I. Initial situation

In its blockchain strategy adopted in September 2019, the German government had already announced its intention to open up German law to electronic securities in the future. According to the current legal situation, German securities always require embodiment in a physical document, either as an individual certificate or – as is almost exclusively the case in practice – as a global certificate (Globalurkunde) deposited with a collective depository. Crypto-based financing mechanisms based on the so-called Distributed-Ledger-Technology (DLT), which include the blockchain technology, have meanwhile also found their way into the financing practice of companies. So-called investment tokens – also known as security, asset or equity tokens – represent certain membership or property rights of the token holder (instructively Kleinert/Mayer in: EuZW magazine 2019, 857 (858)). Such crypto-based financing mechanisms – more precisely the tokens “embodying” the creditors’ rights in Blockchain – are, however, not “things” (Sachen) within the meaning of civil law and thus not compatible with a financial system that is based on the idea of the physical embodiment of a security.
On 11 August 2020, the Federal Ministry of Justice and Consumer Protection and the Federal Ministry of Finance jointly published a ministers’ bill for a law on the introduction of electronic securities. The bill focuses on creating a new law on electronic securities (eWpG-E).

II. Restriction to electronic bearer bonds

The draft bill initially limits the possibility of issuing and trading electronic securities to bonds payable to the bearer. The introduction of electronic shares and electronic investment fund shares is envisaged, but will occur at a later stage. Since the reasoning of the draft bill refers to the fact that the draft is structured in such a way that a later opening for further securities is easily possible from a legislative point of view, the significance of the draft for the development of securities law goes far beyond the area of bonds payable to the bearer which is now to be regulated first.

III. Technologically neutral option to the previous issuing and custody practice

In its scope of application, the eWpG-E is intended to create an additional option to the existing practice of issuing, holding and trading securities. A mandatory issue of electronic securities is not envisaged.
The eWpG-E is basically designed to be technologically neutral. It does not limit the creation of electronic securities to a specific type of technology, but describes the electronic security as a security where the registration in an electronic securities register replaces the issuance of a securities certificate as a scriptural act.
In order to ensure a high degree of synchronization with securities certificates, the draft equates the electronic security by virtue of legal fiction with a “thing” within the meaning of the BGB. This is intended to ensure that special legal regulations only become necessary where this is unavoidable due to the replacement of securities certificates by registrations in an electronic register.
Crypto-securities, i.e. securities entered in a register that operates on the basis of crypto-technology (in particular DLT technology), are treated by the eWpG-E as a sub-form of the electronic security, but supplemented by certain special regulations that are necessary due to the decentralized nature of crypto-technology.

IV. Electronic securities register and crypto-securities register

Electronic securities should – with the exception of crypto-securities – be registered in a centralized securities register. Only a central securities depository (Zentralverwahrer) approved in accordance with the European Central Securities Depositories Regulation may be the registry administrator. Against this background, it seems obvious that Clearstream Banking AG, a subsidiary of Deutsche Börse AG currently acting as the central depository for securities certificates, will also assume the function of the registry administrator. In the event of data loss or unauthorized modification of data, the eWpG-E provides for liability for damages on the part of the registry administrator. According to the draft bill, the electronic securities register is to replace the global certificates currently hold in collective custody (sammelverwahrte Globalurkunden). Therefore, registration in the centralized register of electronic securities should also only be possible by way of collective registration (Sammeleintragung).
Crypto-securities, on the other hand, shall be registered in so-called crypto-securities registers. In accordance with the decentralized functionality of the underlying technologies, in particular the blockchain technology, crypto securities registers are to exist decentrally and thus enable an uncomplicated and cost-effective individual transfer of securities without the involvement of intermediaries. For crypto-securities, the eWpG-E therefore provides not only for collective but also for individual registration (Einzeleintragung).

V. Disposals of electronic securities

The eWpG-E does not contain a separate provision on the disposal of electronic securities under collective registration. This is not necessary, as the eWpG-E stipulates that electronic securities in collective custody are considered collective securities portfolios (Wertpapiersammelbestand) and the beneficiaries of the registered rights are therefore considered co-owners by fractions (Miteigentümer nach Bruchteilen) of the registered electronic securities. As a result, the transfer of electronic securities held in collective custody is also conducted in accordance with the known rules of property law governing collective securities portfolios.
The eWpG-E devotes a separate section to the disposal of electronic securities under individual registration. Any disposal of an electronic security requires registration in the electronic securities register to be effective. A transfer of individually registered electronic securities thus requires not only an agreement between the person entitled to the security and the purchaser, but also the registration of the transfer in the electronic register based on the instruction of the person entitled thereto. To protect legal transactions, the eWpG-E also permits the acquisition of individually registered electronic securities in good faith. The corresponding good faith provision is extremely comprehensive. Thus, in addition to the correctness of the registration as such, good faith may also refer to the authorization of a representative, the power of disposal of the seller and even the legal capacity of the seller or representative.

VI. Replacement of securities certificates by electronic securities

Existing securities embodied in certificates should in principle be able to be replaced by electronic securities with the same content without the consent of the person entitled to the security, unless such replacement has been excluded or made subject to approval in the terms of issue. Only for a replacement by decentralized managed crypto-securities the consent of the person entitled to the security should always be required. This approach is consistent, as the eWpG-E is – in the area outside of crypto-securities – largely based on the legal framework applicable to securities certificates, with the proviso that the issue of a security certificate is replaced by a registration in the centralized electronic securities register.

VII. Conclusion

The draft bill has great potential to strengthen the attractiveness of Germany as a financial market. The Federal Government will hopefully now use the momentum created by the draft bill to create the legal basis for the digitization of securities in a timely manner.