SMART MONEY - GERMANY

The long-awaited modernisation of German securities law has begun

The rise in the use of digital assets has presented regulators around the world with a number of unique challenges. Regulators and law makers in different jurisdictions are considering their options to more effectively regulate these novel assets in ways that protect consumers and the market, but also foster innovation to support the benefits this technology could bring.

Our digital asset regulatory experts in the UK, Germany and the US have each provided their views regarding current developments in their respective jurisdictions. In this article, we focus in on Germany.

On 14 December 2020, the federal German government published a bill introducing an electronic securities regime. The bill provides not only for typical securities functions such as bona fide acquisition, but also an innovative bridge between Distributed Ledger Technology (DLT) and the traditional securities world. This is a significant legal milestone for DLT.

The draft bill has emerged against the backdrop of a far-reaching EU digital finance package, consisting of: regulation on markets in crypto-assets (MiCA), a pilot regime for market infrastructures based on DLT, a regulation on digital operational resilience for the financial sector (DORA), and numerous other amendments to EU law, including amendments to MiFID II. This proposed legislation is likely to enter into force much later than the German bill, which looks set to be enacted during the course of 2021. This article focuses on the German bill only.

Eligibility and Securities Registers

Under the proposed bill, electronic securities can be issued by registration in electronic securities registers, consisting of central registers and crypto securities registers. Crypto securities will be registered in crypto securities registers, which can be operated by anyone the issuer appoints (subject to proper licensing). All other electronic securities will be registered in a central register, to be operated by a central securities depository, such as Clearstream Banking AG, or a custodian bank (appointed by the issuer). Securities already issued in bearer form can be converted (upon request of the issuer) into electronic securities without the consent of the investors.

Initially, the bill shall only apply to electronic securities (including crypto securities) and will provide for bond instruments and for investments in funds. It shall later be expanded to cover other instruments, including equity instruments.

The bill significantly simplifies the issuing process by eliminating the need to issue a physical certificate. This will limit issuance costs and also reduce operational risk. It should also streamline the legal and operational procedures and simplify access to the German market for non-German issuers, in particular where the issuer’s local laws already provide for similar electronic processes.

Bridge between the Worlds

The bill also provides for a comprehensive legal regime for crypto securities (as a subset of electronic securities), which will place Germany amongst the first set of jurisdictions – together with Switzerland, Liechtenstein and others – to have implemented rules governing crypto-assets, thus providing the legal certainty required for large scale crypto-securities issuances and operations.

We predict that this new mechanism will act as a tipping point for DLT technology, enabling investors in both Germany and further afield to invest in digital assets with confidence.

The new law will enable the choice to issue using DLT only, or to hold and settle crypto-assets using traditional securities settlement systems and structures, including listing structures. The same kind of securities token will then be held and transferred both ways. The bill therefore serves to bridge the current technology gap whereby many potential investors and market participants do not yet have fully fledged access to blockchain technology, and some trading venues are not ready to provide large-scale trading in securities tokens. In a securities token offering, issuers will hence be able to tap both traditional foreign investors who are seeking to have their crypto assets credited to their normal custodian accounts (with bank intermediaries facilitating placement and underwriting), as well as new foreign investors who prefer to invest by using their crypto-asset wallets. As discussed during our Emerging Themes webinar on 19 January 2021, we predict that this new mechanism will act as a tipping point for DLT technology, enabling investors in both Germany and further afield to invest in digital assets with confidence.

CONCLUSION

With the German government’s proposal now published, the legislative process in Parliament can begin. We expect Parliament to prioritize this and to aim to enact the bill within Q1 of 2021. Market participants (issuers, intermediaries, market infrastructure providers) should prepare for the new rules as they stand, since it would be unlikely that Parliament would fundamentally change the nature of the proposal during the legislative process. Those who have issued crypto assets prior to the bill’s enactment will also benefit from the new rules.

The bill confirms that Germany, already one of the few EU jurisdictions with a substantial number of securities token issuances, remains at the forefront of technical innovation.


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PROFESSOR DR. BERND GEIER

Partner, Frankfurt

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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.

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