Blockchain Outlook — Beginning 2021
Introduction
In this article, I give my personal outlook on Blockchain for 2021.
Focus is on the two main cryptocurrencies — Bitcoin & Ether — as well as the regulatory environment with the spotlight on Europe and Germany at the beginning of 2021.
“You are always wrong. The question is, a little or a lot.” [1]
This is especially true for the Blockchain ecosystem.
Nevertheless I have tried it.
— Author Philipp J.A. Hartmannsgruber, December 29, 2020.
I. Cryptocurrencies
1. Bitcoin
At the end of 2020, Bitcoin marked a new all-time high with a price of over $20,000. Since then, the price has continued to rise and has already cracked the $28,000 mark. No one can reliably estimate to what heights the price will rise. What can be observed, however, is that the price rally is driven in particular by institutional investors (e.g. Grayscale), large companies (like MicroStrategy) [2] and other big players (e.g. PayPal [3]).
The current all-time high is therefore not driven by consumers as in 2017/18; this is also reflected in the almost threefold increase in daily volume. Many are talking about a price rise to $50,000 in 2021; however, such price speculations are not purposeful. The crucial thing is not the price, but the adaptation and increased interest in the largest cryptocurrency. The high price shows that Bitcoin and thus also the blockchain (distributed ledger) technology is understood as well as accepted by more and more people and institutions. That is much more important than the price.
2. Ether & Ethereum
Ether is the second largest cryptocurrency behind Bitcoin.
The term Ethereum should be more familiar to most, which is how the blockchain behind the cryptocurrency is referred to. The biggest innovation of Ethereum is the concept and implementation of smart contracts.
Smart contracts are computer protocols that can map or verify contracts or technically support the negotiation or settlement of a contract.
An almost unlimited number of tokens (values) can be created in this way.
Ethereum is often referred to as the world computer and to some extent reflects an evolution of the internet:
The “Internet of Things” becomes “The Internet of Values”.
With regards to the price development, Ether has notably outperformed Bitcoin within a year. This may be due to the fact that Ethereum has been working on a new underlying consensus mechanism for several years and was able to show great progress in 2020.
Ethereum 2.0 will no longer be based on Proof of Work (PoW), like Bitcoin. Developers of Ethereum are currently working on switching to Proof of Stake (PoS) to solve scalability issues. Whether this will be successful remains to be seen. For over a decade, PoW has proven itself to work effectively without any significant setbacks. [4] Unlike its counterpart, PoS has yet to prove its reliability over the long term. [5]
II. Public Policy
1. Cryptocurrency taxation
An important and ambiguous issue is the taxation of cryptocurrencies. Within this year, many consumers have been able to make high profits with cryptocurrencies like Bitcoin or Ether.
However, after selling a cryptocurrency, there is still an unresolved question of how these gains have to be taxed:
“So far, there is no letter from the Federal Ministry of Finance that would at least standardize the taxation practice of the executive branch in Germany.
As a result, the tax offices tax very differently in practice.” [6]
This question of cryptocurrency taxation should be answered by the Federal Ministry of Finance. A clear commitment is required that takes account of the Basic Law’s [Grundgesetz] requirement for uniformity and certainty.
In order to create legal clarity after years of uncertainty, the Federal Government is called upon to submit a legislative amendment proposal to Parliament. [7]
2. Digital Euro
Like China, the U.S. and other governments — or their central banks — Europe and the ECB are also working on a digital currency, the digital euro.
However, the ECB’s October 2020 report made it clear that anonymity is not an issue for the European Central Bank. [8]
The digital euro is therefore not intended to be the equivalent of cash.
In Germany anonymous cash payments are possible up to a threshold of 10,000€. The current report stipulates that payments should be disclosed from the first euro cent to the ECB.
This is neither necessary (money laundering and terrorist financing can be ensured otherwise), nor does it correspond to the interest of the consumer (monitoring of the population). This is the most important point to change: As with cash, a threshold of 10,000€ should be introduced. Up to this amount, payments with the digital euro should be anonymous. Higher payments will be reported to the ECB and/or other authorities.
Another point is the lack of programmability of the digital euro.
Smart contracts should be enabled on the digital euro so it’s not necessary to use substitutes like Ethereum. This would be an extreme advantage for the European blockchain ecosystem and could result in a leading blockchain role in the world. [9]
3. Electronic securities (eWpG)
In December 2020, the German government introduced a bill in the Bundestag to modernize German securities law. A central component is the introduction of the new Electronic Securities Act (eWpG). [10]
“With the establishment of digital securities, one of the central building blocks of the German government’s blockchain strategy [‘Blockchain-Strategie der Bundesregierung’], as well as the joint cornerstone paper of the Federal Ministry of Finance and the Federal Ministry of Justice and Consumer Protection on electronic securities is implemented. […]
The draft distinguishes between the maintenance of a central electronic securities register by a central securities depository and the maintenance of registers for the issuance of electronic debt securities — made possible, among other things, by distributed ledger technologies.” [11]
However, startups and blockchain companies should also have the opportunity to hold electronic securities in custody, not just already established big players on the market (depository banks). Care must be taken to ensure that the flaws in the legal text are corrected so that the German startup and blockchain ecosystem is not harmed. [12]
It is also important that the eWpG bill becomes law in Germany before the mandate of the current government expires. The introduction in the Bundestag in December 2020 was important, but the law still has to be revised and then passed.
4. Markets in Crypto-Assets
For Europe to emerge as a leader in blockchain, the legislator has an important task to turn unsolved challenges into opportunities for innovation. The Markets in Crypto-Assets (MiCA) proposal from the EU Commission plans to regulate crypto assets and the blockchain ecosystem at a European level. [13]
“Timely critical is a framework for Decentralized Finance (DeFi).
Emerging solutions in this field have the potential to make blockchain visions become a reality in applications relevant for mainstream users.” [14]
Several provisions in MiCA do raise significant concerns vis-a-vis the still nascent crypto-asset industry.
“It appears, that the regulation goes fully against the objective to support and stimulate innovation. It would clearly decrease the competitiveness of Europe. Competition to lead the sector is fierce and global and is happening now.” [15]
The main shortcomings identified are:
- Prohibition or hinderance of innovation taking place through increasingly decentralised use cases (e.g. DeFi)
- Insufficient proportionality to cater for different business models in the sector
- Barriers to entry too high for newcomers and too low for incumbents
- Certain operational provisions are out of sync with market practice
If the proposal won’t be changed, we will not see the positive development that could be possible. Everyone is called upon to take a stand for this. [16] The European Commission accepts feedback. The proposal can still be amended and turned into a worldwide leading crypto-asset legislation.
Conclusion
The Blockchain ecosystem is always changing.
A lot can and will happen in the next months. A lot of them I can’t predict. What I do know or rather what I think is this:
It’s never too late to get into the rabbit hole. Educate yourself and try to learn as much as possible about cryptocurrencies such as Bitcoin and Blockchain Technology.
Disclosure: I, too, am personally invested in Bitcoin and Ether but this is in no way a solicitation to buy cryptocurrencies or be used as financial advice.
References
[1] Dr. Alexander von Frankenberg, Managing Director of HTGF,
The High-Tech Gründerfonds.
[2] Bitcoin Treasuries, https://bitcointreasuries.org.
[3] PayPal Launches New Service Enabling Users to Buy, Hold and Sell Cryptocurrency, Oct 21, 2020, https://newsroom.paypal-corp.com/2020-10-21-PayPal-Launches-New-Service-Enabling-Users-to-Buy-Hold-and-Sell-Cryptocurrency.
[4] Comment of the Author:
Compared to the existence of the traditional banking system, 12 years is nothing. Nevertheless, unlike traditional banks, financial service providers, etc., there have been no significant failures in Bitcoin and the PoW consensus mechanism over the last decade.
[5] Comment of the Author:
There are already other cryptocurrencies based on PoS. However, these are neither comparable in size nor in time since Bitcoin and PoW has existed.
[6] Oliver Schroen, Speaker of the Working Group Taxes of the Bundesblock and Tax Advisor.
[7] Stellungnahme der AG Steuern zur Kryptobesteuerung, Bundesblock, 23.12.2020, https://bundesblock.de/de/stellungnahme-der-ag-steuern-zur-kryptobesteuerung.
[8] Report on a digital euro, EUROPEAN CENTRAL BANK, October 2020,
https://www.ecb.europa.eu/pub/pdf/other/Report_on_a_digital_euro~4d7268b458.en.pdf.
[9] Geld in programmierbaren Anwendungen. Branchenübergreifende Perspektiven aus der deutschen Wirtschaft,
Frankfurt am Main, 21. Dezember 2020 https://www.bundesbank.de/resource/blob/855080/941264701eb3f1a67ef6815831c9e40a/mL/2020-12-21-programmierbare-zahlung-anlage-data.pdf.
[10] Gesetzentwurf der Bundesregierung. Entwurf eines Gesetzes zur Einführung von elektronischen Wertpapieren, 14.12.2020
https://www.bmjv.de/SharedDocs/Gesetzgebungsverfahren/Dokumente/RegE_Einfuehrung_elektr_Wertpapiere.pdf;jsessionid=1955B675AB776905142B3080BC8D595B.1_cid334?__blob=publicationFile&v=3.
[11] GESETZGEBUNGSVERFAHREN | 16. DEZEMBER 2020.
Gesetz zur Einführung von elektronischen Wertpapieren https://www.bmjv.de/SharedDocs/Gesetzgebungsverfahren/DE/Einfuehrung_elektr_Wertpapiere.html.
[12] Currently (as of December 29, 2020), an urgent appeal to the members of the German Bundestag is being written. Already a large number of blockchain companies and individuals have signed the document
[Link will follow]
[13] Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Markets in Crypto-assets, and amending Directive (EU) 2019/1937,
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52020PC0593.
[14] Julian Voll, CEO of PRIVI, a DeFi Social Network.
[15] Florian Glatz, President of the Bundesblock.
[16] The European Crypto Initiative, or EUCI, tries to educate EU regulators and Members of Parliament alike about the specific technicalities of DeFi use cases and why many of them are bona fide, innovative applications of blockchain that deserve protection and promotion.
Remarks
If you like this article, I would be happy if you would forward it to friends, colleagues or share it on social media channels.
Philipp J.A. Hartmannsgruber holds a master’s degree in
Finance & Accounting. He is Head of Corporates & Digital Markets at
CM-Equity AG and Head of Operations of the Blockchain Bundesverband (Bundesblock). In 2019 he founded ShareHope, a non-profit NGO.
Please note: This is a Blockchain Outlook which was written in
December 2020. Since then, much has changed.
I am also aware that there are many other exciting blockchain topics like
Digital Identity or Digital Copyright. In order not to make the text even longer, I have focused on the issues that are part of the current regulation.
Other topics will be addressed in the next articles.
If you want to criticize or endorse the article or parts of it, feel free to contact me via E-Mail or on any other social network.
In my Linktr.ee you can find (German) Podcast & YouTube interviews, as well as my own Podcast “Decrypted — Blockchain & Bitcoin mit Philipp”.
