Only recently, the German Federal Ministry of Finance, together with the Federal Ministry of Justice and Consumer Protection, published a key issues paper on the regulatory treatment of Digital Securities and Security Tokens while ensuring investor protection.
The Blockchain Bundesverband Germany has not refused the chance to comment on this. The most important points are summarized below:
- German law should generally be opened up to digital securities;
- The regulation of digital securities should be technology-neutral;
- The opening will initially be limited to digital bonds;
- The regulation of digital shares may take place at a later date;
- Possible classification of digital securities as object by virtue of legal fiction – this would justify property protection etc. or as sui generis – then the creation of own property protection provisions etc. is necessary;
- In any case, independent rules on the acquisition and transfer of digital securities and protection of good faith should be provided for.
Statement: Considering, that distributed ledger technology (Blockchain Technology) is still so young, the Blockchain Bundesverband Germany advocates the intended technology-neutral regulation.
Dematerialization of the national concept of securities is a long overdue step.
Limitation to digital bonds is understandable. In light of existing proposals in literature and role models abroad, the issuance of digital shares and fund units in form of digital securities should also be sought in any case.
- The current system of securities certificates will not be abolished; an additional option will be created to create digital securities by registering them;
- The documentation function and core elements of civil law (legitimation, transfer function and liberation effect) of securities are to be ensured by registration in an digital register;
- Registration should be carried out by a (central) state or a body under state supervision;
- Digital securities registers shall contain the terms and conditions of the bonds; they shall be available free of charge on the internet;
- Provided that the authenticity and integrity of the securities is ensured, it should also be possible for the issuer itself or a third party appointed by the issuer to operate the register, provided that no entry with a central securities depository is required.
Statement: Encourage the introduction of digital registers.
Overall, the Blockchain Bundesverband Deutschland clearly pleads for enabling digital registers also on public blockchains after evaluating the strengths and weaknesses of the various systems.
Requirements should be laid down in order to be classified as a qualified register and then to be registered in a list maintained by a public body.
Safe custody of digital securities
- Non-physical items, including digital securities may be held in safe custody: Application of the rules on the safe custody of securities.
- The recording of digital securities in a securities register does not constitute a safekeeping of these securities, but only that the registry administrator takes over the documentation function.
Investor protection provisions against the risk of manipulation when the register is operated by the issuer itself. There are some suggestions for this:
- Securities may only be acquired by institutional/qualified investors;
- The issuer must be under supervision in order for private investors to be able to invest;
- Private investors must buy through intermediaries – not directly from the issuer;
- Private investors may buy directly from the issuer – issuers have to meet certain documentation and information requirements.
Statement: From the point of view of the Blockchain Bundesverband Germany, recourse to conventional regulatory instruments does not appear to be appropriate. Form of securitization in principle has no influence on the financial risk, a blanket exclusion of private investors from participation in digital issues therefore appears disproportionate and not suitable to strengthen investor protection. From the Blockchain Bundesverband Germany perspective, honest investor protection can be better achieved through neutral advice or by strengthening self-protection by promoting one’s own ability to understand and assess the risks of investments.
The Blockchain Bundesverband Germany is basically in favour to allow private investors to purchase digital securities directly from the issuer.
Statement BMCP: Black Manta Capital Partners are glad that the development, initiated by the German Federal Ministry of Finance, together with the Federal Ministry of Justice and Consumer Protection is going in the right direction. Investor protection is, of course, also our top priority and must be placed above any profit mongering of the issuer. The investor must always be provided with all the necessary information, but excluding them from the market is not a solution for us.
Question: What do you think about that? Should investors be taken their free will to invest where they want?
Applicability of further capital market regulations
WpHG, WpPG, Market Abuse Regulation (EU No. 596/2014)
Statement: further need for synchronization with KWG, KAGB, SFTR, CSDR
Photo Credit: Federal Ministry of Finance