As COO (Chief Operating Officer), Marion Spielmann heads the banking business and custody services at DekaBank in Frankfurt. We speak with her about the exciting field of crypto securities.
Ms. Spielmann, DekaBank is heavily involved with the topic of crypto securities. What exactly has Deka done?
We started mapping products on the blockchain in 2018 and were the first bank in Germany to issue digital securities. Initially, these were bearer bonds. Since last year, it has been legally possible to digitize funds. The logical conclusion for us was to issue a crypto fund share in December 2023. The A-Deka-BlockchainEINS is a classic special fund, meaning the portfolio consists of traditional securities, not crypto assets. However, instead of a traditional certificate, we have stored the fund or the fund shares on the blockchain.
The A-Deka-BlockchainEINS was a special fund. Are there already crypto funds that have been launched as public funds?
As far as we know, besides us, only Bankhaus Metzler has launched a crypto fund or tokenized shares of an existing fund. This was a public fund.
Can you give us a brief overview of the product world of digital assets? What different categories are there, and how are they regulated?
Regulation has increased significantly, and legislation distinguishes between two blocks of digital assets, which are regulated differently. Firstly, there is the German Electronic Securities Act (eWpG), which allows for the issuance of bonds, registered shares, and fund shares as electronic securities, such as the crypto fund shares our house issued last December. These securities are not different in substance from traditional securities, except that they are issued digitally, not in paper form. For investors, little changes in terms of their rights or handling.
Secondly, there is the European MiCAR regulation, which regulates actual crypto assets. This includes not only e-money tokens but also utility tokens that enable services and functionalities. MiCAR creates a framework for this, so from January 1, 2025, we will have a European internal market for these crypto assets, and things will be uniformly regulated.
And what about NFTs? What exactly are they?
NFTs are not regulated. They are, for example, collectibles that investors hope will appreciate in value. These could be Panini stickers, or they could represent a part of a special Porsche.
And the German Future Financing Act, what changes has it brought?
The German legislator has set the framework so that legally, nothing changes if securities are issued over a blockchain instead of in paper form. At the same time, the law aims to promote the digitization of capital markets.
Parts of MiCAR will already come into effect in July 2024. You mentioned earlier that this regulation aims to create a harmonized regulatory framework for certain crypto assets. Do you think this will be a game-changer for the European market?
Only part of MiCAR will come into effect in July 2024; the entire regulation will come into force in 2025. I do expect it to create some dynamism, as MiCAR regulates, among other things, who can trade crypto assets and what consumer protection looks like. Providers of crypto assets must be regulated in the EU market. This is especially important for institutional investors as it provides them with security. The collapse of the FTX exchange could have been avoided with regulation.
What is important to institutional investors in crypto assets besides legal security?
Institutional investors want securities to be liquid at all times. With the DLT pilot regime, we have the opportunity to build and test a regulated marketplace for digital securities. This is an extremely important step. I believe that for institutional investors, trading digitalized securities will be more important than trading actual crypto assets.
What categories of crypto assets does Deka focus on? Is it about the assets themselves or more about the technology, the distributed ledger technology?
We are the securities house of the savings banks and are heavily involved in the topic of digital securities. It is important to us that we have the entire value chain in digital form. We want to be able to issue, trade, settle, and store securities based on blockchain – we have already done this in parts in practice. This offers enormous potential for our customers. With blockchain, processes can become faster, more transparent, and more secure. Issuing digital securities requires a register management license; we have that.
What kind of securities has Deka already issued based on blockchain?
In 2021, we were the first bank in Germany to issue a digital security. It was a bond at the time. Last December, we issued our first digital crypto fund shares. Theoretically, we could also issue registered shares electronically, but we have not done so yet.
What is the next step?
We are currently working on completing the entire value chain. After issuing digital securities, we also want to trade them. So far, the trading of digital bonds has only been in the OTC business, i.e., bilateral. We want to connect the trade to regulated marketplaces soon. The third step would be to store digital securities. We are currently building the infrastructure for this – the storage of digital securities requires the use of new technologies to ensure the highest level of security. We will be able to store digital securities for our depot customers by the end of this year.
I heard that Deka is involved with LBBW in a company dealing with blockchain.
Yes, that is Swiat GmbH. Deka founded SWIAT to establish a system developer and network operator for blockchain applications. They develop software applications needed for securities transactions, among other things. SWIAT is now a joint venture – with LBBW as a partner – to attract as many institutions as possible for DLT applications. Standards can only be created together.
How will the market for crypto assets evolve after MiCAR and crypto securities after the electronic securities law (eWpG)?
Currently, probably every major bank is dealing with crypto securities because many banks are also issuing houses or want to continue supporting their customers in the securities business. They need to prepare now to remain competitive. Institutions that currently offer their customers the custody of assets are preparing to store crypto assets.
For crypto assets under MiCAR, the situation is different: here, it's about actual crypto assets, stable coins, and other crypto products. In the past, fintechs have positioned themselves well on the cryptocurrency side. Exchanges then followed, such as the Stuttgart Stock Exchange with Bison or Eurex, which bought Swiss Crypto Finance and already has a license to trade or store crypto assets.
Is that the natural order?
Essentially, yes! First the fintechs, then the market infrastructure – i.e., the exchanges, and so on, and then the banks.
Which target group does Deka aim to address with its crypto activities? Who can benefit from this?
We are the product supplier for the savings bank group. Our target group includes both institutional and retail customers. We are now building the technology because it needs a certain standard to be suitable for mass business. This is currently developing. Institutional customers were and are the first to adapt to this. This has been happening for one or two years. In the issuance business, Siemens issued a bond in digital form last year. KfW will conduct a larger issuance this year. Institutions are preparing on the issuance side, and it will also be institutions that first invest in such digital securities.
What are the advantages of issuing digital securities for the market and for Deka as a company?
The digitization of securities is unstoppable. The earlier you get involved, the better, because more and more issuers are issuing their papers digitally. Those who do not join will see their investment universe shrink in the future.
The advantage of digitization in the securities area is that the process chains and the entire system landscape of banks become simpler. This accelerates settlement, and the costs for securities transactions will decrease. This is important, for example, because the SEC will accelerate settlement cycles for the US market in May 2024 from t+2 to t+1. This reduces settlement risks that arise within the time span from purchase to delivery of the pieces against payment (Delivery vs. Payment).
While this speeds things up, traditional securities transactions will never reach the same speed as digital ones. With blockchain, a transfer from A to B is possible within a few seconds, whereas in Europe, we still have a settlement cycle of two days, namely t+2. Today, Clearstream is still in the middle between the two trading partners – this is where the actual transfer takes place.
Do we still need such central clearinghouses like Clearstream when securities are issued digitally?
No, the function of the central clearer will be eliminated, as it will be performed by the blockchain. Clearers will, of course, look at what roles they can take on in a digital securities world.
Can you look into the future for us, please?
My thesis is that digitization cannot be stopped. Much is already regulated, and the market infrastructure is currently being built. Things are now gaining momentum because all the prerequisites are in place. I can imagine that by 2030 we will have significant shares of new issuances in digital form... perhaps 5 to 10% of the new issuance volume. If things move faster, the market for those who do not participate will noticeably shrink. And once digitization in the securities business has established itself, it won't go incrementally, but it will just go "pop"!
Will all market participants be affected?
At least all those that make up the market infrastructure. Banks now need to adapt their infrastructure. Building the necessary infrastructure takes time. Ultimately, know-how needs to be built, and employees need to be trained. Processes and systems need to be adapted, which entails some complexity.
And the investors?
They have a bit more time because they can wait until the infrastructure is built and functions properly. Investors don't have to do much. They may need to adjust their custody agreements because the key for the wallet will be stored in the future. They may also need to adjust their investment guidelines.
Thank you for these exciting insights!
Anke Dembowski is a financial journalist and author of various investment fund-related and other financial books. She is also a co-founder of the "Fondsfrauen" network.