German funds aimed at institutional investors can now allocate up to a fifth of their assets to cryptocurrencies, but managers are expected to take a cautious approach as they weigh the risks of placing client money in the ultra-volatile asset class.
The new rules, which were enacted at the start of July, come as Germany’s financial watchdog BaFin attempts to balance its concerns about what it has described as the “highly risky and speculative” nature of cryptocurrencies with its desire to encourage the development of new technologies that could have a significant effect on financial services.
Assets held in funds known as Spezialfonds, which are only open to institutional investors and not to the general public, stood at just over €2tn at the end of March, according to the BVI, the trade association representing German asset managers. While these funds can potentially shift billions of euros into cryptocurrencies, the investment industry at large has been reluctant to make big allocations into coins such as bitcoin and ether, which often move in much wider price ranges than traditional securities such as stocks and bonds.
Regulators in the US, the UK and Germany have also become increasingly concerned about the potential for illicit activities at unregulated or loosely overseen crypto groups. These risks could curtail interest from retirement funds, said Klaus Stiefermann, managing director at ABA, the association representing corporate pension schemes.
“Companies are responsible for the pension promises that they make to their members so they are very conservative investors. I would expect that company pension schemes will proceed very cautiously when assessing cryptocurrencies,” he said. The change to allocation rules came as German authorities launched a range of digitally-focused initiatives for the financial sector.
Last month, lawmakers granted permission for companies to issue debt securities using blockchain technology, a type of distributed ledger that underlies tokens such as bitcoin and ether. A similar effort to cut paperwork and enhance efficiency across the sector will later be extended to funds.
“BaFin has been very active in issuing guidance and has gained a reputation internationally as a regulator that understands both cryptoassets and distributed ledger technologies,” said Angelo Lercara, a Munich-based partner at Dechert, the law firm. Officials have also introduced a new legal framework for Germany’s asset managers that will remove them from the same regulations as banks.
More than 700 investment companies have been removed from the banking rules, according to the BVI, which welcomed the change. But the association also noted that about 17 of its members would now be bound by a more complex set of regulatory demands. “The aim was to create a simpler prudential regime. Instead, we are in for a rather bumpy start,” said Thomas Richter, BVI chief executive.