On 10 June 2021, a law entered into force with a two-fold upgrading effect: the German Electronic Securities Act (Gesetz zur Einführung elektronischer Wertpapiere – eWpG). This law is fundamentally reforming German securities legislation and the associated supervisory legislation. By establishing electronic securities, German lawmakers are implementing one of the main points of the Federal Government’s block chain strategy and the joint white paper on electronic securities published by the Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz – BMJV) and the Federal Ministry of Finance (Bundesministerium der Finanzen – BMF). Germany is thus following the example of other European states, moving towards a dematerialisation of securities law.

Scope

In addition to introducing electronic securities, the eWpG as an omnibus act has changed regulatory frameworks such as the German Stock Exchange Admission Regulation (Börsenzulassungsverordnung – BörsZulV), the German Securities Prospectus Act (Wertpapierprospektgesetz – WpPG), the German Safe Custody Act (Depotgesetz – DepotG), the German Bond Act (Schuldverschreibungsgesetz – SchVG), the German Banking Act (Kreditwesengesetz – KWG), the German Pfandbrief Act (Pfandbriefgesetz – PfandBG) and the German Investment Code (Kapitalanlagegesetzbuch – KAGB).

The eWpG now makes it possible to issue bearer bonds, mortgage bonds (Pfandbriefe) and certain fund units in purely electronic format. While the eWpG does not address registered bonds, registered securities or order bonds, generally any bearer-denominated commitment can be the subject of an electronic security. This is the case, for example, with conventional bonds, convertible bonds and bonds with warrants, profit-participation certificates, warrants, investment certificates and structured bonds.

Under the eWpG, issuers have the right to decide whether they wish to issue securities in the form of a certificate or by electronic means. Under certain conditions, it is also possible to digitise existing issues later on. It is likewise possible to revert digital bonds to securitised certificate form – but only if the beneficiaries give their consent or if the terms of the particular issue also permit the reversion without the beneficiaries’ consent.

In addition, towards the end of the legislative process, the lawmakers adopted an option to enable the introduction of crypto funds by Regulation, i.e. unit certificates that are issued via a crypto securities register. Such a regulation would be issued by the BMJV and the BMF. Subject to the clarification of various preliminary legal questions, it is likely that the scope of the eWpG will be expanded later on to include other investment classes, such as electronic shares.

Legal situation

According to the previous legal position, financial instruments deemed securities under civil law had to be securitised in a physical certificate. The existence of the certificate enables a transfer according to principles of property law and compliance with provisions of civil law ensuring the protection of good faith (Gutglaubensschutz). But the protection of transactions (Verkehrsschutz) and the legal certainty of purchases must also be ensured in the case of electronic securities. This is why it is necessary to replace the paper certificate adequately – with an entry in an electronic register. The eWpG provides for two types of electronic securities registers: central securities registers and decentralised crypto securities registers, which are typically operated on the basis of distributed ledger technology (DLT).

Central securities register

Central register securities are entered in a central securities register. The physical global note used in the past is now being replaced by the entry of the issue in a database. Transactions are not shown in the global note, for example, or in the electronic register, but in electronic book entries to securities accounts. Since the two forms of issuance involve comparable settlement structures, not much will actually change in securities trading practices. Under the eWpG, electronic securities are classified as property (Sachen) within the meaning of section 90 of the German Civil Code (Bürgerliches Gesetzbuch – BGB). Thus the transfer of electronic securities will generally continue to be governed by the provisions of the BGB regarding property.

Central registers may be kept by a central depository for securities (Wertpapiersammelbank) (also referred to as a central securities depository – Zentralverwahrer) or, if expressly authorised by the issuer, by a custodian (Verwahrer) (also called a custodian bank – Depotbank). If central register securities are entered in a central register kept by a central depository for securities under the name of such central depository, the securities automatically become book entry securities of that depository under section 12 (3) of the eWpG. This means that the requirements of Article 3 of the European Central Securities Depository Regulation (CSDR) for exchange trading are met. Central register securities that are not book entry securities of a central securities depository are excluded from trading on a trading venue within the meaning of the Financial Instruments Directive (MiFID). Regulated markets, multilateral trading facilities (MTFs) and organised trading facilities (OTFs) thus cannot serve as trading venues.

Crypto securities register

Under the eWpG, it is also possible to issue bearer bonds as crypto securities that are entered in a crypto securities register. Legislators did not tie themselves down to one certain (crypto) technology but aimed to make room for market innovations. At the same time, the provisions of the eWpG are clearly aligned with fintech industry initiatives to issue securities by means of a block chain or distributed ledger technology. These concepts promise to create tamper-proof, decentralised databases that are also designed to document securities transactions. The technology would thus take over tasks that have otherwise been the responsibility of central securities depositories or custodian banks. For the time being, this is likely to have practical relevance for crypto securities only in the cases where the issuer does not seek the tradability of the financial instrument on a stock exchange. A connection to the book entry securities concept of a central securities depository is possible only under the conditions laid down in section 12 (3) of the eWpG; it is not feasible for crypto securities. Thus, tradability on a stock exchange is currently excluded due to opposing requirements of European law (Article 3 of the CSDR).

Crypto securities registry as a financial service

To protect investors and to ensure that market relations are smooth and transparent, as is necessary for market integrity, the eWpG requires the task of keeping a crypto securities register to be supervised by BaFin. For this purpose, lawmakers have defined crypto securities registration as a financial service within the meaning of the KWG. However, in contrast to a central register, they have not reserved it only for central depositories for securities or depositories.

The tasks of managing and updating the register may be automated and algorithm-based. However, the crypto securities register must also involve defining a suitable addressee of the legal requirements – a party that can be dealt with as a legal entity and is thus, in particular, subject to legal obligations. The legal requirements would otherwise miss the mark. Under the eWpG, the addressee of these legal requirements is consistently referred to as the registrar entity. In the case of the crypto securities register, this is the one whom the issuer designates as the registrar entity. The issuer is thus responsible for ensuring clarity in this respect. In cases of doubt, the issuer itself is deemed the registrar entity; it is thus subject to the same supervisory requirements as an external service provider.

BaFin’s tasks

The tasks assigned to BaFin as the supervisory authority are defined in section 11 of the eWpG. According to these provisions, it is first of all responsible for supervising the registrar entities maintaining central registers or crypto securities registers. Secondly, BaFin will be publishing on its website www.bafin.de a public list of the crypto securities as required under section 20 (3) of the eWpG. In future, however, the list will only include crypto securities whose entry or amendment in a crypto securities register has been published by an issuer in the Federal Gazette in accordance with section 20 (1) of the eWpG and regarding which the issuer has informed BaFin of such publication. The maintenance of the list serves only the purposes of information and does not give rise to any legal effects. There is also no material examination to be conducted.

It can be expected that the list, which is to be kept online in accordance with section 20 (3) of the eWpG will be expanded over time. As of the law’s entry into force, crypto securities registrars are able to apply for the necessary authorisation. Once the authorisation has been granted, the registrar entity can set up a crypto securities register that can be used to register crypto securities. From a legal perspective, an electronic security is created when it is entered into the register. Prior to this step, the security does not yet legally exist. It is conceivable that an electronic interface to BaFin will be set up for issuers later on, once the volume of notifications reaches a certain level. This would be a means by which issuers could submit the information required under section 20 (3) of the eWpG to BaFin: issuer’s name, registrar entity, date on which crypto securities are entered in the crypto securities register and changes made to the crypto security.

Impact on investor protection

The eWpG and the amendments to other regulatory frameworks brought about by the eWpG contain various provisions designed to protect investors; these will be described in more detail in forthcoming expert articles on the BaFin website.
For example, the fact that electronic securities are generally treated in the same way as property (section 2 (3) of the eWpG) means comprehensive protection of ownership, particularly in the case of insolvency and compulsory enforcement. This concept is extended by special rules for disposals including the transfer of title and regarding purchases, in accordance with the principle of good faith, by third parties (section 24 et seq. of the eWpG) to ensure that the special features of electronic securities are taken into account in the case of individual entries (Einzeleintragung).

Registrar entities must keep an electronic securities register in such a way that ensures the confidentiality, integrity and authenticity of the data in accordance with section 7 (1) of the eWpG. They must also ensure that the electronic securities register accurately reflects the current legal situation at all times and that entries in registers and transfers between registers are carried out properly and in full. In cases of contravention, section 7 (2) of the eWpG provides for the registrar entity to be liable for damages towards the entitled party if the registrar entity is unable to exculpate itself. The registrar entity may also be the issuer itself, according to section 16 (2) of the eWpG, if the issuer has taken on the registry services itself or has set up a situation that is unclear.

Before an electronic security is registered, the terms of the issue must be made available to the public in the form of a stable electronic document, accessible through the registrar entity (section 5 of the eWpG). This will also allow potential purchasers of an electronic security to gather information about its features.

In the case of crypto securities registered in individual entries, the holder is entitled to have the registrar entity provide an excerpt from the register if the holder requires the excerpt in order to exercise their rights. Moreover, consumers must be provided with a register excerpt after every entry, after every change or at yearly intervals, in accordance with section 19 of the eWpG.

Now that a new provision has been added to the WpPG – section 4 (3) (a) – the securities information sheet may have up to four A4 pages. In addition, the information sheet must include information regarding the technical features of the security and the registrar entity and regarding the possibilities for viewing the register.