German legislators have taken a major step in ushering in a new era of digitalisation of the securities business in Germany. On 6 May 2021, the German Federal Parliament passed the Law on the Introduction of Electronic Securities (elektronisches Wertpapiergesetz, hereinafter referred to as eWpG). With the entry into force of this law, Germany has assumed a pioneering role on the European crypto and electronic securities market.
The draft bill of the eWpG, published on 16 December 2020 and which we reported on in our Client Alert of 23 December 2020, has been passed without any significant amendments.
In general terms, the bill modernises German securities law and associated supervisory legislation by as a first step, initially only for debt securities and, to a lesser extent, shares:
- Enabling electronic securities
- Introducing securities trading on the basis of blockchain technology
- Making this legally secure
Legal situation in Germany under the German Civil Code (Bürgerliches Gesetzbuch)
The German Civil Code requires financial instruments that qualify as securities (Wertpapiere) to be securitised in a physical document, except for securities issued by the federal state (Bund) under the Federal Securities Administration Act (Wertpapierverwaltungsgesetz) or the applicable securities administration acts at the state level.
Under the German Civil Code, the legal basis for electronic trading is a single, physical global certificate, which is held in possession for all investors by Clearstream Banking AG, a subsidiary of Deutsche Börse AG. The investors are co-owners of this global certificate on a fractional basis and – through their custodian banks affiliated with Clearstream Banking AG – co-possessors. This legal structure – a transfer in rem (dingliche Übereignung) as opposed to a pure acquisition of rights – enables a bona fide acquisition (gutgläubigen Erwerb), which in turn serves to protect potential acquirers in the market.
New provisions under the eWpG
Now, in order to ensure the marketability of electronic securities (section 2 eWpG) and crypto-securities (section 4, paragraph 2 eWpG), and thus the legally secure acquisition of these new forms of securities, an entry in a register (Wertpapierregister, section 4, paragraph 1 eWpG) must be made, as an equivalent to the physical certificate in the case of a ‘classic’ issue, if necessary on the basis of blockchain technology. The new provisions are intended to be technology-neutral, meaning that securities issued via blockchain are generally not to be favoured over other electronic forms of issuance.
The entity maintaining the electronic securities register must ensure that the register accurately reflects the existing legal situation at all times, and that entries and transfers are complete and accurate. In the event of a breach of this obligation, the entity shall be liable to pay damages to the party concerned.
For electronic securities, eWpG provides for registration in a central register (zentrales Register, section 12 eWpG). Central registers may be maintained by:
- a central securities depository; or
- a custodian, provided that the issuer expressly authorised them to do so in text form.
In any event, pursuant to section 2(3) eWpG, the legal structure of the acquisition remains a transfer in rem since electronic securities are also to be treated as ‘things’ (Sachen) within the meaning of section 90 of the German Civil Code This is remarkable, as German property law is basically only designed for ‘things’ in the sense of physical objects.
Bona fide acquisitions (gutgläubiger Erwerb) entered in the electronic securities register are also possible under section 26 eWpG. With respect to the acquirer, the contents of the register must be deemed complete and accurate, and the owner must be deemed to be the entitled person, unless the acquirer was aware of anything to the contrary at the time of registration or, as a result of gross negligence, was unaware of the ownership status. The registered holder of an electronic security is presumed to be the owner of that security (section 27 eWpG).
Crypto-securitiesInstead of a central register, as in the case of electronic securities, crypto-securities must be recorded in a decentralised manner in a crypto-securities register (Kryptowertpapierregister, section 16 eWpG). The entity responsible for maintaining the register is whoever is designated as such by the issuer vis-à-vis the holder. In the absence of such a designation, it is the issuer itself. A subsequent change of the designated entity is possible. Regulatory provisions
The eWpG assigns to BaFin (the German Federal Financial Supervisory Authority) supervision over the issuance and maintenance of central registers, as new financial services under eWpG, the German Banking Act (KWG) and the Central Securities Depository Regulation. BaFin’s supervision of the registers includes, in particular:
- A requirement that the entity maintaining the register notifies BaFin of its intention to establish a central register prior to the commencement of registration activities.
- A requirement that the entity reports to BaFin the registration of crypto-securities, and any changes to information required as part of the registration, immediately after publication in the Federal Gazette (Bundesanzeiger).
- Maintaining a public list on the internet of the crypto-securities notified to it.
- If the issuer fails to fulfill its obligation to comply with the requirements applicable to the crypto-securities register and fails to remedy the situation within a reasonable timeframe, requiring the issuer to transfer the crypto-securities to another electronic securities register.
- Granting consent to any issuer wishing to convert a crypto-security into another electronic security.
- BaFin’s prior written permission to keep a crypto-securities register – this is a new requirement for crypto-securities registers under the German Banking Act.
As the supervisory authority, BaFin is also the administrative authority responsible for sanctioning regulatory offences, which are punishable with a fine of up to €100,000.
The final bill of eWpG is available at www.bmjv.de.