Everything you need to know about the new Electronic Securities Act (eWpG)
The most important information on the eWpG summarized for you.
- Germany before the eWpG
- eWpG evolution since 2019
- The Electronic Securities Act at a Glance
- Your non-binding consultation on the eWpG
With the eWpG to the capital market 2.0
In Germany, shareholders and unitholders are entitled to global securitization. Since physical global certificates are typically immobilized in collective custody in a central securities depository system, this costly process has always involved multiple intermediaries and thus no longer met the requirements of digital finance. The new “Gesetz für elektronische Wertpapiere” now aims to enable the trading of electronic securities and crypto securities, ultimately leading to a faster and more cost-efficient capital market. Thus, Germany manages to maintain and strengthen the attractiveness of the financial location.
This makes Germany one of the stragglers in Europe, as most European countries have been offering a dematerialized securities system as an additional option for some time now. For example:
- France: Have completely dematerialized securities since 1984 (but still with the need for a central securities depository)
- United Kingdom: Have stored their securities in an electronic database (CREST) since 1996
- Switzerland: Have allowed electronic “book effects” since 2009
- Luxembourg: Passed 2019 blockchain framework law for digital securities
The path to the current legislation
The latest milestones
the detachment of the document requirement is already a topic since 2019
The Electronic Securities Act (eWpG) at a Glance
The central component of the new law are electronic securities. Establishing these will enable the implementation of the central building blocks of the German government’s blockchain strategy as well as the joint BMF and BMJV cornerstone paper on electronic securities. The following section explains everything you need to know about the law and is divided into the following subsections:
Everything important at a glance
We are very happy that you are interested in the new eWpG. Here you find a comprehensive One-Pager summarizing all the most important information on the new electronic securities act.
The most important definitions in under 100 words
Electronic central registry securities
Electronic central registry securities are securities that are not evidenced by a certificate in accordance with the definition of securities in German legal norms, but only in digital form (section 4 (2) eWpG). The term “central securities registry security” covers various classes of electronic securities: (i) central register securities held in collective custody at a central securities depository, (ii) central registry securities held in collective custody at a custodian bank, and (iii) individually registered central registry securities. As the certificates are digitally represented in practice, trading takes place in a de facto dematerialized manner, thus replacing the physical global certificate used to date.
The subcategory of central registry securities is often also referred to as electronic securities, which can lead to misunderstandings. Here, therefore, differentiation is of great importance.
Central Electronic Securities Registry
(Zentrales Elektronisches Wertpapierregister)
Pursuant to section 4 (1) no. 1 eWpG-E, a “central registry” is the registry established and maintained pursuant to section 12 et seq. eWpG-E in which central registry securities are entered. This registry must be maintained by a company licensed as a central securities depository. In the law, this register is designed to be technology-neutral, so that theoretically other technologies can also be used in addition to blockchain technology.
The crypto security is an electronic security entered in a crypto securities registry and thus a sub-type of electronic securities (Section 4 (3) eWpG). It can be issued as a total issuance through a collective entry as well as by way of an individual entry. Three things are essential for the issuance: a designation as crypto security, a publication in the “Bundesanzeiger” and a notification to the supervisory authority.
The entry into a regulated registry and the new issuance process distinguish the new crypto securities from the “classic” tokenization as security tokens.
Often, the subcategory of crypto securities is also referred to as electronic securities, which can lead to misunderstandings. So here, too, differentiation is of great importance.
Crypto Securities Registry
Pursuant to Section 4 (1) no. 2 eWpG-E, a “crypto securities registry” is a registry in which electronic securities are entered. It is required that it be kept on a tamper-proof recording system in which data is logged in chronological order and stored in a manner protected against unauthorized deletion and subsequent modification. Although the law is intended to be technology-neutral, the term “crypto securities registry” probably refers to a distributed ledger that makes use of blockchain technology.
The register may be maintained by companies appropriately licensed for this purpose, which must ensure that certain minimum information is stored in the register for the crypto securities entered in the register. In particular, the entry of the essential content of the securities rights and a securities identification number, information about the issuer and the holder as well as any impediments to disposal, rights of third parties as well as the indication of whether individual or collective custody exists shall be required. In contrast to the electronic securities registry, the registry keeper can be determined by the issuer itself. Thus, this register can be maintained by anyone who has been commissioned by the issuer – as long as a regulatory permit as well as the supervision of BaFin is given.
The Law in Detail
Everything you need to know about the eWpG:
No, because tokenized debt securities are so-called securities sui generis, which are considered securities by BaFin only in the sense of prospectus law. If you look at the whole thing from a regulatory and civil law point of view, STOs do not meet these standards – Because civil law requires a securities certificate. However, the new legislation brings the electronic security one step closer to the classic paper security, as the same protection of ownership and circulation will apply in the future. It is important to note, however, that the new Electronic Securities Act does not create a new security of its own kind, but merely a new form of issuance that issuers can use as an option. The term “electronic security” therefore refers to securities issued electronically.
If you want to learn more about this topic, click here to get our free whitepaper on the topic: Comparing crypto securities and security tokens – How the new electronic securities act is changing the capital market.
No, these will still exist in parallel, at least temporarily. Since the eWpG does not require dematerialization, the issuance of physical global certificates will continue to be legally possible. But these can be replaced by central register securities at any time without the consent of the holders, unless this is otherwise excluded (the consent of the holders is required, however, if the holder and the beneficiary are the same person, partnership or custodian). Thus, physical global certificates will most likely gradually disappear.
Electronic securities are created immediately upon entry in the relevant electronic securities register. Upon registration, an electronic security then has the same legal effect as if it were evidenced by a physical document. In addition, it is deemed to be an object by virtue of a legal fiction within the meaning of section 90 of the German Civil Code.
These two points are clearly defined in the law. The holder is the person who is entered as the owner in the electronic securities register, while the beneficiary is the person who holds the right arising from a security.
Who can be entered as a holder in the electronic securities register depends on whether a collective entry or an individual entry is to be made:
In the case of a collective entry (electronic counterpart to securities evidenced by individual or collective certificates held in collective custody), a securities clearing and deposit bank (custodian) is the registered holder of electronic securities. In this case, therefore, the formal holders are not the same as holders of rights (material beneficiaries), unless the electronic securities are the own holdings of the collective securities depository or custodian bank registered as the holder. In order to carry out a collective registration with crypto securities nevertheless, there is the omnibus wallet solution. Here, there are several investors behind a token, which in turn are managed by a custodian. With the custodian, it is important to have a custodian license.
In the case of a single registration, any natural person or legal entity, or partnership with legal capacity, can be the holder of the electronic securities. Unlike in the case of a collective registration, the (formal) holder is regularly also the (material) beneficiary of the electronic security (personal union).
Yes, but it is worded “openly” in several respects. The government draft is clearly intended to preserve the current status quo, but also to create new opportunities. The aim is to be able to take advantage of the benefits of electronic securities without major conversion effort. To this end, the new regulations to be created should fit as smoothly as possible into existing civil and supervisory law. In particular, the use of electronic securities will not be “prescribed,” but rather offered as an option.
Those who do not make use of it can issue securities in the usual way using the established and well-functioning process. Those who do make use of it, however, can be assured of the continued validity of previous, highly developed legal principles through the applicability of property law, and thus have extensive legal certainty when entering the new terrain. Furthermore, the aim is to anticipate the market as little as possible, i.e. merely to create a certain framework in which the market can develop. This is done against the background that both the market and the technology are still in the development stage, despite all the progress that has been made.
The legislative materials also show that further digitization is at least being considered by the legislature. In the course of its deliberations on the eWpG, for example, the German government was expressly called upon to evaluate the new regulations after just three years and to make proposals for regulations on the introduction of electronic shares at the beginning of the next legislative period.
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(section 1 eWpG-E).
The electronic issuance of bearer bonds
Currently, the most important area of application for the new eWpG is for the electronic issuance of bearer bonds. This means that, in principle, all performance bonds issued to the bearer can be the subject of an electronic security. The issuance is effected by entry in an electronic register and thus replaces the traditional requirement for physical certification.
The following are covered: traditional bonds, convertible bonds and bonds with warrants, profit participation certificates and warrants, certificates of any kind, commercial paper, structured notes of any kind, including in particular credit-linked notes, and regulatory equity instruments to the extent that they are clothed in a bearer bond (including subordinated bonds of any kind).
Share certificates in investment funds
The Electronic Issuance of Electronic Fund Units in the Case of Investment Funds
Since the first draft law of December 16, 2020, the law has been expanded to include the possibility of issuing electronic fund units. This means that shares in investment funds can now also be issued as electronic share certificates. Here, too, it should be possible to replace the certificate with an entry in a central register – but not in a crypto securities register. Electronic bearer share certificates must therefore be entered in a central register. As described in more detail above, a central securities register is either a securities clearing and deposit bank or a custodian bank. Accordingly, shares in unlisted companies can only be made out to the bearer if the right to individual securitization is excluded and the global certificate is deposited with a securities clearing and deposit bank or an authorized central securities depository. In this way, the legislator keeps in particular the circle of possible registrars for electronic fund shares narrow. The Fund Location Act is therefore likely to have a significantly greater impact, whereby not only closed-end but also open-end special funds are now permitted to invest in crypto securities to a certain extent. At least in this way, “crypto funds” will be made possible to a certain extent.
How does the Issuance of Electronic Securities Work?
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