(For German version click here)
Companies that collect money from third parties which, according to the base agreement, shall be subject to an unconditional repayment clause, in most cases operates a depository business and therefore requires a banking license. The depository business is an activity that can legally only be provided by licensed banks. There are some exemptions from the general obligation to acquire authorization in order to operate a depository business that either evolved over the years from the administrative practice of BaFin or derive directly from the codified legal provisions of the German Banking Act (KWG). For example, BaFin acknowledges an exemption from the deposit business when it comes to the collection of unconditionally repayable money, if the repayment claim is secured by a standard banking collateral, e.g. bank guarantees or immediately realizable mortgages on real estate. Furthermore, BaFin also acknowledges an exemption from the deposit business in cases of collection of money, if the investor and the recipient contractually agree upon a qualified subordination clause in regard to the investor’s repayment claim, because in these cases the repayment is not unconditional. A legal exemption according to the wording of the law applies if the repayment claim is securitized in bearer or registered bonds. The legislator intended with this exemption to give businesses the opportunity to procure funds directly from the capital markets without the necessity of involving banks as intermediaries. But is this exemption applicable to tokenized bonds as well even though the wording calls for a traditional securitization of the bearer or registered bonds?
Exemptions are Older than Tokenization
The legislator of the time in which the exemption was introduced obviously did not think about the possibility of blockchain-based bonds. The legislator rather assumed that bonds under German law would be regularly securitized in paper documents. BaFin interprets the exemption in a way that for the exemption, only financial instruments are suitable that qualify as bonds and that are either, if they are issued in accordance to German law, issued as identical bearer or registered bonds to the capital markets as part of a total issuing or, if they are designed in accordance to foreign law, are comparable to identical bonds from a total issuing under German law.
The Key Criterion is the Capital Market Eligibility
So far BaFin´s administrative practice does not address the question if the exemption is applicable to tokenized bonds without securitization in paper documents or not. The emphasis on “identical bonds from a total issuing” shows that the essence of the matter is the capital markets eligibility of the bonds. If the intention of the legislator of the time is taken into consideration according to which the legislator wanted to create an opportunity for businesses to procure funds at the capital markets without the necessity of the involvement of an institute that is authorized to operate a depository business, the relevant factor cannot be the securitization of the financial instrument but only the capital markets eligibility. Tokenized bonds are directly transferable between holders and therefore highly tradable which potentially leads to an increased capital markets eligibility. Therefore, there are not a lot of arguments that counter the applicability of the exemption for tokenized bonds, as long as they are designed identically and for the purpose of a capital markets issuing. However, it is not clear yet, if BaFin will actually adapt its administrative practice in this regard. As long as a decision on this matter has not been published by BaFin, every blockchain-based capital markets issuing should be coordinated with BaFin prior to the issuing or the token terms should include a qualified subordination clause in order to trigger the exemption for qualified subordination clauses.
Attorney Lutz Auffenberg, LL.M. (London)
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