The German Ministries of Finance and Justice published their long-awaited joint draft legislation concerning the introduction of electronic securities in late July of 2020. The reform proposals included in the draft are not limited to a mere equating of paper-based securities and electronically issued securities to be introduced, but instead the Electronic Securities Act (eWPG) is supposed to implement a comprehensive legal framework that is intended to introduce crypto securities as a subcategory of electronic securities as well as centralized security registries and crypto security registries. While centralized security registries shall only be operated by authorized central security depositories, crypto security registries on the other hand are intended to be operated by private companies which will have to obtain a corresponding authorization in accordance to the German Banking Act (KWG) once the aforementioned authorization and its requirements are implemented into the KWG.



Another change intended by the draft legislation relates to the crypto custody business, which in turn was just introduced at the beginning of this year. The draft legislation intends for crypto custodians to not only be allowed to offer the management, custody and safekeeping of crypto assets but also the safekeeping of private keys which correspond to crypto securities. In its guidance published in March 2020 regarding the crypto custody business, BaFin already clarified that the authority does not consider tokenized securities (so-called security tokens) as securities in the sense of the Securities Deposit Act and that therefore crypto custodians are authorized to take custody of security tokens. The reason is that BaFin only demands authorization as a depository bank from providers that offer custody services for securities that qualify as such under the provisions of the Securities Deposit Act. The current draft legislation of the ministries now explicitly intends for crypto securities just as for electronic securities in general to be subject to the Securities Deposit Act. The extension of the crypto custody business to also include private keys related to crypto securities could therefore be a way to allow crypto custody service providers to offer limited services in relation to crypto securities. The actual custody and management of crypto securities would still be reserved for depository banks. In this regard it will be interesting to see whether the market develops a need for the mere safeguarding of private keys connected to crypto securities or not.



According to the draft legislation, crypto securities are electronic securities that are registered in a crypto security registry. Furthermore, the draft legislation intends for electronic securities to be issued by registering them in an electronic securities registry. Issuers will therefore still have the option to issue security tokens not as crypto securities but instead as mere tokens that are connected to investor rights. This kind of security tokens of which numerous examples of issued tokens already exist in Germany could still be managed and kept in custody by crypto custody service providers even if the current draft legislation goes into effect, provided that BaFin does not change its administrative practice.


Attorney Lutz Auffenberg, LL.M. (London)





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