Speedread
- German Parliament finally issues e-Securities Act
- The e-Securities Act is accompanied by the introduction of new financial services in the German Banking Act (Kreditwesengesetz)
- Issuers must file for authorisation with the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) before issuing e-Securities using a decentralised cryptoasset register
On 6 May 2021 the German Parliament (Deutscher Bundestag) finally issued the long awaited Electronic Securities Act (e-Securities Act, Gesetz über elektronische Wertpapiere – eWpG) opening the German Financial Market for electronic securities (e-securities).
Based on the current hunger for innovative financial solutions from the national and international financial markets this Act is intended to allow German market participants to be part of contemporary technological developments eventually.
The essential advance of this new rulebook is based on the – quite simple but effective – determination that the emission of an e-security replaces the emission of a certified security with the same legal consequences, rights and obligations. The necessity to regulate specific details is avoided through a reference to the Property Law of the German Civil Code (Bürgerliches Gesetzbuch – BGB). Despite of being nearly 125 years old, the structuring of these fundamental provisions is highly adaptable to several different scenarios which allows to apply these to any kind of e-securities as well. As e-securities (due to the trick of a fiction) like well-known certified securities are now property within the meaning of the German Civil Code they are highly protected by law in the same manner. Thus they enjoy protection in circumstances of insolvency or compulsory enforcement and the principle of bona fide acquisition is applicable as well.
Initially the scope of application of the e-Securities Act is restricted to bearer bonds, although the legislator has already announced that further sorts of securities will be implemented in the future. Notwithstanding, from a technological perspective the Act has been intentionally designed to be open for all different kinds of electronic technology which allow for utilisation as an e-security register. Insofar the Act differentiates between Central Register eSecurities and Cryptoasset eSecurities.
The former is likely expected to replace the current paper-based collective custody by plain digital registration in centralised registers. This may reduce corresponding custody costs due to the fact that electronic registration can be provided (and maybe protected) much cheaper than paper custody. This will nonetheless require the performance of an intermediary entity acting as a central e-registrar.
The latter appears to be very appealing for issuers as cryptoasset securities will no longer require central storage but can be registered decentralised – which allows usage of nowadays established technologies like distributed-ledger or blockchain and may likely reduce costs for registration because a third intermediary entity is no longer required.
Irrespective of who will be acting as registrar and whether it takes place centralised or decentralised, it must be ensured that the register is always kept with confidentiality, integrity and with guarantee of authenticity – and nevertheless (e-)public.
This is where the regulatory requirements and implications of the e-Securities Act must be reflected – together with the issuance of the e-Securities Act the German legislator introduced some correlating changes to the German Banking Act (Kreditwesengesetz – KWG) shaping the regulatory framework for e-securities. Insofar, according to the German legislator, the protection of investors and market integrity shall not be the price for innovation.
Keeping cryptoasset registers is now an autonomous financial service within the revived provision of Section 1 (1a) no. 8 of the German Banking Act. Therewith acting as cryptoasset registrar requires a license from the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) in accordance with Section 32 (1) of the German Banking Act. The German Federal Financial Supervisory Authority is explicitly assigned to be the competent supervisory authority for all activities of e-Securities registers – covering both central registers and cryptoasset registers.
Apart from that, securing of crypto keys which allow the usage of e-Securities (as holding, storing or disposing) pursuant to the e-Securities Act complements the crypto custody business in Section 1 (1a) no. 6 of the German Banking Act and is now a regulated activity which requires a license from BaFin as well.
In this relation issuers must be aware that issuing e-Securities based on decentralised technologies might be very attractive from a perspective of costs and their reduction, but always requires application for authorisation prior to commencing with regulated cryptoasset registrar activities. Otherwise criminal offences may be realised and penalties of imprisonment up to five years and material penalty fees must be feared.
