange-traded products or ETPs listed on Switzerland’s stock exchange SIX that have cryptocurrencies as their underlying assets.
The most prolific issuer of digital asset ETPs on SIX has been 21Shares, which has partnered ARK Investment Management to apply for a Bitcoin ETF with the U.S. Securities and Exchange Commission.
While German pension funds and other retirement schemes are naturally conservative, years of negative yields on German government bonds and diminishing returns from equities, at a time when obligations to members are increasing, could force their hand into more speculative segments of the market.
And to that end, German regulators have been paving the way for its institutional investors and hedge funds to take on greater risks.
German officials have introduced a new legal framework for Germany’s asset managers that will remove them from the same regulations as banks, with over 700 investment companies now free of the shackles that once constrained their operations and risk-taking ability.