Digital Securities About to Go Mainstream with Germany’s New Draft Law
Digitization has led to significant changes in many areas, not the least in money and financial markets.
The financial markets and its participants are at a point where they cannot ignore technological developments bound to disrupt the industry. Recently, there has been a rush towards developing and implementing blockchain-based protocols to power financial products. The digitization wave is hitting the financial system and regulators are paying attention.
More specifically, Germany is moving forward with its plan to modernize its securities law with the introduction of provisions catering to blockchain-based assets.
New Draft on Legal Framework for Tokenized Securities
The German Finance Ministry published a statement wherein the institution will be working on a draft law with the primary goal of creating a legal framework for digital securities, including the issuance of tokenized assets.
The plan is to create legally secure regulatory frameworks and supervisory structures to protect and improve the integrity, transparency, and functionality of the financial markets.
The implementation of the proposed plan will see blockchain assets issued by German firms fall under the same regulatory provisions as the country’s stock market.
The intent from Germany’s institutions is clear: embrace and leverage blockchain technology.
Germany is the most influential actor in the European Union and naturally, it wants to play a significant role in the new paradigm of digital securities and the blooming decentralized finance sector.
A legal framework would enable new technologies to be used on a large scale. Already at the start of 2020, Germany had allowed local banks to sell cryptocurrencies to their customers. With huge steps forward, German legislators aim to increase the attractiveness of their financial sector allowing companies to issue and manage digital assets.
The milestone of the draft law is the change in paper document requirement for investment instruments like government bonds and stocks. The updated law would create a framework expanding this requirement to cover digital signatures for tokenized assets.
The draft is based off of existing frameworks in other countries that have already made progress in the regulatory space. As such, the proposal is to replace the currently mandatory physical security certificate for bearer bonds with an entry in a securities register.
According to the draft for electronic bonds, the security certificate document is to be replaced by an entry in a securities register. Naturally, a securities register can be kept in a digital format either privately and centralized or distributed with cryptography-based technologies like DLT or decentralized blockchains.
This makes it clear that the new electronic securities law considers assets issued via both public and private blockchains. This change could make regulated security token offerings (STOs) as the preferred method of issuing securities within the country.
Local companies looking to offer tokenized assets would still have to fulfill existing capital requirement laws.
Opportunities for Regulated Security Token Offerings on Public Blockchains
The legislator hints that the issuance of digital securities is not restricted to private systems. Instead, it would also be possible to be done on public blockchains. This would create the potential for securities, according to German law, to be issued on Ethereum, currently the most popular platform to issue digital assets on.
Even more importantly – if the regulations are established, the procedure would be eligible for digitizing stocks or investment funds.
In the press release expanding on the regulatory decision, the Finance Ministry’s statement reads:
“This proposed regulation also creates regulatory clarity: The Federal Financial Supervisory Authority will monitor issuance and the maintenance of decentralized registers as new financial services under the eWpG , the KWG and the central securities depository regulation.”
The monitoring of securities registers will be undergone by the German Federal Agency for Financial Market Supervision (BaFin). According to the draft, BaFin will grant licenses to companies looking to issue or convert traditional stocks into digital assets.
The newly drafted law is not specifically targeted towards blockchain-based assets, but it poses further development opportunities for the adoption of the novel technology in Germany.
As the press release states, the drafted proposal law is part of the government’s long-term pro-blockchain strategy.
After approving the sale of cryptocurrencies, 40 banks had reportedly applied for crypto custody licenses by February 2020. Earlier this year, BaFin also officially classified cryptocurrencies as financial instruments, following regulatory recommendations from the Financial Action Task Force (FATF).
Germany is taking big leaps to enable the adoption of blockchain technology in the country. Boerse Stuttgart, the country’s second-largest stock exchange is also active in the crypto market with a Bitcoin exchange-traded product (ETP) being launched earlier in the year.