Initial meeting

Category: blog EN

Mar 04, 2024

The Electronic Stock Is Now Officially Introduced – What Should Be Considered?

The act on the financing of investments to secure the future (Future Financing Act) came into force for the most part on December 15, 2023. Among other things, the act is intended to facilitate access to the stock market and the procurement of equity capital. The Future Financing Act amended the Electronic Securities Act (eWpG) so that bearer and registered stocks are now explicitly covered by the scope of the eWpG. This dematerializes the stock. The previously common securitization of stocks, for example in a global certificate, is no longer mandatory. Instead, electronic stocks are also treated as objects, which establishes security and transfer functions such as acquisition in good faith for electronic stocks. An electronic security is issued by the issuer making an entry in an electronic securities register instead of issuing a securities certificate. The following explanations are intended to highlight some of the practical aspects associated with the new electronic stock.

Registered Stocks Can Be Issued as Crypto Securities

The eWpG establishes two types of electronic securities, the central registry security and the crypto security. The central registry security is an electronic security that is entered in a central register. Such central registers can be maintained by central securities depositories or a custodian. A crypto security is an electronic security that is entered in a crypto securities register. A crypto securities register must be kept on a tamper-proof recording system in which data is logged in chronological order and stored in a manner that is protected against unauthorized deletion and subsequent modification, such as a blockchain. This makes it possible to issue tokenized stocks. Both the central registry security and the crypto security can be issued to different holders in individual and collective registration. The Future Financing Act provides that registered stocks can be issued as crypto securities and central registry securities. Bearer stocks, on the other hand, may only be issued as central registry securities. With regard to a possible IPO, however, it should be noted that only central registry securities in collective registration are covered for settlement in the securities giro and therefore only such securities are suitable for stock exchange trading, unless an exception applies under the current DLT pilot regime.

Articles of Association of the Stock Corporation Must Provide for the Issuance of Electronic Stocks

In order to issue electronic stocks, the articles of association of the stock corporation must provide for the exclusion of securitization. Registered stock in the form of a crypto security can only be issued if the articles of association expressly permit this. In the case of existing stocks, an issuer may replace a security issued by means of a global certificate or by means of individual certificates held in collective custody with a central registry security with the same content at any time and without the consent of the beneficiaries. Provided that the articles of association exclude the securitization of stocks, they must be amended. In all other cases of conversion, the approval of the shareholders is required. Conversely, electronic stocks can also be converted into securitized stocks. Because the exclusion of securitization must be provided for in the articles of association in order to issue electronic stocks, conversion into a paper certificate would require the exclusion of securitization to be removed.

FIN LAW

I.  https://fin-law.de

E. info@fin-law.de

subscribe to Newsletter

    Contact

    info@fin-law.de

    Feb 26, 2024

    Expansion to Europe – How Can Crypto Asset Service Providers from Third Countries Come to Europe Under MiCAR?

    With the Markets in Crypto Assets Regulation (MiCAR), the European venue has become much more attractive to the global crypto industry. In future, crypto asset service providers (CASP) will find uniform regulation for their business in the member states of the European Union, which clarifies that crypto services are legal in Europe and in which form. In addition, MiCAR offers European crypto asset service providers the opportunity to provide their crypto services throughout the European Union on the basis of just one MiCAR license from their competent authority which in Germany is BaFin. These options and the legal certainty associated with MiCAR are also of interest to CASP from the USA, Asia or other third countries such as Switzerland and the UK. Crypto asset service providers from these countries are therefore increasingly interested in how they too can benefit from MiCAR regulation and how an expansion into Europe can be structured in terms of supervisory law. Applying for their own MiCAR license from BaFin is the most obvious solution in this respect and offers the advantage of maximum freedom in terms of their own business organization. However, the expected very long processing time until a BaFin license is issued by the authority is problematic. Alternatives for expansion into Europe for non-European CASP could be cooperation with companies supervised under MiCAR or the acquisition of an already licensed CASP.

    Cooperation with Licensed Crypto Asset Service Provider as an Alternative to an Own MiCAR License

    One way for companies from a non-European country to expand into Europe may be to enter into a cooperation agreement with an EU company licensed for the intended crypto services. In practice, in many cases, arrangements are possible whereby the foreign company is included in the business organization of a CASP licensed by BaFin by way of an outsourcing agreement. The supervised crypto asset service provider is then responsible under supervisory law, while the company from the third country merely acts as a service provider for the licensed company from a regulatory point of view. Fronting and customer support can then be provided by the foreign company, for example. However, it must always be ensured that customers can recognize that the company with a BaFin license assumes civil and regulatory responsibility for the crypto services offered via the cooperation.

    Acquisition of a Crypto Asset Service Provider with BaFin License Requires BaFin Acquisition Approval

    Another alternative for crypto asset service providers from third countries may be to acquire a company in Europe that already has a BaFin license to provide the intended crypto services. Not only CASPs with a MiCAR license are eligible. Depending on the type of crypto services planned, certain investment firms with a BaFin license may also be considered as possible target companies. Similarly, under MiCAR, credit institutions are generally permitted to offer crypto services in addition to their actual business activities. In all these cases, however, a successful BaFin approval procedure must be completed prior to the acquisition. As part of the BaFin approval procedure, the authority has the opportunity to check the reliability of the acquirers interested in the acquisition and their intentions with regard to the acquisition. The information and evidence to be made available to BaFin during the BaFin approval procedure are numerous. Nevertheless, an approval procedure generally takes considerably less time than applying for a BaFin license. In this respect, acquiring a company supervised in Germany is a very interesting alternative for crypto asset service providers from third countries looking to expand into Europe.

    Attorney Lutz Auffenberg, LL.M. (London)

    I.  https://fin-law.de

    E. info@fin-law.de

    The competent lawyer for questions regarding a BaFin license under MiCAR, outsourcing and BaFin approval procedures in our law firm is Attorney Lutz Auffenberg, LL.M. (London).

    subscribe to Newsletter

      Contact

      info@fin-law.de

      Feb 19, 2024

      Public Warnings by BaFin – How Affected Companies Can React

      If companies wish to provide financial services such as investment advice or investment brokerage on a commercial scale, they require a BaFin license to do so. BaFin issues warnings via its website if companies offer financial services without a license. The basis for such warnings is Section 37 Subsection 4 of the German Banking Act (KWG). According to this provision, the authority may inform the public of this suspicion or finding, stating the name of the company, if and for as long as facts justify the assumption or it is established that a company is conducting unauthorized banking business or providing unauthorized financial services. The naming of the company’s real name in particular can result in considerable reputational damage for the company. This applies in particular to cases in which the press also reports on such an incident on the basis of public information, thereby increasing its reach. The following article is intended to show which principles BaFin must observe and how those affected can defend themselves if necessary.

      Anyone Providing Financial Services Must Possess a BaFin License

      The prerequisite for informing the public is that it is established or suspected that a company is providing unauthorized financial services, i.e. is operating on the market without the required authorization from BaFin. The provision of Section 37 Subsection 4 KWG serves the purpose of collective consumer protection and is intended to ensure that the public can be informed of potentially unauthorized activities at an early stage in order to minimize the damage to depositors and investors and to Germany as a financial marketplace. What is striking is that even the initial suspicion of BaFin is considered sufficient basis for publication. The authority may even make use of its right to issue a public warning if a company does not carry out the unauthorized activities, but merely gives the appearance of doing so publicly, for example through advertising measures. BaFin is therefore not obliged to formally intervene against the company first and only then publish the warning. It may publish its suspicions and warn the public at an early stage and prior to taking formal measures. However, the company concerned must always be heard by the authority before a decision on publication is made.

      Affected Parties Can Take Action Against Publication

      Due to the significant impact that a public warning by BaFin can have on the companies concerned, the authority must observe the principle of proportionality. If it turns out that the information published by BaFin is incorrect or that the underlying circumstances have been incorrectly reproduced, BaFin must inform the public of this in the same way as it previously published the information in question. As the publication on the website is an actual administrative action by BaFin, an action for a declaratory judgment aimed at establishing that the information provided to the public was unlawful or that the information was inadequately corrected or an action aimed at the publication of corrected information may be considered. By way of urgent legal protection, an application can be made for a temporary injunction, such as the deletion of certain information from the BaFin website until a decision is reached on the main issue.

      FIN LAW

      I.  https://fin-law.de

      E. info@fin-law.de

      subscribe to Newsletter

        Contact

        info@fin-law.de

        Feb 12, 2024

        The BaFin License According to MiCAR – Which Application Variants Are Available for Crypto Asset Service Providers?

        The MiCAR regulations on crypto services and crypto Asset service providers (CASP) will be applicable at the end of this year. The German legislator is already positioning itself and has published a government proposal for a Crypto Markets Supervision Act (KMAG), which will regulate how BaFin is to process license applications in accordance with MiCAR. For market participants, the transition to MiCAR means that they may have to approach the supervisory authority again in order to create the conditions for offering crypto services that are permitted under supervisory law once the MiCAR regulations come into force. However, not all crypto asset service providers will have to submit a basic initial application to BaFin. For companies that already hold a license under the current national crypto regulation or under applicable supervisory law, MiCAR provides for simplified procedures for obtaining the required BaFin license. But what types of procedures are available to the individual crypto asset service providers in this respect?

        Complete Application for BaFin License According to MiCAR Required for Initial Registration

        As expected, the most difficult type of procedure is applicable in the case of companies that are not yet regulated. Such CASPs will have to submit a complete license application to BaFin and may only become operational once BaFin has issued the requested license. The initial regulatory capital required under MiCAR, a proper business organization that covers all applicable requirements under MiCAR in relation to the crypto service to be provided and a viable business plan for the planned business model must be submitted. The directors of the CASP must be fit and proper and reliable. The shareholders and owners of the applicant company must also be reliable and provide appropriate evidence. According to the provisions of MiCAR, BaFin must confirm receipt of an application for authorization within 5 working days and then inform the applicant within 25 working days whether the application is complete. If this is not the case, BaFin must grant the applicant a rectification period at its own discretion. Should the application still be incomplete after expiry of the rectification period, BaFin may reject the application. In contrast, BaFin must decide on a complete application within 40 working days.

        Banks and Investment Firms Benefit from Simplified Procedure for MiCAR License

        For banks and investment firms that already hold a BaFin license for their business operations, the MiCAR provides considerable privileges. From the legal effect of MiCAR, credit institutions will also be allowed to provide crypto services if they notify BaFin of this at least 40 working days prior to offering crypto services for the first time. A separate MiCAR license is not required. In particular, the notification must contain a viable business plan with regard to the crypto services to be provided and also describe how the bank’s business organization will be structured in the future with regard to crypto services in a crypto-specific manner. After 20 working days, BaFin must state whether the notification is complete. As soon as the notification is complete, the credit institution may provide the planned crypto services. Investment firms can also benefit from this simplification, however, based on the notification procedure, they may only provide those crypto services for which they have a corresponding authorization as an investment firm. There is also a special feature for companies that are permitted to provide crypto services under national law on 30 December 2024 and apply for a MiCAR license from BaFin by 1 July 2025 at the latest. Such companies – such as crypto custodians with a license under the German Banking Act (KWG) – only have to prove to BaFin that they meet the additional obligations arising from MiCAR for their business model in order to obtain the MiCAR license. A complete application does not have to be submitted.

        Attorney Lutz Auffenberg, LL.M. (London)

        I.  https://fin-law.de

        E. info@fin-law.de

        The competent lawyer for questions regarding a BaFin license under MiCAR in our law firm is Attorney Lutz Auffenberg, LL.M. (London).

        subscribe to Newsletter

          Contact

          info@fin-law.de

          Feb 05, 2024

          Raising Money via the Capital Market – What Financial Information Must Be Included in a Securities Prospectus & a Securities Information Document (WIB)?

          As an alternative to a bank loan, companies can raise money from investors via the capital market. This can be done through a variety of financial instruments. The most common and best known in this context are stocks as equity instruments and bonds for raising debt or hybrid capital. The financial instruments can be represented classically in securities certificates or in electronic form. Irrespective of the form of the instrument used to raise capital, however, it should be noted that an information document must be published in the case of a public offer to a large number of retail investors. In the case of large-volume issues, this is generally a securities prospectus. The information that must be included in the prospectus is specified in the Prospectus Regulation and other accompanying regulations. For issues of up to EUR 8 million in Germany, there is the alternative option of using a securities information document (WIB) of up to four pages in length. The content requirements of the WIB are based on the German Securities Prospectus Act (WpPG). One important piece of information for investors is the financial situation of the issuer. Accordingly, it is regularly required that historical financial information be included in the documentation. Particularly in the case of young or small companies as issuers, it is therefore necessary to check in advance whether they can meet the requirements.

          Securities Prospectus has the Strictest Requirements

          The requirements for historical financial information are the strictest for a securities prospectus under the Prospectus Regulation. For equity securities such as stocks offered to retail investors, the audited historical financial information for the last three years must be included as well as an auditor’s report for each financial year. In the case of consolidated financial statements, these must at least be included. Where the issuer is required to prepare financial statements in accordance with international accounting standards, this financial information must be included. Should the issuer not be obliged to do so, the financial information may also be prepared in accordance with national accounting standards such as the German Commercial Code (HGB). In this case, it must contain at least the balance sheet, the income statement, an overview of all changes in equity, the cash flow statement, the accounting methods and explanatory notes. In these cases, smaller companies in particular must check whether their accounting meets the specified requirements or whether they may have to prepare additional financial information in accordance with the aforementioned requirements. The same applies, with a few simplifications, to the historical financial information for non-equity securities for small investors such as bonds. Here, the period to be reported is two years instead of three.

          Simplifications for SMEs and Small Volume Issues

          Under the Prospectus Regulation, small and medium-sized enterprises (SMEs) have the option of drawing up a so-called EU Growth Prospectus. In terms of content, this has fewer requirements than a regular securities prospectus. This also applies to the financial information. For example, only the last two financial years have to be included instead of three in the case of equity securities. If the balance sheet is prepared in accordance with national accounting standards, no cash flow statement and no statement of changes in equity must be presented. In the case of non-equity securities, only the last financial year must be included, and no cash flow statement must be included if the issuer prepares its financial statements in accordance with national accounting standards. A WIB can be used for issues of up to EUR 8 million in Germany. In the case of a WIB, the issuer’s debt-equity ratio calculated on the basis of the most recently prepared annual financial statements must be included. Furthermore, a reference to the most recent annual financial statements must be included and it must be stated where these can be obtained. These simplifications can make the preparation of the prospectus or WIB much easier, especially for smaller and young companies, as they can result in no new financial reports having to be prepared.

          FIN LAW

          I.  https://fin-law.de

          E. info@fin-law.de

          subscribe to Newsletter

            Contact

            info@fin-law.de

            Jan 29, 2024

            Asset Referenced Token – What Exactly Are ART Under MiCAR?

            Titles III and IV of the Markets in Crypto Assets Regulation (MiCAR) will become legally effective in the European Union on June 30, 2024. From this date, issuers of Asset-Referenced Tokens (ARTs) and E-Money Tokens (EMTs) will require authorization from BaFin or the competent supervisory authority in their country of domicile to issue such tokens. But what types of tokens will actually qualify as ARTs under MiCAR? While the MiCAR definition of E-Money Tokens requires the value of the token to be pegged to the value of an official currency, the interpretation of the MiCAR definition for Asset- Referenced Tokens is much more difficult. According to this definition, those crypto assets that are not E-Money Tokens and that purport to maintain value stability by reference to other values, rights or currencies or combinations thereof are to constitute Asset-Related Tokens. A particular problem with the definition is the requirement of stability of value, as it remains unclear what specific requirements will be placed in this regard.

            When Does a Token Have a Stable Value?

            According to the definition in MiCAR, the decisive factor for the qualification of a token as an ART is, in particular, the question of whether the token is intended to create a stable value. In principle, many types of tokens could be described as referencing assets, as assets of all kinds could be considered here. This could also include, for example, tokens that are used to digitally represent objects from the real world. Examples would be tokenized collectible playing cards or other fungible collectibles. However, the definition of Asset-Referenced Tokens also presupposes that value stability is to be maintained. Unfortunately, the MiCAR does not specify the term “stable value”, so that it is questionable when a stable value is given in the required sense. In any case, it will not be sufficient in this context if the value of a token is merely linked to the value of an object in the real world. In such cases, the value of the token can always be determined on the basis of the value of the reference object. However, the value cannot then necessarily be described as stable.

            Regulation for Asset-Referenced Tokens Targets Parallel Currencies

            Historically, the regulation of both E-Money Tokens and Asset-Referenced Tokens goes back to the intention of the legislator to strictly regulate the creation of parallel currencies in the form of tokens. The reason for the inclusion of the regulations on ART and E-Money Tokens was the now abandoned plan of the Meta Group to create the substitute currency “Diem”. Taking this legislative objective into account, the value stability required in the definition of ART must at least be suitable for keeping the value of the relevant tokens stable enough to allow them to be used as a parallel currency. Nevertheless, the contours of the characteristic of value stability remain blurred. However, a reliable interpretation aid can be expected in the form of the technical regulatory standards on ART still to be developed by ESMA.

            Attorney Dr. Lutz Auffenberg, LL.M. (London)

            I.  https://fin-law.de

            E. info@fin-law.de

            The competent lawyer for questions regarding a BaFin license under MiCAR and advice on Asset-Referenced Tokens (ART) in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

            subscribe to Newsletter

              Contact

              info@fin-law.de

              Jan 15, 2024

              SEC Approves Exchange-Traded Bitcoin ETFs – Is This Also Possible in Germany?

              On January 10, 2024, the United States Securities and Exchange Commission (SEC) approved the listing and trading of a number of shares in Bitcoin Spot Exchange Traded Funds (ETF). Spot ETF in this context means that the fund tracks the up-to-the-second Bitcoin price on a one-to-one basis. Furthermore, the fund actually holds bitcoins. This makes it possible for institutional investors to invest in Bitcoin without having to purchase Bitcoin directly. The SEC has for many years objected to the approval of Bitcoin ETFs, but now sees many advantages in the approval. This is because investing in regulated products such as ETFs also entails information obligations towards investors.  Of course, there is also ongoing supervision by the SEC. For example, the existing regulations on investment funds and standards of conduct for fund providers and managers apply to the purchase and sale of approved Bitcoin ETFs. Thus, broker-dealers who recommend investments in ETFs to retail investors must act in their best interests. The SEC emphasizes that no crypto trading platforms or intermediaries were approved or endorsed in its January 10, 2024 decision. The approval of Spot ETF is therefore intended to prevent investments in unregulated financial products that are related to Bitcoin. In Germany, a spot ETF that only tracks the value of Bitcoin would not be permitted. In Germany, such funds must always invest in several securities.

              Wasn’t There Already a Bitcoin ETF?

              Bitcoin ETFs have already been marketed and approved in the past. However, these were not spot ETFs in the USA. No real Bitcoin was deposited. These were regularly so-called Bitcoin Future ETFs. Unlike ETFs, Bitcoin futures are traded on specialized trading venues based on dates and future prices. These futures are intended to allow investors to participate in price gains without holding Bitcoin. Unlike a spot ETF, however, the problem with futures is that they may react with a time lag. Institutional investors are also regularly not allowed to invest in such products without a physical deposit. The approval of Bitcoin spot ETFs in particular makes Bitcoin potentially accessible to a larger group of investors. Should a price structure emerge in which the fees for the acquisition of shares in a Bitcoin Spot ETF are more favorable than the procurement of Bitcoin directly via a crypto exchange, investors can also benefit from this accordingly.

              Bitcoin May Also Be Used as a Reference Value in Germany

              As explained above, it is currently not possible to launch a pure Bitcoin spot ETF in Germany. However, Bitcoin can be used as a reference value for other financial products. The term Bitcoin Exchange Traded Notes (ETN) refers to debt securities that are traded on the stock exchange and whose payout conditions are based on the performance of Bitcoin. The structuring options are numerous. For example, it is possible to bet on falling or rising prices or to integrate leverage into the product. In Germany, if these products are offered to retail investors, they are subject to the documentation requirements under the Prospectus Regulation or the WpPG or the Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products (PRIIPs). In this respect, there may be an obligation to publish a securities prospectus or a key information document. Financial contracts for difference (CFDs) can also use Bitcoin as a reference value. However, it is particularly important to ensure that CFDs entered into with retail investors meet the requirements of the BaFin general ruling of July 23, 2019. With the general ruling, BaFin restricted the marketing, sale and distribution of CFDs to retail investors in Germany.

              FIN LAW

              I.  https://fin-law.de

              E. info@fin-law.de

              subscribe to Newsletter

                Contact

                info@fin-law.de

                Jan 08, 2024

                Crypto Service Providers in the DeFi Space – Is Money Laundering Regulation a Dealbreaker for an Engagement in Decentralized Finance?

                Decentralized Finance (DeFi) has been a megatrend in the crypto sector for several years now. The idea is to create a financial market without intermediaries. Participants should be able to interact directly and immediately with decentralized smart contracts, for example to carry out swaps involving crypto assets without having to use the services of a crypto asset service provider. However, regulated market participants are also recognizing the potential of DeFi and are working on business models that provide for automated liquidity procurement via DeFi protocols and their smart contracts, for example. Nevertheless, regulated crypto service providers (CASP) are not completely free to organize their business activities. Rather, they have to observe numerous compliance regulations, which can make the creation of corresponding business models more difficult and sometimes even impossible. CASP face particular difficulties in this respect due to money laundering prevention regulations.

                Are DeFi Business Models Compatible with Anti-Money Laundering and Anti-Terrorist Financing Regulation?

                For private individuals, the use of DeFi protocols is easier than for regulated crypto asset service providers in that they are not obliged by the anti-money laundering laws of the European Union and the German legislator. The situation is different for crypto asset service providers with a license under the German Banking Act (KWG), the German Investment Firms Act (WpIG) or, in the future, the Markets in Crypto Assets Regulation (MiCAR). They have to fulfill identification, verification and information procurement obligations when carrying out crypto transactions. In this respect, crypto asset service providers regulated under the KWG and WpIG are also obliged entities within the meaning of the German Money Laundering Act (GwG) and the national Crypto Asset Transfer Regulation (KryptoWTransferV). In future, crypto asset service providers regulated under MiCAR will also be obliged entities under anti-money laundering law and consequently be subject to the revised EU Travel of Funds Regulation (TFR). All of the aforementioned legal standards assume that all parties involved in a crypto transaction are identifiable legal entities. If this is the case, the originator and recipient of crypto transactions as well as the crypto asset service providers entrusted with the execution can be identified and verified. They may also be requested to provide information such as names, addresses or details of the origin of the crypto assets. However, the fulfillment of these obligations for regulated crypto asset service providers is problematic in the case of smart contracts in DeFi protocols that are not backed by an identifiable legal entity. The question then arises as to whether the non-fulfilment of the obligations under money laundering law means that the crypto asset service provider concerned cannot interact with the DeFi protocol in principle, because the legal consequence of non-fulfilment is that the transaction may not be executed.

                Classification of Smart Contracts under Money Laundering Law Will Be Decisive

                It is true that the legal consequences provided for by the TFR and the German AML Act in the event of non-compliance with anti-money laundering prevention obligations can lead to the impossibility of carrying out crypto transactions with the smart contract in question. However, for the legal consequences to be triggered, the corresponding obligation must first also apply in the event of interaction with the DeFi protocol. There may be doubts about this if there is no identifiable legal entity underlying the smart contract in question. This is because the originators and beneficiaries required as transaction parties to trigger the obligation to provide or obtain information under the TFR are defined in the TFR to the effect that they must be persons. However, according to the general understanding, persons can only be natural or legal persons, or, if interpreted broadly, partnerships. A mere smart contract, on the other hand, can hardly be regarded as a person in the required sense. The concept of contractual partner, which is relevant in the context of the applicability of the obligations under the German AML Act, also causes difficulties in the case of mere smart contracts in DeFi. This is because a contracting party can only be someone who can be legally bound by a contract. However, without a legally capable operator, a smart contract will not have such legal capacity. It is impossible to predict whether these arguments will find their way into the administrative practice of BaFin and the relevant European supervisory authorities. What is clear, however, is that a specific and practicable legal regulation – preferably at the European level – should be created for the interaction of regulated CASP with DeFi protocols. Particularly in view of the dangers that can arise for consumers when using DeFi protocols independently, the legal facilitation of the involvement of regulated crypto asset service providers in DeFi protocols should also be desirable from a political perspective.

                Rechtsanwalt Dr. Lutz Auffenberg, LL.M. (London)

                I.  https://fin-law.de

                E. info@fin-law.de

                The competent lawyer for questions regarding business models connected to Decentralized Finance (DeFi) and Anti-Money Laundering regulation in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

                subscribe to Newsletter

                  Contact

                  info@fin-law.de

                  Dec 19, 2023

                  Can Security Tokens or Crypto Securities Meet the European Green Bond Standard?

                  On November 30, 2023, Regulation (EU) 2023/2631 on European Green Bonds and Optional Disclosures on Bonds Marketed as Environmentally Sustainable and Sustainability-linked Bonds (EU Green Bond Regulation) was published. The Regulation applies in its entirety from December 21, 2024. The EU Green Bond Regulation specifies the circumstances under which bond issuers may use the designation “European Green Bond” or “EuGB” for bonds offered in the Union. In order for a bond to qualify as a European Green Bond, the proceeds of the issue must, subject to certain flexibilities, be used in full for specific investment categories in accordance with the criteria for environmentally sustainable economic activities set out in the European Taxonomy Regulation (Regulation (EU) 2020/852). In addition, as with other Green Bond standards, external auditors must be involved and documentary requirements must be met.

                  The European Green Bond Standard Requires Prospectus Transparency and External Audit

                  The EU Green Bond Regulation stipulates that only bonds for which the issuers have published a securities prospectus in accordance with the Prospectus Regulation (Regulation (EU) 2017/1129) can qualify as a European Green Bond. In addition, the issuer must complete an information sheet provided for in the EU Green Bond Regulation prior to issuance and ensure that the completed information sheet is subject to a pre-issuance review and that an external auditor issues a favorable opinion on it. In order to ensure that the proceeds have been invested in accordance with the EU Green Bond Regulation, issuers must prepare an allocation report for each 12-month period until the date of full utilization of the proceeds of their bonds and indicate that the proceeds of the bonds have been used in accordance with the EU Green Bond Regulation since their issuance and until the end of the period specified in the report. If the allocation report has been prepared after the proceeds of the bond have been fully utilized, the report must be subject to a post-issuance audit by an external auditor. Issuers should also provide information on the environmental impact of their bonds by publishing an impact report at least once during the duration of the bonds after the proceeds have been fully utilized.

                  Security tokens and Crypto Securities May Also Meet the Green Bond Standard

                  The EU Green Bond Regulation does not regulate that blockchain-based security tokens or crypto securities under the Electronic Securities Act (eWpG) cannot fulfill the requirements of the European Green Bond Standard . Therefore, bonds for which a securities prospectus must be prepared can be issued both as security tokens and as crypto securities under the eWpG. The funds raised from such an issue can be used for the environmental objectives of the European Taxonomy Regulation. The information to be provided in the individual reports on the form of the bonds also does not suggest that blockchain-based bonds cannot be issued under the EU Green Bond Regulation. There are therefore valid reasons to believe that blockchain-based bonds can also be issued as European Green Bonds. It remains to be seen whether a market for European Green Bonds based on blockchain technology will develop.

                  FIN LAW

                  I.  https://fin-law.de

                  E. info@fin-law.de

                  subscribe to Newsletter

                    Contact

                    info@fin-law.de

                    Dec 11, 2023

                    Qualified Crypto Custody After MiCAR Go-live – What are Cryptographic Instruments?

                    In October 2023, the Federal Ministry of Finance (BMF) published an initial draft bill for a new Financial Market Digitization Act (FinMaDiG). In addition to the introduction of national implementation provisions regarding the EU Regulation on Markets in Crypto Assets (MiCAR), which will to a large extent come into force in summer 2024, the core content includes a planned amendment to the German Banking Act (KWG). According to this, cryptographic instruments are to be introduced as a new category of regulated digital units, which are to be clearly distinguished from the crypto assets now regulated under MiCAR. At the same time, the national definition of crypto assets is to be removed from the KWG and the custody of cryptographic instruments is to be made subject to authorization. According to the draft legislation, the custody of cryptographic instruments is to constitute qualified crypto custody in future and as such constitute a regulated financial service. But what is the legislator aiming to achieve with the new introduction of cryptographic instruments and qualified crypto custody?

                    German Crypto Asset Concept Cannot Simply Be Removed from the KWG

                    In the explanatory memorandum to its proposal for the introduction of qualified crypto custody and cryptographic instruments, the BMF states that the new terminology is necessary in order to regulate a remaining area of application that is not covered by MiCAR but was regulated under the previous national crypto regulation. In particular, financial instruments within the meaning of MiFID2 regulation do not fall under the scope of MiCAR. The KWG, on the other hand, also covers tokenized MiFID2 products as regulated financial instruments and does not exclude the possibility that a crypto asset is also a financial instrument within the meaning of MiFID2 regulation according to the KWG. Crypto custodians licensed under the KWG in Germany may therefore currently also hold security tokens that constitute financial instruments within the meaning of MiFID2. However, the crypto custody license under MiCAR will no longer permit to do so. In order to prevent crypto custodians already licensed under the KWG from retroactively prohibiting previously permitted business in the course of the transition to MiCAR, the German legislator is now proposing to retain the current definition of crypto assets in the KWG, but to apply it to cryptographic instruments in the future. According to the draft bill, cryptographic instruments should therefore in the future be digital representations of value that have not been issued or guaranteed by any central bank or public authority and do not have the legal status of currency or money, but are accepted as a means of exchange or payment or serve investment purposes on the basis of an agreement or actual practice and which can be transferred, stored and traded electronically. According to the intended legal arrangement in the draft, e-money, crypto assets under MiCAR, crypto securities under the eWpG and crypto fund shares in particular are not to be considered cryptographic instruments.

                    Cryptographic Instrument and Qualified Crypto Custody Should Be Terminologically Revised

                    The legislator’s intention to continue to supervise crypto custodians with a BaFin license under the KWG to the same extent as before, even under MiCAR, is not objectionable in terms of content and is a logical consequence of the historically chosen approach of a licensing requirement for crypto-related business models in Germany. However, the terms “cryptographic instrument” and “qualified crypto custody” proposed in the draft bill are unnecessarily complicated and misleading. It is not clear why the term “crypto instrument” cannot be used instead of “cryptographic instrument”. After all, the current version of the KWG also refers to crypto assets instead of cryptographic assets. The term “qualified crypto custody” is even misleading. This is because the term suggests that the financial service is an extension of crypto custody in accordance with MiCAR. In fact, however, qualified crypto custody should refer exclusively to the custody of cryptographic instruments and therefore not to the custody of crypto assets. The new financial service would therefore represent an activity that is clearly distinct from crypto custody under MiCAR and would not have any overlaps with it. It would therefore be more appropriate to call it crypto-instrument custody, for example.

                    Attorney Dr. Lutz Auffenberg, LL.M. (London)

                    I.  https://fin-law.de

                    E. info@fin-law.de

                    The competent lawyer for questions regarding tokenization and applying for a BaFin license under MiCAR and the KWG in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

                    subscribe to Newsletter

                      Contact

                      info@fin-law.de

                      Dec 04, 2023

                      BaFin Publishes Guidance on Register Management for Crypto Securities

                      On 23 November 2023, BaFin published a guidance sheet with information on the facts of crypto securities register management. The crypto securities register is closely related to the German Electronic Securities Act (eWpG). Under the eWpG, bearer bonds can be issued in the form of an electronic security. The same applies to crypto fund units in accordance with the Regulation on crypto fund units. An electronic security is issued by the issuer making an entry in an electronic securities register instead of issuing a securities certificate, e.g. in the form of a global certificate. The eWpG includes a central register and a crypto securities register among these electronic securities registers. The crypto securities register only applies to the latter. A crypto security is an electronic security that is entered in a crypto securities register. In addition to statements on the licensing requirement, the information sheet also contains general statements on the system of the eWpG.

                      Existing DLT-Based Security Tokens are not Automatically Crypto Securities

                      Traditional securities always require a certificate for a right, the utilization of which is governed by private law through the possession of the certificate. With the introduction of global certificates, it is no longer necessary to create a large number of securities certificates, but several rights can also be securitized in one certificate. In order for one of the rights securitized in the securities certificate to come into existence, an effective act of scripting and an effective contract of issuance are required. The effective scripting act requires the issuer to draft a certificate. In the case of a crypto security, the scripting of a certificate is waived. In BaFin’s opinion, the scrip is instead entered in the crypto securities register by entering the crypto security in the register. It is precisely this act of registration in a crypto securities register in accordance with the eWpG that is regularly missing for security tokens issued prior to the introduction of the eWpG. In this respect, BaFin therefore is of the opinion that these cannot qualify as crypto securities without further ado.

                      Operation of Crypto Securities Register Regularly Subject to Authorization and Additional Licenses May Be Required

                      The registry operator shall maintain a crypto securities register in such a way that the confidentiality, integrity and authenticity of the data are guaranteed. The entity operating the register must take the necessary technical and organizational measures to prevent data loss or unauthorized data modification for the entire duration for which the electronic security is registered. In order to comply with these obligations, BaFin assumes that it is always required that business operations are set up in a commercial manner. Accordingly, anyone operating an eWpG-compliant crypto securities register must always obtain a license from BaFin. Since crypto securities are ultimately securities, their safekeeping and/or management is also subject to the custody business requiring a license. However, according to the administrative practice now published by BaFin, a crypto securities registrar who is also licensed for custody business does not necessarily require a separate license for crypto custody business in order to secure any cryptographic keys. Nevertheless, crypto securities can also be held in custody by BaFin-approved crypto custodians in accordance with the eWpG.

                      FIN LAW

                      I.  https://fin-law.de

                      E. info@fin-law.de

                      subscribe to Newsletter

                        Contact

                        info@fin-law.de

                        Nov 13, 2023

                        From KWG to MiCAR – How Does the Legislator Intend to Shape the Regime Change for Crypto Asset Service Providers?

                        On 23 October 2023, the Federal Ministry of Finance (BMF) sent a draft bill for a new Financial Market Digitization Act (FinmadiG) to associations and experts from the crypto industry with a request for critical feedback. In particular, the FinmadiG provides for the creation of a Crypto Markets Supervision Act (KMAG), in which the responsibility and powers of BaFin with regard to the granting of MiCAR licenses and the performance of the supervisory tasks provided for under MiCAR are to be regulated. In particular, the draft KMAG contains provisions on the necessary transition of crypto asset service providers already operating on the basis of national BaFin licenses to the new MiCAR supervisory regime. Corresponding regulations are needed in German law, as in Germany, unlike in other member states of the European Union, crypto assets have already been regulated as financial instruments within the meaning of the German Banking Act (KWG) and the German Investment Firm Act (WpIG) since 2020, with the consequence that business models based on corresponding instruments are subject to the prior procurement of a BaFin license. Those crypto asset service providers that have already received a BaFin license for their business operations on the basis of this national crypto regulation must now be transferred to the new supervisory regime under MiCAR.

                        How Is the Transition to the MiCAR License to be Made According to the KMAG?

                        The draft KMAG includes transitional provisions stipulating that companies that already hold a BaFin license under the KWG, the WpIG, the Payment Services Supervision Act (ZAG), as an exchange operating company or as a capital management company may also perform activities in relation to crypto assets within the meaning of the current national regulation under the new law if they are in possession of the BaFin license required for these activities under the then applicable legal framework on 29 December 2024. The date has been chosen in view of the  30 December 2024 deadline provided for in the MiCAR, from which it will take full legal effect. Crypto asset service providers operating on the basis of a German BaFin license are thus granted a transitional period, albeit a very short one. The draft bill for the KMAG stipulates that the transitional possibility of providing crypto services is to expire by 31 December 2025 at the latest. German crypto asset service providers therefore do not have much time to manage the transition from the current national license to the MiCAR license. Based on the fact that applications for a MiCAR license can only be submitted to BaFin once the MiCAR license requirements are also legally effective, crypto asset service providers would only have one year to successfully complete the transition process. It is likely that numerous German crypto asset service providers will be able to take advantage of the simplified procedure under MiCAR. However, if they wish to license additional crypto services that are not yet covered by their current license, the simplified procedure would not be available to them.

                        Crypto Asset Service Providers Might be Subject to Both KWG and MiCAR According to the KMAG Draft

                        It is interesting to note that, with regard to the necessary amendment to the KWG, the BMF’s draft legislation provides for the legal definition previously used for crypto assets to be retained almost word for word. However, tokens covered by the definition should no longer be considered crypto assets under the KWG in the future, but rather cryptographic instruments. In addition, crypto custody under national law is to be considered qualified crypto custody in the future and may only be provided in relation to cryptographic instruments. The reason for this is that the legislator must create a regulation to enable crypto custodians licensed under the KWG to continue to hold security tokens, i.e. financial instruments as defined by the MiFID2 regulation and crypto securities under the German Electronic Securities Act (eWPG), for example. This is because these instruments are excluded from the scope of MiCAR, meaning that they cannot be the subject of crypto custody on the basis of a MiCAR license. German crypto custodians will therefore require both a license for qualified crypto custody under the KWG and a crypto custody license under MiCAR in order to be able to conduct their business to the extent to which they are accustomed under current national regulation.

                        Attorney Dr. Lutz Auffenberg, LL.M. (London)

                        I.  https://fin-law.de

                        E. info@fin-law.de

                        The competent lawyer for questions regarding crypto asset services and BaFin license under MiCAR in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

                        subscribe to Newsletter

                          Contact

                          info@fin-law.de

                          to top