Written by Norman Isaac Mwambazi

Cryptocurrency: New law in Germany that allows institutional funds to invest up to 20% takes effect next week

Since its inception, more than a decade ago, Bitcoin has enormously grown in value from being worth just a dollar …

Since its inception, more than a decade ago, Bitcoin has enormously grown in value from being worth just a dollar in 2008 to being valued at more than $60,000 in April before settling to half of that in the past two months.

The growth of bitcoin inspired other technology inventors to create their versions of cryptocurrency based on blockchain technology and therefore coming up with digital assets like Ethereum, Dogecoin, Litecoin, XRP, among others. These have grown in value as people became more interested in investing in these digital assets, promising a significant return on investment.

Along the way, more companies and businesses started accepting this cryptocurrency as a mode of payment for goods and services, while others directly invested in them by buying vast amounts of cryptocurrencies like bitcoin, and Ethereum to mention just a few. El Salvador, the Latin American country, went an extra mile a few months ago when it announced that bitcoin, the largest cryptocurrency globally, will be accepted as legal tender in the country. However, it maintained the US Dollar as the primary currency.

However, all is not all rainbows and butterflies for cryptocurrencies. Central banks of numerous countries have greatly discouraged their people from trading and investing in cryptocurrencies because of their decentralised nature and the inability to regulate them, with countries like China banning them altogether. Bitcoin has also come under scrutiny by environmentalists who claim that the cryptocurrency mining process is detrimental to the environment due to the tremendous amount of power it consumes and its substantial carbon emissions.    

As bitcoin enthusiasts try to convince opponents and financial regulators that the cryptocurrency’s (and other digital assets) merits far outweigh the demerits. Germany seems to be already convinced, with institutional funds being the first set to benefit from the developments in Deutschland’s crypto-verse.

According to Yahoo Finance, legislators have passed a bill into law that will take effect on Monday, August 2, 2021, instructing all institutional funds, also known as Spezialfonds, to invest as much as 20% of their holdings in cryptocurrencies like Bitcoin and others. These funds, which are dominated by pension and insurance companies, currently manage assets worth about 1.8 trillion euros ($2.1 trillion).

This law signifies a shift of the asset class in Germany into the mainstream. It follows investments by some of the biggest names in the finance industry, like the CEO of Galaxy Investment Partners Mike Novogratz and Brevan Howard Asset Management LLP, Alan Howard.

Tim Kreutzmann, a crypto assets expert at German Investment Funds Association (BVI), said that most funds will most likely not exceed or even reach the 20% threshold set in cryptocurrency investment and that institutional investors like insurance companies already have strict regulatory requirements for their investment strategies. However, investing in cryptocurrencies would also be an option for them going forward.

Even though funds will be allowed to invest in digital assets, some German funds will most likely not do so initially, first due to their conservative nature, and secondly, due to the high volatility of the digital assets. Kamil Kaczmarski, a Financial Services Adviser at management consulting firm Oliver Wyman LLC, said in a comment about the law coming into effect that he expects funds not to go all-in but rather experiment with cryptocurrencies at a low level, adding that most of the German funds will not invest 20% of their holdings for at least five years. 

According to a spokeswoman at DWS Group, the asset manager of investment banking company Deutsche Bank AG, the events unfolding in Germany about cryptocurrency are closely monitored. However, the option to provide funds to buy crypto is not yet being considered.

As German institutional funds weigh their options and make up their minds about whether to invest in cryptocurrency or not, American companies are leading the way, with large, publicly traded companies already holding billions of dollars in bitcoin: Some of these include MicroStrategy Inc. (ticker: MSTR), Tesla Inc. (ticker: TSLA), Galaxy Digital Holdings (ticker: GLXY), Square Inc. (ticker: SQ), and Coinbase Global Inc. (ticker: COIN) among others.

In other crypto news…

Miami launches its own cryptocurrency

The crypto markets have tumbled over the previous few months, but more entities continue to adopt the idea of having a digital currency based on blockchain technology. In Miami, Florida, authorities have finalised plans of launching the city’s own cryptocurrency next month, August, and it is expected to generate millions of dollars in revenue. The cryptocurrency is going to be called MiamiCoin.

Miami City Mayor Francis Suarez, who referred to his city as the Bitcoin capital of the world, said that the city has partnered with a company called CityCoins to make MiamiCoin. Several local governments have contracted the company in cities worldwide to build and deploy a treasury of their own version of digital coins.

According to Miami City officials, once their cryptocurrency is deployed and put into circulation, 30% of the revenue collected from MiamiCoin will go to the city’s general fund, which will then be used to invest in the city’s infrastructure projects, fund start-up companies and other city events. Miami sees this invention as a continuous revenue stream for the city. MiamiCoin will be available for mining starting Tuesday, August 3, 2021.

When Chinese regulators banned financial institutions and payment companies from providing crypto-related services in May and enforced strict regulations on miners, Suarez responded the following month by encouraging Bitcoin miners to move to his city to avoid such regulations.

Suarez is a big fan of cryptocurrency and the technology built around it, so much so that he believes Miami could earn millions of dollars from this venture that could be used to provide better social services to its people and fund the police.

It has been reported that San Francisco is also considering following in Miami’s footsteps. It would be interesting to find out what unique name the authorities in San Francisco choose to christen their coin.