BaFin President Hufeld: Regulation in the “tension relationship between innovation and safety


Felix Hufeld, President of the German regulatory authority BaFin, last week made a speech on crypto currencies and the blockchain. He also discussed the role of his authority in the regulation of technology and applications. Innovation must be promoted, but financial market stability must also be maintained.

On Thursday, 7 June, the President of the Federal Financial Supervisory Authority (BaFin) gave a speech in Berlin with the title topic “Bitcoin, Blockchain: What is hype and what remains? As the title suggests, it was on the one hand about the challenges crypto currencies present from the point of view of the financial market regulator. On the other hand, Hufeld also addressed the possibilities that the technology offers in his opinion.

Hype or future cryptosoft technology?

“At this point I cannot and will not conclusively answer the question of what is only hype about Bitcoin and cryptosoft Blockchain and if it is a scam and what actually has the substance to disruptively change the financial markets. However, as a financial supervisor, I can offer you some assessments and observations.”

This is how Felix Hufeld introduces his remarks on the blockchain. As the best-known application of the blockchain, he highlights the Bitcoin as representative of all crypto currencies. He still does not regard it as a currency, since in our jurisdiction the term currency is classically reserved for central bank money. Although Bitcoin was once created as an alternative currency, it should be regarded more as a unit of account.

BaFin must act in a regulatory capacity
He sees BaFin in the role of the regulator, which sets the necessary framework for blockchain and crypto currencies to develop securely. However, in order not to overshoot the mark and over-regulate, the first step is to learn more about the technology. “Innovations need space, especially at the beginning, in order to develop. A market economy is characterised by giving them this space,” says Hufeld, pointing out his guidelines. Out of fear of risks, opportunities must not be allowed to fade into the background.

BaFin also wants to protect the interests of consumers and investors. Therefore, Initial Coin Offerings are the main focus of the authority. The financing method ICO is so far still extremely unregulated, uncertain and highly speculative. However, the maxim of action is not to protect individual investors, but to ensure financial stability and prevent systematic damage to consumers.

The blockchain can be used in a variety of ways

Hufeld describes the temporary price gains of the crypto currencies as a hype, he sees the blockchain as somewhat more stable. He mentions Estonia and Sweden as examples where the blockchain is already used in public administration. There, the technology is particularly suitable in countries with a lower level of development, where structures are still in the process of being set up. He describes the blockchain for “some African countries” as a “real quantum leap”, for example in the documentation of property rights.

But the blockchain can also contribute to securing growth and prosperity in industrialized nations. The financial sector in particular, as an obvious field of application, is of particular interest here. Small and medium-sized enterprises can benefit from free cross-border payment transactions without intermediaries. He also mentions borrower’s note loans and insurance as fields of application for block-chain applications such as Smart Contracts. However, he also warns against looking for a solution for all problems in the block chain. One has to ask oneself exactly who can benefit from the technology.

As clarified at the beginning of the speech, Hufeld cannot say exactly where the promise of the blockchain ends and the irrational hype begins. However, he shows a clear will on the part of BaFin. It wants to promote technology where it can be used profitably. For the serious part of the cryptoscene this is good news.

Good BaFin, bad BaFin – Why the Bitcoin secret has many facets

The Federal Financial Supervisory Authority, BaFin for short, supervises and controls all areas of finance in Germany within the framework of financial supervision – at least this is what Wikipedia says. It is therefore obvious that the crypto-economy falls under the jurisdiction of BaFin. Its reputation, at least among many blockchain start-ups and crypto investors, is, however, only moderate. But why? And what can the BaFin do in this context?

One accusation that is often made against BaFin is that it tends to have a negative attitude towards the Bitcoin secret

Consumer warnings against Bitcoin secret support this image of a skeptical authority. Many forget thereby: It is the duty of every regulatory authority to draw attention to risks. If it does not do this, it will be in greater need of explanation to the Ministry of Finance and the government. It would be completely untrustworthy if an authority were to call on the population to invest in such assets. The same applies to central banks and other public institutions around the world, all of which have communicated the risks of crypto-trading and Bitcoin secret. It is therefore wrong to accuse an authority of being negative about an asset simply because it issues a risk warning – unfortunately it is not that simple.

BaFin is too strict
It should be noted here that BaFin does not make any laws, but only implements them. Its room for manoeuvre is therefore limited to the interpretation of existing law. Nevertheless, it is not an exhilarating statistic if there is only one blockchain startup in Germany that has managed to obtain a BaFin licence (Bitbond) and there has not yet been a regulated ICO on German soil. So the question is: Is the blockchain start-ups lacking in competence or is the BaFin trying to avoid decisions?

There is no simple answer here either. The BaFin itself understands the subject of block chains and crypto currencies very well. There is also no law that forbids ICOs or the release of tokens. One challenge that is being fought against, however, is the differentiation between utility and security tokens – a topic on which we have often reported. The debate about token categorization is currently leading to heated discussions around the world. Accordingly, the BaFin is afraid of a decision. This impression at least comes to mind when talking to blockchain start-ups that have to wait a long time for answers and requests. If you do nothing, you don’t make any mistakes – at least as far as decisions are concerned, this mantra unfortunately seems to be far too popular with the Financial Market Authority.

Time is of the essence

Especially small jurisdictions such as Liechtenstein or Gibraltar benefit from the hesitation of a BaFin or other financial market supervisory authorities in other, larger European countries. In countries like Gibraltar, the mills do not grind so slowly. Short distances allow a quick implementation of crypto-friendly regulatory guidelines. Although this is initially negative for Germany, Germany cannot be compared to a country that is only a few football pitches in size and can be described in the broadest sense as a tax haven – the EU or not.

The question here is: Do the adopted regulatory guidelines allow an adaptation or testing of a new technology or do they only further restrict it? In the first case, it is desirable that an authority hastens with its decisions and shows courage. If, on the other hand, there is a tendency to regulate something prematurely in such a way that innovation is nipped in the bud, then in many cases it is advisable to ignore the issue of regulation for the time being.

Germany is not Gibraltar
A country like Germany cannot be compared to a British overseas territory on the Spanish border. Stricter regulation is not only a disadvantage. Regulation made in Germany could fully exploit its advantages, especially in terms of legal certainty and consumer protection, since companies can rely on the German state or the German jurisdiction. If the BaFin says something, then it carries weight. This reliability and the high requirements that have to be met in Germany help companies to establish stable business relationships with banks. In countries with lower regulatory requirements, one or two crypto startups had to experience that the business relationship with the bank was terminated because the bank got cold feet. Such a scenario would be in Germany at e