Cryptocurrencies & Digital Assets

Crypto Compass: The Crypto Market at a glance

01.12.2023

BSD Blog Header Krypto Kompass (1)

 

The capital market is in a constant state of change. In particular, the market with digital assets as the most important application area of blockchain technology is very dynamic. In order to provide a holistic perspective of this promising market, Boerse Stuttgart Digital has published a comprehensive "Crypto Compass". Here we present the most important content and insights from it. 

The Crypto Compass 2023 

The Crypto Compass is a comprehensive report on the business potential of blockchain and digital crypto assets. With this compass that illuminates all sides, Boerse Stuttgart Digital aims to make it easier for interested banks, fund managers, family offices and all other institutional and private investors to enter the world of digital finance. 

In this article, you will find the most important contents from the report in a compact summary. All sources, evidence and further statistics can be found in the Crypto Compass, which is available free of charge. Want to dive deeper? At the end of the article, you will find the free download link to the document. 

The blockchain as a game changer 

Blockchain technology is at the heart of all crypto financial products. This revolutionary technology redefines the "old" financial world and enables greater transparency, high security standards and significantly increased settlement efficiencies throughout the value chain. Boerse Stuttgart Digital welcomes the associated regulatory projects on a national and international level and sees itself as a connector between the traditional and digital financial market with its offerings. 

The crypto ecosystem is particularly exciting for institutional investors such as funds, banks, or family offices. Blockchain technology is redefining trust in the capital market through transparency, security, and efficiency. The core features of the blockchain, such as consensus mechanisms and decentralization, play an important role in this. This technology makes it possible to record financial transactions transparently and in a way that is traceable to all network members. The decentralized nature of the blockchain can protect against manipulation and technical failures, while smart contracts enable real-time automated transactions that work across national borders. 

Consequently, these properties of blockchain have the potential to contribute to making the capital market more efficient, secure and accessible to investors of all kinds. 

The crypto ecosystem, its terminology, and its size 

The Crypto Compass focuses on understanding the crypto market and its terminology. Some terms have already been used that may be foreign or unclear to you. To be able to understand the further summary of the Crypto Compass, we explain them to you. 

From DLT to Tokenization: Crypto terms at a glance 

The most important crypto terms from the report at a glance: 

  • Distributed Ledger Technology (DLT): A decentralized database managed by different participants (nodes). Each node in the network has a copy of the ledger, making it secure and difficult to manipulate. Blockchain is a form of DLT. 

  • Decentralization: A system without a central control authority. In a blockchain, this means that the data and transactions are distributed across a network of many computers, making the system very secure and transparent. 

  • Smart contracts: Programmable contracts that are automatically executed when set conditions are met. They run on the blockchain, which makes them transparent, immutable, and secure. 

  • Consensus mechanism: A process by which all participants in a decentralized network reach a common consensus on the current state of data or the validity of transactions. 

  • Proof of Work (PoW): A consensus mechanism on a blockchain that is used to confirm transactions and create new blocks. Miners solve complex mathematical problems to create new blocks. The first person to solve the problem gets to add the next block to the blockchain and is rewarded with the blockchain's cryptocurrency. 

  • Proof of Stake (PoS): An alternative consensus mechanism to PoW that is less computationally intensive. In PoS, transactions and blocks are confirmed (stake) by people who own a share of the cryptocurrency. The larger their share, the higher the probability that they will be allowed to validate a block. 

  • Staking: The process of holding cryptocurrencies to support the operations of a blockchain network. In return, participants (validators) receive rewards – the staking rewards. 

  • Token: A type of digital asset created on an existing blockchain. Tokens can represent different values or rights and are often used for transactions within a specific ecosystem. 

  • Tokenization: The process of converting rights or assets (for example, company shares or real estate) into a digital token on a blockchain. 

The evolution of the crypto market 

The crypto market is becoming more and more professional worldwide – Germany is playing a pioneering role in this. By the end of July 2023, only 45 tokenized securities had been issued here, mainly in the form of bonds, but the market is growing. A prominent example is the €60 million bond issued by Siemens in February 2023. In Switzerland, the market is a little further along and the tokenization of shares is already possible, and the European Investment Bank (EIB) has issued several bonds in tokenized form. 

A look at other numbers and crypto statistics also clearly shows the continued growth: 

  • The volume of global investments in blockchain technologies and cryptocurrencies increased from $8.2 billion in 2018 to $30.2 billion in 2021, according to Statista
  • In 2021, €160 million was invested in crypto startups based in Germany. 
  • According to Cointelegraph, 36 percent of 55 institutional investors surveyed in the DACH region (German-speaking countries) had already invested in cryptocurrencies, stablecoins, and derivatives in 2020, with another 40 percent planning to do so. 

Even though tokenized securities are still in their infancy, they can establish themselves as a "form of securitization" in the future. In any case, the basis for this is the creation of a regulatory framework for crypto assets that enables all investors, institutional and private, to invest safely. 

Crypto on the capital market of the future 

Understanding the market is the basis for recognizing the potential of the technology. The fact that these will change the financial market can be seen not least in the regulatory plans of Germany and the EU with regard to cryptocurrencies and tokenized securities. 

In Germany, the early regulation of crypto custodians and the Fund Location Act have contributed to the professionalization of the crypto market. For example, it is now possible for special funds to invest directly in crypto assets. This strengthens investor protection and promotes market development. Progress has also been made in Switzerland and the EU. 

MiCAR and DLT PT: Regulation at European level 

The EU's Markets in Crypto-Assets Regulation (MiCAR), welcomed by Boerse Stuttgart Digital, represents a significant regulatory advancement that imposes similar standards on issuers and providers of crypto assets as traditional financial institutions. MiCAR provides a comprehensive set of rules for crypto assets in the EU's domestic market and increases trust and market integrity, which could lead to an increased willingness to invest. 

Another key component of the regulatory projects is the EU's Distributed Ledger Technology Pilot Regime (DLT PR). This is a kind of regulatory sandbox that enables the testing of DLT in the issuance, trading, and settlement of financial instruments. This regime demonstrates the EU's willingness to promote and adapt innovative technologies, making it a pioneer in the use of new technologies in the financial sector. 

eWpG and ZuFinG: Important laws for the future of the German crypto market 

Back to Germany: Here, in mid 2021, the Electronic Securities Act (eWpG) was introduced, which enables the electronic issuance of certain securities, including crypto securities. This law marks a significant step in the digitalization of the German capital market. The eWpG covers a wide range of financial instruments and has the potential to make the issuance process more efficient. In particular, structured securities, which account for a large proportion of newly issued securities, could benefit from this new mechanism. 

Another important law in this context is the Future Financing Act (ZuFinG). It aims to expand the eWpG and also enable the issuance of registered shares on DLT. However, there are still challenges in adapting crypto securities, including exclusively bilateral OTC trading and the costs associated with the obligation to publish issues in the Federal Gazette. 

Two topics are repeatedly criticized in connection with the crypto market: money laundering and taxes. Germany reacted to these developments in the crypto space at an early stage. Through the Crypto Asset Transfer Ordinance, Germany implements the "Travel Rule" specified by the OECD, which requires information about the persons involved in crypto transactions. In addition, Germany has introduced clear tax guidelines for crypto assets, making profits from the sale of crypto assets taxable if they are realized within one year of purchase. 

Blockchain technology paves the way to the modern capital market 

Boerse Stuttgart Digital's entire Crypto Compass shows that blockchain technology is the key driver and at the same time a great opportunity for the modern capital market of the future. The transparency, high security standards and efficiency that come with it are important to gain investor confidence. Germany and the EU are on the right track here in global competition, which makes the locations interesting for institutional investors. 

It is important to set the right course now and drive change so as not to miss out on the next wave of innovation. First and foremost, this includes the creation of innovation-friendly and technology-neutral regulatory approaches. 

Opportunities for institutional investors 

The most important findings from the Crypto Compass, coupled with current developments such as the approval of Bitcoin Spot ETFs or the possibility of being able to reliably stake via Boerse Stuttgart Digital in the future, show that digital assets offer highly exciting opportunities for private, but above all institutional investors. 

Would you like to delve deeper into the matter, learn more about the capital market of the future, and understand in detail how it works? The Crypto Compass is available for you to download free of charge! 


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