Tokenized Debenture Bonds and Deposit Business – What must STO Issuers Observe during the Planning Process?

Next to the credit business, the deposit business is probably the most prominent banking business. According to the legal definition, deposit business is conducted, if unconditionally repayable funds are accepted by a third-party. However, the definition of deposit business intends for an important exemption for cases in which the repayment claim is securitized in bearer or registered bonds, in order to offer commercial enterprises of the real economy an alternative to bank financing. In cases of tokenized debenture bonds, the participating parties are confronted with the problem, that Germanies highest courts as well as BaFin only deem a right resulting out of a debenture bond as securitized, if it is embodied in a paper document as a physical object, so that the bearer of the document can legitimize himself as the bearer of the right and assert said right against the issuer of the debenture bond. Tokens as merely virtual positions are therefore generally unable to trigger the aforementioned exemption for debenture bonds.

DOES THE NEW LEGISLATION ON ELECTRONIC SECURITIES (EWPG) OFFER A SOLUTION?

The introduction of electronic debenture bonds is particularly devised to serve the purpose of enabling bona fide transfers of unsecuritized debenture bonds, meaning that the acquirer of an electronic security will effectively become the owner of the security, even if the transferor was not the owner of the security and the acquirer had no knowledge of this fact. This is achieved by the registration of electronic debenture bonds in an electronic securities registry. Should the debenture bond be tokenized, it must be registered in a specific crypto securities registry. The aforementioned exemption within the definition of the depository business has not been adjusted by the German legislator when it introduced the electronic security to the German law, meaning that the exemption is still only applicable to securitized – paper-based – debenture bonds. However, the newly introduced eWPG expressly states that electronic securities – and therefore also crypto securities as a subtype of electronic securities – shall have the same legal effects as securities, which are securitized in paper form as long as the eWPG does not stipulate otherwise. This clear and unambiguous stipulation should be a sufficient argument for the equation of crypto securities with securitized securities for the applicability of the exemption in the definition of the deposit business. 

WHAT ARE THE OTHER OPTIONS FOR TRADITIONAL SECURITY TOKENS?

Issuers of security tokens are not mandatorily obligated to issue their tokens as crypto securities. There are other ways to avoid the qualification as deposit business for the issuer, in cases in which tokenized debenture bonds are issued without them being registered in a crypto security registry, but instead in a “traditional” way without the privileges offered by the eWPG. The most common option is a contractual agreement which includes a qualified subordination clause in the token terms. According to the established administrative practice of BaFin, such qualified subordination clause excludes an unconditional repayment claim. Another highly attractive option is the provision of standard bank collaterals or comparable assurances for the default risk of the issuer. BaFin accepts collaterals in the aforementioned sense for the inapplicability of the depository business, if they are provided in a way that investors can make use of them immediately and in an uncomplicated way in the event that the issuer defaults on the repayment claim.  

Attorney Lutz Auffenberg, LL.M. (London)

I.  https://fin-law.de

E. info@fin-law.de

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