A new law allows German investment funds to invest massively in so-called "crypto currencies" such as Bitcoin.

This initiative must come as a surprise, to put it mildly, for several reasons.

Although there are now a large number of cryptocurrencies with very different characteristics, the following explanations focus on Bitcoin, which continues to dominate the market.

As Bindseil / Schaaf convincingly demonstrated in their article in the FAZ on September 17, 2021, Bitcoin is not a currency.

Bitcoin has no intrinsic, i.e. inherent, value, nor is it covered by valuable collateral.

That is why the repeated comparison with gold, which has shown great fluctuations in value for thousands of years, has never become worthless thanks to its various uses for jewelry, for example.

But this is exactly what can happen with Bitcoin.

Its value is driven by speculation.

However, as soon as the conviction spreads that “the emperor stands there without clothes, that is, naked”, the total loss of value could occur.

Organized crime financing

Private investors may take this risk in anticipation of an increase in value, but then they themselves have to bear the loss. The case is completely different with special funds. Although private individuals are not allowed to invest directly in these, they are indirectly affected by losses in value through professional investors such as banks or insurance companies. Any collapse of a fund that has invested heavily in Bitcoin could also pose risks to the financial system. The new law allows special funds to invest considerable amounts, up to 20 percent of the fund's assets, which are currently around 2,000 billion euros, in so-called crypto values. After all, the German law could open the door wide to the further spread of investments in crypto currencies. The German law must be all the more surprisingwhen there are now clear indications and signs that cryptocurrencies are used to a large extent for money laundering and the financing of organized crime and terrorism.

How can this finding be reconciled with the promotion of Bitcoin by the German legislator?

A downright shocking contradiction also arises from the extreme energy requirements of the bitcoin system.

Bindseil / Schaaf have pointed to estimates that correspond to the energy needs of a country the size of Pakistan.

How does this fit in with the priority that German politicians attach to climate protection?

How can a new law promote such climate-damaging financial investments if everything else is done to reduce CO2 emissions and promote green investments?

A stair joke in financial history

Ultimately, the German advance counteracts efforts at the level of the European Union and America to do everything possible to prevent the use of crypto currencies for illegal purposes. For example, the European Commission recently made legislative proposals aimed at strengthening EU rules on combating money laundering and terrorist financing, with the aim of "ensuring that transfers of crypto assets such as Bitcoin can be fully traced ... [and] their potential use for Money laundering or terrorist financing purposes ”can be prevented.

As soon as mutual funds have high investments in cryptocurrencies, a large loss in value could pose a threat to the entire financial system.

Small investors could then also suffer indirectly.

It would be grotesque if politicians had to step in with taxpayers' money to limit risks to the financial system.

With the expectation of state rescue measures, Bitcoin might still receive a kind of implicit state guarantee - a joke in financial history.

Otmar Issing is President of the Center for Financial Studies.

Klaus Masuch is Principal Adviser in the ECB's Directorate-General for Economics and represents his personal opinion here, which does not necessarily correspond to that of the ECB.