The Electronic Securities Act (eWPG) came into effect on the 10th of June 2021 in Germany. Since then, businesses have the opportunity to issue bonds in the form of electronic securities. A special form of electronic securities are crypto securities, which are electronic securities that are registered in a crypto security registry. However, the eWPG itself does not call for crypto securities to relate in any way to cryptographic technology. It merely stipulates that crypto registries have to be kept on a forgery-proof recording system, which records data in chronological order and secures said data against unauthorized deletion as well as subsequent modification. The Legislator intentionally chose a technology-neutral wording that is applicable to blockchain and distributed ledger technologies as basis for crypto registries while at the same time does not exclude future technologies.



Prior to the eWPG going into effect, businesses already had the option to issue securities in tokenized form as so-called security tokens. The rights and obligations of the issuer and investors of tokenized bonds are connected to the tokens via the underlying bond terms. In the event of transferring the tokens, the rights connected with the tokens are reassigned to the new token bearer simultaneously. Security tokens will remain a legal alternative to the legislator’s design because crypto securities can only be qualified as such if they are registered in a crypto registry and security tokens without such a registration cannot be qualified as crypto securities. Token issuers can therefore choose between the issuance of a crypto security and a traditional security token. But what are the advantages and disadvantages connected to each of the variants?



Crypto securities have to be registered with a crypto securities registry. This registration obligation is connected to considerable additional expenditure for the issuer. Even though the eWPG grants issuers the option to act as registration provider for their own crypto securities and to perform all the legally required entries into the crypto securities registry, it will however in practice be easier and therefore more common to commission a specialized service provider with the registration, which in turn is obviously connected to additional expenditure. A clear advantage of crypto securities however is the protection of legitimate expectations and good faith granted by the eWPG. Should an investor acquire a crypto security from an unauthorized seller the investor may still become the rightful owner of the crypto security if he was unaware of the lacking authorization during the acquisition process. This characteristic enables a reliable transfer of crypto securities and therefore may also enable exchange-based trading of crypto securities in the future. The protection of good faith and legitimate expectations can therefore be categorized as an unambiguous advantage of crypto securities.



One advantage of traditional security tokens is the option to have them safeguarded by crypto custody service providers. The safeguarding of crypto securities which qualify as securities in the sense of the German Securities Deposit Act on the other hand requires an authorized depository bank. In contrast to the requirements for depository banks, the requirements for crypto custody service providers are rather low, meaning that the safeguarding of traditional security tokens will most likely be cheaper than the safeguarding of crypto securities.


Attorney Lutz Auffenberg, LL.M. (London)





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