Electronic Registry: eWpG – Electronic Securities Act
On May 5th, 2021, the committee meeting, chaired by Katja Hessel (FDP), and the coalition factions of the CDU / CSU and SPD, as well as the FDP faction, voted in favor of the federal government’s bill (19/26925) to introduce electronic securities in Germany and has been forwarded to the Bundesrat (approval expected on May 28, promulgation and entry into force expected in June/July). Hence, we considered it convenient to collect the Electronic Securities Act (eWpG) registry implications revising the law in English.
- Technology agnostic: The electronic issuance of securities should also be made possible outside the use of blockchain technology and comparable distributed ledger technologies (DLT).
- The currently mandatory embodiment of securities by certificate (i.e., classic paper format) will be abandoned: In the future, issuers will have the right to choose whether they wish to issue securities by certificate or by electronic means. This is neither a substitution of the classical paper certificate issue nor is it intended to create a security of its own kind with the electronic security (functional approach). It is only an extension of the usable forms and not an extension of the “nummerus clausus” of the securities.
- The regulation will initially be limited to bearer bonds, with the opening for further securities in bearer form to be made at a later date: The draft law only refers to securities in bearer form from the outset. Although the presented draft only addresses bearer bonds, most of the commonly issued security tokens have character or equity-like investments: They aim to participate the investors in the growth of the company’s value and do not usually offer them voting rights nor a fixed rate. For which this type of digital securities can be understood as profit participation certificates (Genussscheine). Profit participation certificates are regularly bearer bonds.
- Crypto register: For reasons of investor protection, market integrity, and to ensure a functioning and transparent market exchange, the bodies maintaining a crypto securities register should be placed under the supervision of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). For this purpose, the provision of a crypto-security register will be structured as a financial service.
- The draft is worded so that a later opening for other types of bearer securities can be achieved without any legislative problems: This piece of legislation opens the door for the potential issuance of all kinds of financial instruments as security tokens. Many business cases of tokenized securities can be done entirely compliantly thanks to this new regulatory advancement.
- In order to give the beneficiaries of electronic securities the same comprehensive protection as owners of securities in certificated form, electronic securities should be considered as moveables (Sachen), creating a legal fiction. This will ensure comprehensive protection of property, especially in cases of insolvency and foreclosure.
- For collective registration, this is done per section 6 para. 2 of the Federal Government Debt Management Act (Bundesschuldenwesengesetz) by equating registration with a collective security holding.
- To consider the unique features of electronic securities in individual registration, special provisions are made for dispositions, including the transfer of ownership, and in particular for acquisition in good faith (gutgläubiger Erwerb).
- The crypto assets that have the property of a security should be legally certain. For this reason, a crypto-security is to be marked as such and published in the Federal Gazette (Bundesanzeiger) and at the same time notified to the supervisory authority, whereby neither the publication nor the notification is constitutive for the creation of the security.
Electronic Register & Custody
Issuers will be able to decide whether the security will be issued through a Central Security Depository (CSD) or an Electronic Security Depository (ESD). The term electronic security depository or crypto registry refers explicitly to a decentralized and immutable ledger system, recognizing DLT as a registry for crypto securities.
- There are two types of registers capable of holding securities in which electronic securities can be issued: One is the central register of securities, and the other is the crypto register of securities.
- A crypto security cannot at the same time be an electronic security entered in the central securities register. The respective form of issue of a security as a central or decentralized register entry is therefore exclusive. Changes of the register are possible if provided for by law (see section 21 para. 2 and section 22).
- In the case of securities issued electronically, the securities certificate should be replaced by an entry in an electronic securities register (elektronisches Wertpapierregister). In principle, there should be a central electronic securities register maintained by an authorized central depository.
- In the case of securities issued using blockchain technology or comparable technologies, it should also be possible to make an entry in a decentralized crypto securities register (Kryptowertpapierregister).
- For the new digitally issued securities, the German regulators also introduced a clear enacting legal framework. Custody of such securities will fall under the new crypto custody license regime (“Kryptoverwahrgeschäft”). Additionally, a CSD license is not required.
- Maintaining an Electronic Security Depository (ESD) and providing related services will fall under the German Banking Act (“Kreditwesengesetz — KWG”) and hence will require service providers to obtain a license. Based on our understanding, this also means controlling Smart Contracts (owning the private keys) representing the digital security or crypto security on, e.g., a permissionless platform such as Ethereum.
Entry of the security in an electronic securities register with the information required pursuant to section 13 or section 17 para. 1.
The content of the register to be compiled by the registrar is an essential step in the creation of the electronic security. The information to be included in the register serves the purpose of identifying the security and, like a paper certificate, can be visually perceived at any time for the legal transactions involved.
The law requires that electronic securities also be assigned a securities identification number also for electronic securities but does not specify the body by which this is to be done. It is required that an individual security identification number is available and can be applied for each electronic bearer bond – regardless of whether it is to be traded on a stock exchange or not.
When using standard formats for the output of the register contents (such as html or txt), it can be expected that the viewer can read the identification number. The recording of the security identification number in the register is part of the signature (Skriptur) of electronic securities by which they are identified. The other part of the signature (Skriptur) is the deposition of the terms and conditions of issue, which “securitizes” the content of the right.
Deposition of the terms and conditions of issue.
The further part of the signature (Skriptur) is the deposition of the terms and conditions of the issue. This is the actual (electronic) embodiment of the law, which ensures that the content of the electronic security can be determined. The securities identification number may only be registered once the terms and conditions of the issue have been deposited with the registrar. Section 5 contains more detailed provisions on the deposition, so that reference can be made to the individual rationale to section 5.
Reference to the terms and conditions of issue.
The scriptural act (Skripturakt) must ensure that the electronic security is suitable and intended to be used at any time from the register to prove the legal relationship in legal transactions. This presupposes that there is a permanent and unambiguous reference in the entry in the register to the terms and conditions of issue deposited outside the register. In this context, an electronic link between the securities identification number and the data stock stored at the registry office for the respective terms and conditions of issue should be considered. This link must be easily recognizable, traceable, and readable by everyone without the need for technical aids beyond the usual application programs.
The details of keeping the register and the technical requirements are to be laid down in legal regulations, which can be adapted more quickly to technical developments. To see the Electronic securities Act in German and English, follow the bibliography.
micobo is committed to delivering the best technological solutions for the new era of digital capital markets. Providing the technological infrastructure for the future of capital markets is our mission. We know all the benefits that DLT brings and all the growth opportunities that tokenization opens for many business cases, and have worked hand-&-hand with our clients to reach greater growth.
micobo’s tokenization solution is a modular all-in suite covering the entire digital investment journey, from the investor onboarding throughout the issuance and life-cycle management of the tokens. With granular user rights, delivering the highest protection for investors, allowing our clients (issuers) to perform administrative tasks responding to the corporate rights embedded in the tokens.
micobo’s tokenization solution integrates strong Know Your Customer (KYC) and Anti-Money Laundering (AML) features to sufficiently comply with the legal requirements of the German and European jurisdictions.
Certainly, an important step forwards to adopt all the efficiency gains and liquidity potential of distributed Ledger Technology (DLT) and asset tokenization.
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Blandón, Luisa. MiCA and eWpG: Overview and Summary of the latest regulatory developments for digital assets in the financial industry. Retrieved from https://micobo.medium.com/mica-and-ewpg-overview-and-summary-of-the-latest-regulatory-developments-for-digital-assets-in-c28b0ad24c63. Last accessed 14.05.2021.
Deutsche Bundestag. Gesetzentwurf der Bundesregierung. Drucksache 19/26925. Retrieved from https://www.bundestag.de/dokumente/textarchiv/2021/kw09-de-elektronische-wertpapiere-824852. Last accessed 14.05.2021.
Linklaters. New Electronic Securities Regulation Draft in Germany. August 2020. Retrieved from https://www.linklaters.com/en/insights/publications/2020/august/draft-electronic-securities-act-paves-the-way-for-dlt-based-securities-in-germany. Last accessed 14.05.2021.