BaFin expressly stated in the publication on crypto custody business dated 2nd of March 2020 that it does not consider security tokens as securities in the sense of the German Securities Deposit Act under the current legal framework. This results in the fact that providers offering the custody of security tokens currently do not require authorization as a depository bank. According to the established administrative practice of BaFin, custody service providers are instead required to obtain authorization for the depository business, if they take custody of securities that are subject to the German Securities Deposit Act. According to the authority’s opinion, security tokens as a paperless form of securities do not fulfill this requirement. Custody services for security tokens can therefore legally be offered with an authorization as a crypto custody service provider. Crypto custody services have been introduced earlier this year as a new category of financial services. Does this mean that security tokens have a market advantage over paper-based securities and that the tokenization of financial instruments offers a real-world added value?



From the custodian’s point of view, the regulatory requirements for the operation of a crypto custody service are significantly lower than the requirements for the operation of a depository bank. While the operation of a depository bank constitutes a banking business, the operation of a crypto custody service provider is merely considered a financial service. This results in a significant difference regarding the minimum starting capital that is required for the respective services. Required starting capital for an authorization as a depository bank may be up to 5 million euros, while crypto custody service providers only have to show 125,000.00 euros as a minimum starting capital. Moreover, crypto custody service providers enjoy some very attractive privileges as long as they only offer crypto custody services and no other banking or financial services. For example, they are not subject to the capital requirements of the CRR and they do not have to comply with the German Remuneration Regulation for Institutions when compensating their employees. Additionally, as shown above, they are also not subject to the German Securities Deposit Act while depository banks must observe these regulations when taking custody of securities.



The lower regulatory requirements for crypto custody service providers as compared to depository banks result in lower operating costs concerning the custody of security tokens which will in the end also be beneficial for the investors. When issuing security tokens, issuers do not have to create and safeguard a global certificate as it is the case with traditional securities. Moreover, investors always have the option to safeguard their security tokens themselves on their own electronic devices in wallets that are compatible to the security tokens to be stored.



In contrast to paper-based documents, security tokens are not tangible objects and therefore not considered as objects in a legal sense by the German civil law. Therefore, the stipulations regulating the unencumbered, bona fide acquisition of objects of the German Civil Code (BGB) are not applicable to security tokens. However, the possibility of an unencumbered, bona fide acquisition is a mandatory requirement for a security to be listed at a stock exchange. That means, that for the time being, issuers that intend to have their security listed at a stock exchange should therefore take the traditional approach and issue the security in a paper-based form and create a global certificate for it. The German legislator showed his intention to change the abovementioned situation earlier this month by publishing his legislative draft concerning the introduction of the electronic security. The actual introduction of electronic securities into German civil law will certainly take at least until the end of the year.


Rechtsanwalt Lutz Auffenberg, LL.M. (London)





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