The German crypto-scene has been waiting a long time for the Federal Ministry of Justice to publish its draft legislation on the introduction of electronic securities, especially since this draft was announced by the ministry for the last quarter of 2019. It was finally published last Friday. The Federal Government deems the development of regulations for electronic securities necessary, because it holds the view that German law currently mandatorily requires the embodiment of a security in a paper document. In a joint effort, the Federal Ministry of Justice and the Federal Ministry of Finance now presented a comprehensive draft for this legislation that proposes not only changes to the German civil law, but also extensive changes to the German regulatory banking and capital markets law. It has to be noted, that the published document is just a first draft that may be subject to significant changes during the course of the subsequent legislative process. Nevertheless, the published draft already shows the direction that the legislator intends to take for the regulatory framework for the security of the future.



Instead of selectively changing the German Civil Code (BGB), the legislative draft proposes the introduction of a separate legislative act that contains the majority of the relevant regulations for the electronic security. The new eWPG will initially only be applicable to bearer bonds. Registered bonds and other securities such as e.g. stocks will initially not be covered by the new law, but their inclusion is intended once some experience is gained with the new eWPG. The intention of the eWPG is to equate electronic securities with those that are securitized in a paper document. In order to achieve this goal, the eWPG not only stipulates that electronic securities are to be treated similar to objects under German property law, but it also contains comprehensive, special regulations for the transfer of ownership and the bona fide acquisition of electronic securities. The legislative draft differentiates between two kinds of electronic securities, namely between crypto securities and electronic securities in the strict sense of the term.



The published draft legislation intends for the transfer of electronic securities to be done by assigning them to their new owners in central registries. These registries could not be managed by the issuers of the electronic securities, but instead would have to be operated by BaFin authorized and supervised financial service institutes. All electronic securities would have to be registered with such a central registry, which itself would have to be operated by a company that is authorized as a central securities depository. In addition, crypto securities would also have to be entered into a crypto securities registry. The draft legislation therefore calls for the introduction of crypto security registry management into the KWGs catalogue of activities that are subject to authorization.



Somewhat surprisingly, the custody of electronic securities according to the newly proposed draft shall be regulated in the future by the Securities Deposit Act. BaFin seemed to have a different point of view with regards to the custody of security tokens when the crypto custody service for the custody of tokenized securities was introduced earlier this year. For clarification purposes, the draft legislation now calls for a change of the Securities Deposit Act in order to explicitly include electronic securities. However, it is important to understand that even though the draft legislation regulates electronic securities, it continues to allow the possibility of issuing tokenized securities that do not meet the requirements of an electronic security. Those would most likely continue to potentially be safeguarded by crypto custody service providers, while tokens that meet the requirements of an electronic security would have to be safeguarded by depository banks.


Attorney Lutz Auffenberg, LL.M. (London)





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