By now, many investment products can be tokenized in Germany. Most security tokens are tokenized profit participation rights, i.e. bond products that grant the token holder a right for interest and repayment of the invested amount against the token issuer at the end of the duration. Such tokens are interesting products, especially in times when central bank interest rates are low and opportunities to earn returns are rare. Currently, however, the global economy is facing a turning point. Inflation is exceeding 10% monthly at times, and central banks are responding with substantial key interest rate hikes. To remain attractive in the face of inflation rates, bond products must promise investors very high returns. In some cases, therefore, issuers of tokenized profit participation rights promise additional participation in their corporate profits. What is really interesting for investors in these times, however, is the acquisition of genuine company shares in order to be able to participate directly in an increase in the value of the company in which they are investing. But which company shares can actually be tokenized in Germany?
Tokenization of Stocks is Legally Possible
In the summer of 2021, the German legislator had created the possibility under civil law to issue bearer bonds as crypto securities with the Electronic Securities Act (eWpG). Since then, the rights from such crypto securities can be linked to crypto tokens in the same way as securitized securities, so that the respective holder can assert them against the issuer. It is true that the legislator plans to extend the scope of application of the eWpG to stocks. Currently, however, there is only a draft paper of the Federal Ministry of Finance in place, according to which an inclusion of stocks in the eWpG is planned. However, tokenization is already possible under current law, at least for registered stocks in Germany. Tokenized registered stocks do not yet enjoy the advantages of, for example, the possibility of acquisition in bona fide and free of encumbrances. However, they can still be issued with legal effect if the statutes of a stock corporation are drafted accordingly. Bearers of such stock tokens have the legal status of a shareholder of the respective issuer.
Limited Partnership Shares Can Also Be Tokenized
Another possibility of tokenizing company shares already exists today for limited partnership shares. In this case, token holders would participate as limited partners in a limited partnership. As such, they would only be liable up to the amount of their contribution, but as partners they would participate in any increase in the value of the limited partnership’s business proportionately to the amount of their share. It is true that limited partners must in principle be entered in the commercial register, which could significantly complicate the transferability of tokenized limited partnership shares. However, limited partnership shares can also be held by a trustee, who would then be entered in the commercial register instead of the investors.
Attorney Lutz Auffenberg, LL.M. (London)