The Electronic Securities Act (eWpG) is a German law that came into effect on June 2021, aiming to modernize the issuance and trading of securities by allowing the possibility to issue purely electronic securities without a physical certificate, and creating the so-called tokenized securities.
By providing a legal framework from which companies can issue electronic securities using blockchain technology, it opens up a whole new world of investment opportunities for both issuers and investors, who can now issue and trade assets that were previously illiquid or inaccessible to certain investors.
Only the ability to now issue such assets as full-fledged securities really makes them liquid, as bona fide ownership and senior bonds become possible.
The eWpG recognizes electronic securities as legally protected rights that can be electronically represented and transferred. Under the current eWpG, the securities that can be tokenized are:
On April 12, 2023, the German Federal Ministry of Finance (BMF) and the German Federal Ministry of Justice (BMJ) published their draft bill for an "Act on the Financing of future-proof Investments" (Zukunftsfinanzierungsgesetz). It will soon be possible to tokenize:
It lays the foundation for the issuance of digital assets but is designed to be flexible enough to allow future additions and changes to be incorporated in a way that is in line with the interests of the market.
In contrast to the prior legal situation, it enables the issuance of digital securities without a physical certificate. This can be seen as progress in the digitalization and modernization of the German capital market.
The law in its current form is a sensible and, both innovative and bold basis for the issuance of electronic securities, which should be additionally refined with the insights gained from the further development of trading in tokenized securities.
New investment opportunities into previously hardly investable assets.
Increased value proposition with additional functions such as lending, voting and collateral.
24/7 trading basis that provide greater flexibility in managing investments.
Peer-to-peer marketplaces & simplified price discovery for illiquid assets.
Trade is executed by Smart Contracts and all transactions are auditable on-chain.
Trading and Settlement occur simultaneously, without any intermediary agents or arbitrary delays.
Tokens can be transferred immediately after order matching, thereby reducing counterparty risk.
Low transaction on-chain costs for trading and settlement via the trading platform.
The central element of electronic securities is their entry into a register, which can only be operated by a BaFin-licensed financial institute, like NYALA’s Smart Registry. The eWpG allows registration in both centralized and decentralized registers (so-called crypto securities registers).
Under the eWpG, electronic securities can be registered in a Crypto Securities Register, operated on the basis of Distributed Ledger Technology (DLT).
Electronic securities that are issued through entry in a crypto securities register are referred to as crypto securities and need to be mantained on a tamper-proof system of record and protected against unauthorised deletion and modification.
Crypto securities registration is a financial service supervised by BaFin (Federal Financial Supervisory Authority), and it is subject to requirements regarding business organisation and conduct.
Alternatively, securities can be 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 shown in electronic book entries to securities accounts.
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.
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