Will the German election give crypto markets a boost?
German parties contend with the burgeoning digital asset sector
Germans will go to the polls on 26 September in a federal election to determine who will lead the economic powerhouse of Europe in the wake of Angela Merkel .
During her almost 16 years as chancellor, Germany’s first female leader has had to navigate a series of crises, from the 2008 global economic meltdown to 2015’s migration crisis and, most recently, COVID-19.
With only days to go, the outcome of the election remains highly uncertain. The vote's potential impact on the global digital asset sector, both in the short and long term, is similarly unclear.
The resurgence of the Social Democratic Party (SDP) has been the dominant story of the German elections thus far. Having slumped to its lowest share of the vote in its post-war history in the last elections, Germany’s oldest existing party has bounced back into pole position.
Serious flooding in July is widely thought to have played a major role in this reversal. The weak response to the floods by Armin Laschet, Merkel’s successor as the leader of the Christian Democratic Union (CDU), attracted severe criticism. Indeed, the 60-year old had to apologise after he was photographed laughing during a visit to a flood-stricken town.
According to the latest polling, the SDP is leading with 25%, followed by the CDU in conjunction with its Bavarian sister party the Christian Social Union (CSU) at 22%, with the Greens in third position at 16%. The Free Democratic Party (FDP) and Alternative for Germany (AFD) both poll at 11%.
Digital currency regulation and tax
Germany’s regulatory response to the burgeoning digital asset space can be said to be mixed. Cryptocurrencies are considered to be private money. Although capital gains taxes are levied on crypto holdings above €600, if the owner holds the cryptocurrency for more than a year they pay no tax on it irrespective of its value.
Such a landscape could change with the emergence of a left-leaning coalition. The SDP, the Greens and the Left Party, have all argued in favour of a pan-European Union (EU) financial transaction tax and the reintroduction of a 1% wealth tax for what they deem to be “very high assets”.
The Greens and the Left Party, which polls at 6%, have gone further. Both have called for the abolition of the capital gains tax exemption granted to land, real estate and the trading of precious metals, commodities and cryptocurrencies.
Although the CDU has also pledged to introduce a “European financial transaction tax with a broad base”, it is opposed to the return of the wealth tax and crackdowns on speculation.
There is cross-party support for the improvement of legal and regulatory frameworks surrounding digital assets and the blockchain technology that underlies them.
The Greens have called for the strengthening of know-your-customer (KYC) and anti-money laundering (AML) regulations and have stressed the need to “explore the opportunities and risks of cryptocurrencies and blockchains”.
Even the classically liberal FDP has recognised the need for a uniform legal framework to support the sector’s development.
While the CDU has called for Europe to become a “world leader” in the industry, the Left Party has called for a ban on cryptocurrency mining, largely on environmental grounds.
The attitude of almost all German parties to some forms of innovation offered by digital assets and blockchain technology have been explicitly hostile.
In 2019, the finance ministers of France and Germany issued a joint statement condemning Libra, a stablecoin project led by Facebook that has since rebranded as Diem. They argued that “no private entity can claim monetary power, which is inherent to the sovereignty of nations."
The German finance minister in question was Olaf Scholz, the SDP’s current candidate for chancellor. In its election programme, the party repeated its opposition to such endeavours, stating: “We reject a privatisation of currencies. This applies to private digital currencies that are kept stable artificially [stablecoins].”
The Greens have likewise stated that they “strictly reject an erosion of the money and currency monopoly by private currencies of powerful conglomerates”.
Acceleration of a digital euro
In his condemnation of Libra, Scholz recognised the need to improve European payment systems and encouraged European central banks “to accelerate work on issues around possible public digital currency solutions”.
Such an acceleration took place in the succeeding years that the introduction of a digital euro has now become a matter of when and not if.
The adoption of a central bank digital currency (CBDC) by the European Central Bank (ECB) has widespread support across the political spectrum. The CDU has promoted a digital euro as a “fast and easy means of payment”, while the Green party has stated it would “increase the efficiency of Euro-transactions”.
The latter also argued that a CBDC would counteract the unjustified costs caused by corporate stablecoin oligopolies and would provide “more data and legal certainty” to the state and citizens.
The AFD, a party to the right of both the CDU and CSU, has been the most vocal critic of a digital euro. Advocating the preservation of cash, it has criticised the level of surveillance and control that CBDCs afford to the state.
Other parties have similarly opposed the complete shift towards a cashless society, with the CDU, Greens and FDP all arguing that a digital euro should not supplant cash, but rather complement it.
Barring a Left Party sweep to victory and a subsequent ban on mining, the German federal election is unlikely to have an immediate impact on cryptocurrency markets.
However, the election will affect the long-term development of the wider digital asset sector, from taxation to regulation and currency innovation.