The interest in token-based capital markets issuances increases notably. Not only blockchain startups and tech companies, but also well-established businesses with more traditional business models increasingly consider this new and innovative means of refinancing through the tokenized capital markets. So far, German businesses limit themselves to the issuance of tokenized, subordinated participation rights, but it just seems to be a matter of time until the next step in tokenization will be taken. The issuance of tokenized stocks is seldomly an option for stock companies, even though there is a considerable market-interest for alternatives to tokenized debt products. Hardly anyone wants to be the first one to issue blockchain-based stocks especially because the German legislator announced that there will be changes to the legal basis for these types of issuances in close future as a result of the legislators blockchain strategy. This leads to the question if there is an alternative to the issuance of tokenized stocks for businesses already available that might pave the way for tokenized equity products.
CONVERTIBLE BONDS AS A HYBRID OF DEBT AND EQUITY PRODUCTS
This is where so-called convertible bonds come into play. The idea of convertible bonds is not new but rather a tried and tested one. Convertible bonds are bonds that give the investor at the end of the duration the option to receive e.g. stocks instead of the repayment of the invested capital. The duration of a convertible bond can be set without restrictions by the issuer, just as the interest rate and the other associated rights and obligations of the investor and the issuer. In the new market of tokenized financial instruments, convertible bonds have the advantage that they can be designed as tokenized participation rights at first and thereby give the issuer the option to wait and see if the announced legal changes for tokenized stocks actually are suitable for his needs. Issuers could design a convertible bond in a way that it would give the investor the option to choose stocks as a repayment at the end of the duration, but could also reserve the decision on how those stocks (securitized, unsecuritized or tokenized) would be issued to the investor. The design of the specific stock could therefore be postponed to a later point in time when the legal basis for tokenized stocks might already be implemented, if the duration of the bond is long enough.
ALTERNATIVES TO TOKENIZED SUBORDINATED BONDS INCREASE
Tokenized convertible bonds could therefore be a valid alternative to tokenized participation rights for issuers wanting to offer investors the option of a real stake in the company without being the first company that actually issues tokenized stocks. Tokenized convertible bonds give the option of a blockchain-based capital markets issuing to these issuers. It is interesting to see that and how the market for tokenized capital markets products rapidly expands and that alternative product designs such as e.g. tokenized stocks, tokenized asset investments and tokenized shares of investment funds are being developed. Tokenized participation rights will of course stay as a viable alternative and not only be remembered as a pioneer design when it comes to digital financial products. But already today it is a good idea to think outside the box when designing a tokenized financial product to find the financial instrument that best suits the issuers needs.
Attorney Lutz Auffenberg, LL.M. (London)
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