In the past few weeks, two drafts by the Federal Ministry of Finance (BMF) have led to critical reactions from the blockchain community. If the drafts are passed as laws in this form, then crypto investors and industry companies face massive disadvantages. Why Germany is facing a turning point, what the consequences of the BMF drafts mean for each individual and what reactions can now be expected.
Finance minister and SPD chancellor candidate Olaf Scholz has never let a good hair down on the crypto-economy. He has already warned against cryptocurrencies and especially stablecoins several times. The fear that cryptocurrencies could establish themselves beyond the control of the state and central banks seems to be a serious concern. How much is shown by the new draft bill from the Federal Ministry of Finance, or BMF for short. Specifically, it is about the crypto value transfer regulation and a new draft for the taxation of crypto currencies.
Crypto Values Transfer Ordinance: Going it alone against decentralization
In order to fight financial crime, the Federal Ministry of Finance would like to work with the Crypto Value Transfer Ordinance nip any anonymity in the bud. It is required that crypto service providers must record all transaction data including identities. How exactly this should work has apparently not been considered in the meantime. The digital association Bitkom describes the project as practically impossible to implement. Even with the transition periods of the BMF, if the individual service providers succeed at all technically, there would be a significant disadvantage for the German crypto industry.
Going it alone nationally would mean that even more money would be withdrawn to unregulated crypto exchanges or custodians, ergo exactly the opposite. A European solution looks different. After all, the German crypto service providers would also have to collect the data from unhosted wallets. The technical implementation of such interfaces with the associated identification poses big question marks for the industry. After all, it is in the nature of decentralization that there is no need for intermediaries to record identification. The effort to be carried out would therefore quickly undermine or simply prevent the cost and efficiency advantages of decentralized business models.
Tax hammer: holding period increased tenfold
In addition to the crypto value transfer regulation, the next draft of the BMF became public last week, which has it all. In the letter “Individual questions on the income tax treatment of virtual currencies and tokens”, approaches come to light that also make Blockhain stakeholders shake their heads. If the German tax offices were to comply with these requirements in the future, Germany would become unattractive from a tax point of view for crypto investors and therefore also the service providers.
The targeted tax practice that staking, lending and masternode income should no longer be tax-free after one year, but only after ten years, is particularly striking. Assigning a ten-year holding period to a risky and liquid asset class appears disproportionate. With this change, the existing tax law, which is supposed to come from 2007 in its original form, has simply been slipped over the new asset class without looking whether it makes sense at all for crypto assets. So the tax regulation was issued at the time to curb tax-saving models with movable assets.
The accusation against the Federal Ministry of Finance (BMF)
The criticism that can be formulated against the BMF is not based on their plan to regulate the crypto space. Workable laws that lead to legal certainty, fair tax rules and consumer protection can even be positive for the crypto industry. One must, however, reproach the BMF for the fact that some of its proposals are impractical. One gets the impression that politically motivated people have now picked up the cannon to shoot sparrows. There is a lack of proportionality and a basic understanding of what is important in the blockchain industry.
Finally, there are significantly more contemporary variants thanks to blockchain technology, for example to determine identities in the crypto value transfer ordinance. For example, as Bitkom suggests, one could agree on transaction IDs and blockchain analysis tools instead of collecting innumerable personal data old school.
As a result, this is putting a still young sector under massive pressure. Within a few weeks, blockchain stakeholders have to work out counter-proposals and do a lot of persuasion. In contrast to some other industries with strong lobby associations, this means that start-up entrepreneurs with packed days now have to do lobby work on the side so that their crypto company is not regulated to death.
If you are thinking about locating your company in Switzerland, especially in the Krypto Valley Zug, you will get two good arguments from the Federal Ministry of Finance. Such regulation means that blockchain innovations are not created in Germany, but in Switzerland, among others.
Not incompetence, but party politics
This disadvantageous legislation is not per se due to a lack of expertise. Smart people work in the ministries who have sufficient expertise in their respective presentations. However, that does not mean that these bright minds will prevail. If the responsible minister says that crypto currencies are a danger and lead to tax abuse, then the heads of departments and units will only partially outdo each other with progressive and innovation-friendly regulatory drafts. Instead, we see restrictive draft laws which, due to the lack of innovation incentives within the administration, ensure that the existing order is protected as well as possible.
How are things going now?
Associations (especially Bitkom) and the crypto scene are currently consulting to formulate their points of view. In the next few days and weeks, there will therefore be bilateral consultations between the BMF and blockchain interest groups. Regarding both the crypto value transfer regulation and the BMF tax letter, one can be quite optimistic that not everything will find its way 1: 1 into regulatory practice.