(June 29, 2021) On June 10, 2021, the Electronic Securities Act (Gesetz zur Einführung von elektronischen Wertpapieren, eWpG), which enables the issuance of bearer bonds using innovative technologies such as distributed ledger technology (DLT), entered into force in Germany. In particular, the Electronic Securities Act establishes a legal basis for the trading of rights through electronic securities registers and adds a new license category for maintaining a crypto securities register.
The Electronic Securities Act implements the main components of the blockchain strategy of the German federal government and of the joint paper published by the German Federal Ministry of Finance and the Federal Ministry of Justice and Consumer Protection on the regulatory treatment of electronic securities and crypto tokens.
Content of the Electronic Securities Act
Trading of Rights Through Electronic Security Registers
The Electronic Securities Act introduces a new category of “electronic securities” that are equivalent to traditional securities issued by means of a physical certificate. The requirement for a physical certificate is replaced by an entry in an electronic securities register. The new law classifies electronic securities as “moveables” within the meaning of section 90 of the German Civil Code. (eWpG § 2.)
Electronic securities are divided into central register securities and crypto securities. A central register security is defined as “an electronic security that is entered in a central register,” whereas a crypto security is defined as “an electronic security that is registered in a crypto securities register.” The registrar of the electronic securities register must ensure the confidentiality, integrity, and authenticity of the data. (§ 7.)
A bona fide purchaser of a single entry electronic security may rely on the content of the register (protection of good faith). Obstacles to disposition must be entered into the register or known to the purchaser to be valid. (§ 26.)
Central registers may be maintained by a central securities depository or, if the issuer has given express written authorization, by a custodian. For the definition of a “central securities depository,” the Electronic Securities Act refers to the EU Central Securities Depositories Regulation, which defines them as legal persons that operate the infrastructure that enables the securities settlement systems. Central registers must contain information on the essential content of the issued right, the issue volume, the nominal amount, the issuer, an indication of whether the entry is an individual or a collective entry, the bearer, and information on mixed holdings. Individual entries must also contain information on obstacles to disposition and third-party rights. (§ 13.)
Crypto Securities Registers
The term “crypto securities register” is technology-neutral. However, according to the explanatory memorandum, “recording systems based on distributed ledger technology are the primary focus.” (Explanatory memorandum at 59.) A crypto securities register must be maintained on a “tamper-proof recording system in which data is logged in chronological order and stored in a manner that is protected against unauthorized removal and subsequent modification.” (§ 16, para. 1.) A crypto security register must contain the same information as a central securities register. (§ 17.) The Federal Ministry of Justice and Consumer Protection and the Federal Ministry of Finance are authorized to jointly issue regulations regarding, among other things, the establishment, maintenance, and technical requirements of crypto securities registers, as well as requirements for confidentiality, integrity, availability, and authenticity of the data. (§ 15.)
Registration of a crypto security in a crypto securities register must be published in the German Federal Gazette (Bundesanzeiger) as well as notified to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). The list is made public by BaFin. (§ 20.)
Maintenance of a Crypto Securities Register
Maintaining a crypto securities register is added to the list of financial services that require authorization from BaFin under the German Banking Act. (Banking Act § 1, para. 1a, no. 8, § 32, para. 1.) The definition of “crypto custody business” is amended accordingly. (§ 1, para. 1a, no. 6.)