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The Electronic Securities Act (eWPG) went into effect in June of 2021. According to the unambiguous intention of the legislator, the eWPG relates solely to unsecuritised bearer bonds and it is in its current iteration intended as somewhat of a test for the possible introduction of other unsecuritised financial instruments such as e.g. electronic stocks. With the introduction of the eWPG, the legislator nevertheless also altered a number of provisions in other codes of law regarding securities and capital markets law. The legislator e.g. amended the Capital Investment Act (KAGB) to provide for the option to introduce crypto fund shares. The specific legal design of these crypto fund shares is delegated by the legislator to the Federal Ministries of Finance (BMF) and Justice (BMJ) which are authorized to issue executive ordinances in this matter. The two Federal Ministries acted on this authorization last week and published a draft for a Crypto Fund Shares Regulation (KryptoFAV).
What is Supposed to be Regulated by the Crypto Fund Shares Regulation?
The published draft of the KryptoFAV consisting of just four paragraphs is rather short. According to the draft, crypto fund shares are intended to be electronic participation certificates that are registered in a crypto security registry. Next to the legal definition of crypto fund shares it also regulates the mutatis mutandis applicability of the eWPG provisions concerning crypto securities and crypto security registries to crypto fund shares. The draft intends for a special feature for the depository of crypto fund shares, which in contrast to those of electronic securities, mandatorily has to be the registry operator for the registration of the issued investment fund so that it can fulfill its legal control and information obligations towards the investors of the fund. Crypto fund shares will therefore not differ much from crypto securities pursuant to the eWPG other than in this particularity. The supervisory regulations of the KAGB will be applicable to crypto fund shares in the same way as they are applicable to traditional fund shares.
Can Fund Shares Be Tokenized in a Different Way?
The KryptoFAV intends to provide market participants with the option to issue tokenized shares of investment funds which may be acquired in an unencumbered, bona fide way by investors, similar to securitized participation certificates. Crypto fund shares will then be just as suited for an organized secondary market as traditional securitized fund shares. That being said, capital management companies are not restricted to crypto fund shares, if they intend to issue tokenized shares of investment capital. There will still be the option to tokenize fund shares without the registration in a crypto security register and observation of the requirements of the KryptoFAV by creating a legally valid contractual connection between the shares and the tokens representing it. The advantages of crypto fund shares regarding a bona fide, unencumbered acquisition is in this case lost, but on the other hand a registration in the crypto security registry of a depository that is also authorized as a crypto securities registry operator is also not required.
Attorney Lutz Auffenberg, LL.M. (London)
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