Germany has released its "Blockchain Strategy" report. The paper is remarkably comprehensive and friendly towards the blockchain technology. This blog post aims to summarize key takeaways from the report.
The Blockchain Agenda of the Federal Government
The paper summaries several measures for supporting the further development of blockchain technology and also regulating it. The roadmap for these measures ends in 2021. The focus will be on five fields:
- Blockchain in the financial sector
- Support of blockchain initiatives and innovation
- Investment Framework
- Blockchain for the public administration (focus: Identity)
- Share of knowledge and collaboration opportunities
Blockchain in the Financial Sector
The Germany law system does not currently allow for civil law securities to be issued on the blockchain. The German Civil Code, in its current form, does not know any electronic bonds. Securities, which must be freely tradeable on the capital market, are still securitised in physical records so that they represent tangible things. Germany recognises the potential of blockchain technology in reducing the cost and the number of intermediaries when securities are put on the blockchain. Therefore it is looking into ways to open German law to electronic securities.
The government is also focusing on Utility Tokens, especially these created for funding (example: Initial Coin Offerings) purposes. In particular, the use of such tokens for funding purposes should also create legal certainty that the legal consequences associated with a specific token design are clearly recognizable. The German government intends to publish a bill by the end of 2019 regulating the public offering of certain crypto tokens.
Another focus point for the German government will be the crypto exchanges. The key takeaways are: Regulatory measures should strengthen investor protection and include anti-money laundering measures (strengthening of KYC & AML). For more info: Richtlinie 2014/65/EU, Richtlinie (EU) 2018/843 (German)
Stablecoins are scary! This is what the government has to say:
"The German government will work at European and international level to ensure that stablecoins do not become an alternative to state currencies."
The government is in further discussions with the German central bank regarding the stablecoin uncertainty. We should expect much more on the topic in the next few months. This part of the paper seems to be a last-minute add and I suspect this to be motivated by the latest Facebook Libra announcements. If you want to learn more about Libra, you can read my previous blog post.
Support of Blockchain Initiatives and Blockchain Innovation
Blockchain-based solutions are increasingly being used outside the financial sector. Examples of such solutions are the private sector, civil society and the public sector. To support such initiatives, the government will be supporting pilot projects and sandboxes. The idea behind this is to test the use of technology in practice and develop regulatory approaches.
Energy is a big topic of interest. On the one hand the paper criticizes the energy consumption of Proof-of-Work (PoW) blockchains and its potential negative effects on the environment (read: Bitcoin's energy usage if interested). On the other hand, the federal government announces a blockchain-based pilot project for energy exchange on a public blockchain (does not specify which public blockchain). It involves smart-meters. Further details about the pilot are expected in 2020. Last but not least Germany announces a cross-technology pilot laboratory for the energy sector. They throw in AI and Big Data as buzzwords.
Smart contracts are being actively researched. The focus is on legal issues in the negotiation and execution of agreements between machines (in the context of supply chains). From February 2020, the German government will support the development and application of platform-based secure digital business processes with its funding measure "Internet-based services for complex products, production processes and systems", including the "SealedServices" project.
The Blockchain-Lab of the Gesellschaft für Internationale Zusammenarbeit GmbH (GIZ), founded in 2018, is focusing on the sustainability aspect of blockchains. Germany will focus on supporting such initiatives in the future. More info will be available from mid-2020.
The Federal Government supports the testing of blockchain-based verification of higher education certificates and work certificates. Apparently, the DACH countries are testing a system for "digital credentials".
Legal Framework: The compatibility of blockchain technology with the General Data Protection Regulation (GDPR) has been a topic of discussion in recent times. As of today, the Federal Government doesn't see the need for adaptation of the law. They emphasise on the use of hashes, Zero-Knowledge-Proofs, privacy-by-design and privacy-by-default techniques. Nevertheless, this will be an ongoing discussion in the next years, especially when it comes to customer protection.
The Federal Government is examining how blockchain data (hashed documents) can be transferred to courts (and be used as evidence) or any authorities for verification purposes, and thus the legally required marketability can be guaranteed. An example would be copyright infringements in the music industry.
A few more points lacking detailed information:
- Use and application of blockchain technology in the field of corporate law: Ownership rights
- New forms of cooperation: The potential use of Decentralized Autonomous Organizations (DAOs) as a tool for collaboration: The government supports the development of such digital innovations and will look into the legal framework conditions of such structures.
- The potential of international arbitration board based on a blockchain
- Improving the car admission process with blockchain: Using the technology for verifying vehicle data.
- Certification and standardisation of blockchain: There is a need for more standards in the certification processes in the blockchain sphere - Information about the content of the Smart Contract should be easily understandable for users and can thus form the basis for further acceptance and dissemination of the technology.
- A smart contract register for the energy industry: Automation and efficiency increase - The Federal Government will start setting up a register listing the contractual facts of the energy industry. The government is in talks with the German Energy Agency (dena) in which facts/data points can be converted into smart contracts.
- The possible introduction of accredited certification procedures for the development of smart contracts
- Identity: Digital identification, authentication and verification of devices - focus would be the Internet of Things (IoT). The Federal Government is planning to put out a study containing an overview of a large number of technical procedures for digital identification, authentication and verification. The study should also examine the use of blockchain-based secure elements for the storage of identity credentials.
- Blockchain in the Health sector: Germany is looking into the use of blockchain in the Telematics infrastructure for networking healthcare.
Blockchain for the Public Administration
The primary focus is the identity of people and the associated challenges. The Federal Government believes that blockchain can be used for identification of people. The role of the state is seen as an organiser and regulator. Germany is researching the possibility of integrating the technology into state-issued passports. The paper acknowledges the existence of a wide variety of identity technologies (centralised/decentralised). The state is planing the setup of competition on secure digital identities interoperability of different technologies in order to gather more insights regarding the various technologies.
The Federal Government is exploring the idea of a state-run blockchain infrastructure where public agencies maintain the nodes. The idea is to provide companies and non-profits with the needed infrastructure to build their applications on top. There is already a similar blockchain initiative on EU level where Germany is also part of.
The state is exploring ways of reducing written communication between public agencies. The paper mentions the possible use of blockchain for securing digital communication.
The Federal Government will carry out pilot projects for the introduction of blockchain-based applications for a more efficient and transparent customs valuation of e-commerce transactions in third countries. The first pilot project will be a cooperation with African countries (the paper doesn't mention which ones).
Share of Knowledge and Collaboration Opportunities
The last part of the paper focuses on the share of knowledge between different stakeholders: science, corporations and startups. The Federal Government will support application-oriented new forms of cooperation. As an example, the paper mentions the Fraunhofer Blockchain Labs. With increased funding, the federal government will significantly increase the number of new, more open forms of cooperation between companies and civil society actors with scientific institutions. The Federal Government will expand existing Open Data initiatives. Again, it seems the main focus area is the energy sector. The state is exploring to what extent data from the energy sector could be shared with third parties without compromising GDPR.
A few Thoughts
Interestingly the paper starts with the subtitle: "We set the course for the token economy". One would expect to read a lot about the token economy and maybe the many types of tokens. This is was not the case. The only time the paper mentions tokens is company shares, ICOs and stable coins. The last one seems to have scared the government, and it got criticized. This might be caused by the fact that Facebook is launching a stable coin and the governments around the world weren't happy about that fact.
Overall it seems that Germany has acknowledged the variety of use cases blockchain could provide. The government is very open to new technologies and is willing to support further research and development. There are many legal questions, especially around fundraising over the blockchain and data privacy. It seems there are a few focus industries: opening securities law for blockchain use cases, blockchain in the energy industry, identity on the blockchain (for people and IoT), ownership rights and possible use cases in the health industry.
Read the full version: "Blockchain-Strategie der Bundesregierung" (2019) (German only)