Unlike in the USA, crypto securities are legally defined and regulated in Germany. But the long-awaited boom did not materialize. Perhaps that's because the law serves old wine under a new label.
For the crypto industry in the USA, the topic of "securities" is currently dominant. When is a token a security and when is it not? And how do you have to deal with these securities? For many companies, these questions begin to tremble .
Coinbase, for example , complained that the lack of legal liability is preventing the emergence of a serious market for crypto-securities, i.e. crypto-securities.
First of all, let's take a look at the law in question: It's the law on electronic securities (eWpG) . Since June 2021, this has regulated the electronic representation of securities.
crypto securities securities, registers, register keepers
According to the eWpG, a "crypto security" is "an electronic security that is entered in a crypto security register".
An electronic security is characterized by the fact that it is not issued in paper form, but is entered in a central office, the register: "Instead of issuing a securities certificate, the issuer [effects] an entry in an electronic securities register".
This registry is administered by a licensed registry administrator. He has several duties: He must keep the register in such a way "that the confidentiality, integrity and authenticity of the data are guaranteed." He must ensure that entries and transfers only take place in accordance with the legal situation. The data must remain confidential, but must be visible to anyone who "shows a legitimate interest."
Such a “crypto securities registrar” is inherently subject to the same duties as an ordinary securities registrar and must document the same information, including identification of the security, issue size, par amount, issuer and holder.
However, the crypto assets register is subject to special requirements: It must be “kept on a forgery-proof recording system in which data is logged in chronological order and stored protected against unauthorized deletion and subsequent changes.”
But if you are now thinking of a blockchain, you should read on: Because the registrar must be able to change entries. To do this, certain legal conditions must be met, such as an instruction from the owner, an executor or a court, and so on.
When a law rules out the perfect solution
What does all this mean? At its core, the eWpG tries to implement all the properties of the classic security as an electronic security, and the concept of the crypto security tries to somehow treat the electronic security as a crypto security.
The key difference seems to be that the requirements for a register are slightly different. The law is based on the properties of blockchains, but defines additional duties and responsibilities that contradict an open blockchain.
If a blockchain can be pitched for a cryptocurrency registry, then key benefits are lost: pseudonymity — or at least some degree of privacy — interoperability, speed, transparency, authenticity, anti-counterfeiting, and so on.
An ideal crypto security registry is a smart contract that issues a token. It is confidential but transparent; the information it maintains is authenticated, error-free, undeletable; and they can only be changed under strictly defined conditions. A smart contract would be perfectly regulated because it CANNOT violate the rules at all. It is every legislator's dream, for the law immediately contains enforcement.
However, the structure of the law should make it impossible to designate a smart contract as the registrar. Because the German Banking Act (KWG) calls the crypto securities register management a financial service that requires a permit. The conditions for permission specified by BaFin are unlikely to be achievable by a smart contract.
Fin Law puts it this way: “First of all, crypto securities registrars must have a regulatory initial capital of at least EUR 150,000. You also need a reliable and professionally qualified manager, reliable owners and, in particular, proper business organization.”
After all that, you should be able to guess what the outcome of the whole exercise will be.
Works - Doesn't work
There is already an immensely broad, productive and vital market for "crypto assets". These, whether a security or not, enjoy a technological basis with smart contracts, ERC tokens, NFTs, DeFis and DAOs that may not be perfect, but definitely "works".
"Works" means that the tokens operate according to the rules of the smart contract and that there is a broad, vital, innovative, bubbling market.
Cryptocurrencies don't work, in that sense. They have none of the transparency, automation, and vitality of crypto tokens. BaFin maintains a list of crypto securities that it has approved. This is 11 securities from 9 companies managed by 8 cryptocurrency securities registrars as of the end of June.
The only registrar that already manages securities from two companies is GfK, Gesellschaft für Kryptoregisterführung. It issued the first crypto security in late January 2022; the website is still not really there. That doesn't seem really transparent and trustworthy.
Just the beginning – or already the end?
Of course this is just the beginning. One might note that with its passage to crypto securities, the eWpG has only just begun to merge traditional securities and crypto. It was not until mid-June that the regulation on crypto fund shares supplemented the crypto security.
This regulation, lawyer Annabella Rau explains on LinkedIn , "enables investment fund providers to issue electronic #share certificates in the future by entering them in a crypto securities register as crypto fund shares."
However, the lawyer also points out: “The number of potential crypto security register keepers should currently be somewhat limited; a run comparable to the BaFin license for crypto custodians has not yet been observed for the crypto securities register management.”
That brings us back to the fact that the crypto security does not really “work”. And if you look at the legal framework, there is little chance that this will change in the future.
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