(For German version click here)
With the introduction of the Electronic Securities Act (eWPG), the German legislator intends to create a legal alternative to paper-based securities. The corresponding draft legislation to the eWPG dated 23rd of July 2020, which for the time being shall only be applicable to bearer bonds, therefore proposes the introduction of electronic securities as an alternative to traditional securities. Additionally, the draft legislation to the eWPG also proposes new rules regarding the regulation of crypto securities. But what exactly shall be the differences between electronic securities and crypto securities according to the intention of the legislator?
Security Tokens Create the Need for Electronic Securities
The main motivation for the German legislator to create electronic securities was probably the increasing interest that Security Token Offerings (STO) have enjoyed over the last couple of years. Security tokens are blockchain units that are connected to rights comparable to those that are connected to securities, such as repayment and interest claims or shareholder participation and voting rights. Since the emergence of security tokens, the capital markets show an increasing need for a legal framework that equates digitally represented securities to traditional, paper-based securities. According to the current version of the legislative draft, the issuance of electronic securities would require the registration of the specific electronic security with the central electronic security registry in contrast to traditional securities which require the securitization of the specific security in a paper document. According to the current version of the proposed draft, the legal effects of an electronic security shall be equal to those of a paper-based security, provided the law does not stipulate otherwise. In order to ensure that the existing regulations concerning securities will also be applicable to electronic securities, a legal fiction that equates electronic securities to objects in the sense of the German civil law is also intended by the draft legislation because the German civil law currently only recognizes tangible objects as objects in a legal sense.
Crypto Securities as a Special Form of Electronic Securities
According to the draft legislation, crypto securities are electronic securities that are registered in a crypto security registry. They are therefore by definition a subcategory of electronic securities. The draft legislation expressively states that crypto securities cannot simultaneously be electronic securities that are registered with the central electronic security registry. The explanatory memorandum to the draft emphasizes that the regulation of crypto security registries itself as well as the registered crypto securities will be technology-neutral. Under the current version of the draft it would therefore be possible to issue crypto securities that are not based on a distributed ledger technology. The main difference between electronic securities and crypto securities would therefore be the registration. While electronic securities would have to be registered in a centralized registry operated by a provider that is authorized as a central securities depository, crypto securities would have to be registered in one of many decentralized crypto security registries. According to the draft legislation, these crypto security registries would be operated by authorized providers that would have to ensure that the required minimum information about the crypto securities will be registered. Crypto security registries would therefore have to contain information about the main rights and obligations that are connected to the registered crypto security and an identification number, information about the issuer of the crypto security and information about disposal restrictions, eventual third-party rights as well as information regarding the kind of custody - individual or collective - in which the crypto security is kept.
Attorney Lutz Auffenberg, LL.M. (London)
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