One of the key questions for sustainable businesses is how to create trust between strangers so that transactions can be made. DLT/Blockchain technology can help minimize the level of trust required, thereby reducing transaction costs for the parties involved in the transaction. Additionally, DLT/Blockchain technology enables decentralized ecosystems. Here, agreed transactions are enforced autonomously based on rules such as those set forth in self-executing “contracts” called smart contracts. Decentralized ecosystems are also manifesting in a new form of organizational design based on DLT/blockchain governance-Based on rules.
The emergence of these decentralized ecosystems also affects traditional and established value chains in the financial services sector. One of the consequences is that the hitherto uniform value chains of industry further fragment or disappear (disintermediation). This has the potential to significantly and permanently transform the financial services industry as it exists today. It would then no longer be necessary to resort to financial intermediaries such as banks to carry out financial transactions. With this, DLT/Blockchain could change the way financial transactions are done. However, this disruptiveness does not only mean reduced transaction costs, it also offers the opportunity to generate revenue, for example through new products in new markets.
Keep an eye on opportunities and risks
A technology with such disruptive potential offers opportunities, but also risks. Opportunities, especially in terms of financial inclusion, especially in countries of the South, where many people do not have access to a bank account, but have access to digital communication tools such as smartphones. But also with a view to developed regions, innovative forms of decentralized finance (DeFi) promise to make capital markets even more inclusive and efficient. These potential future promises are balanced by risks and therefore regulatory challenges. For example, one can still ask how the requirements for the HE-Security or data protection can also be fully ensured in systems that operate on the basis of DLT/Blockchain. regulators like this BaFin has the task of ensuring the integrity and stability of the financial markets, even under such changed environmental conditions. For the BaFin Consumer protection is also relevant as an additional legal control objective.
Rapid development in the market
In January 2009, the first block of the Bitcoin-Blockchain launched, and that Bitcoin-The network has worked without interruption since. Another milestone was reached in July 2015 when Ethereum, a decentralized company Software-Platform based on blockchain technology, which enabled smart contracts in blockchains for the first time. This made it possible to use simple computer programs that operated worldwide without interruption or the possibility of outside intervention. Smart contracts were the basis of Decentralized Autonomous Organizations (DAOs), which revealed new forms of organizations and their governance.
Smart contracts provided an early glimpse of the technology’s potential. As a result, initial coin offerings peaked in 2017 (ICO), a method of raising capital against the issuance of crypto tokens. Already with the DAOs and ICOs dark sides have arisen when providers and investors meet in a supposedly unregulated segment and information asymmetry is not sufficiently reduced by an effective set of rules. However, it has also been shown that the well-known bases of HE-Security should also be considered with DLT/Blockchains. For this she has BaFin issued several consumer advisories. The risks inherent in crypto-assets, such as volatility, cyber risks and information asymmetry, are just some of the points we warn against. Additionally, there are complex questions such as which state law should actually apply to virtual cross-border transfers via blockchain.
Since the advent of value-referenced tokens (called stablecoins), Decentralized Finance and non-fungible tokens (NFTs), i.e. digital proof of ownership of intangible assets, market experts are increasingly aware of the potential of DLT/blockchain and smart contracts. There is also a growing awareness that this technology must also be deeply penetrated and analyzed in order to safeguard financial stability. Thus, the traditional financial industry is increasingly confused with the world of cryptoAssets intertwined. Credit institutions are sometimes involved as pioneers in order to develop the potential of DLT/Blockchain and Smart Contracts on the market. Even the biggest HE-Companies (Bigtechs), mainly in the United States or East Asia are located, play in the further development of DLTCapital-based solutions also play an important role in the financial market.
New Monitoring Issues
International standard setters, such as the Bank for International Settlements (Bank for International Settlements – UNTIL) or the Financial Stability Board (Financial Stability Board – FSB), are already intensively addressing issues raised by developments related to crypto assets. Regulators and central banks around the world are convinced that they must take steps to develop strong regulatory frameworks given the market penetration of DLT/blockchain applications and crypto assets.
Also BaFin focuses on these innovation topics. In 2013, it was one of the first regulators in the world to issue a prudential classification of Bitcoin made. The German legislature was also active at an early stage and, for example, dealt with crypto assets and crypto custody activity in banking law in a regulatory manner. Among many other regulatory developments, the BaFin its expertise now also in the work in progress related to the evolution of the regulation of the European Union (EU) on cryptographic asset markets (Cryptocurrency Markets RegulationsAssets -MiCA) a. With MiCA, a European framework for dealing with Crypto Assets created, that EU– ensures uniform treatment at all levels. the BaFin will also pay attention to financial stability and consumer protection in a future shaped by DLT/blockchain and crypto-assets.