Specialist lawyer Lutz Auffenberg and his law firm Fin Law have specialized in the field of fintech and innovative technologies. In particular, blockchain technology and its regulation are at the center of his work. In his guest post he is devoted to the upcoming crypto fund share regulation.
This article is first on the Fin Law Blog appeared.
The law on the introduction of electronic securities (eWPG), which came into force in June 2021, initially only refers to unsecuritized bearer bonds and is intended in this form as a kind of test balloon for the possible introduction of other certificate-free financial instruments such as electronic shares to serve. With the Introductory Act to the eWPG, however, the legislature has also changed a number of other provisions of securities and capital market law in other codes. For example, he has provided for the possibility of introducing crypto fund shares in the Capital Investment Code (KAGB). The legislature left the concrete legal design of such crypto fund shares to the Federal Ministries of Finance (BMF) and Justice (BMJ), to which it granted the authority to issue regulations in this regard. The two federal ministries finally made use of this last week and presented a draft for a crypto fund share regulation (KryptoFAV) for public consultation.
The published draft for the KryptoFAV is relatively short with only four paragraphs. According to the proposed regulation, crypto fund shares should be electronic share certificates that are entered in a crypto securities register. In addition to the legal definition of crypto fund shares, it regulates the corresponding applicability of the provisions of the eWPG on crypto securities and crypto securities registers to crypto fund shares. The draft provides for a special feature for the custodians, who, unlike in the case of electronic securities, must also be the registrar of the issuing investment fund in the case of custody of crypto fund shares so that they can meet their statutory control and information obligations towards the fund’s investors. With the exception of this one special feature, crypto fund shares will hardly differ in their legal form from crypto securities according to the eWPG. The regulatory provisions of the Capital Investment Code (KAGB) will apply to them as well as to classically structured fund units.
The KryptoFAV is intended to offer market participants the opportunity to issue shares in investment funds in tokenized form, which, like securitized share certificates, can be acquired by investors in good faith and unencumbered. Crypto fund shares will then be just as suitable as classically securitized fund shares for organized secondary market trading. Nevertheless, the choice of the design of units in investment funds as crypto fund units is optional for the capital management companies. It is also still possible to tokenize fund units in other ways than by entering them in a crypto securities register, taking into account the requirements of the KryptoFAV, by establishing a reliable legal link between the units and the tokens they represent. The civil law advantages of the crypto fund shares with regard to the possibility of a bona fide and unencumbered acquisition are then not given. However, entry in a crypto securities register operated by a company licensed as both a crypto securities registry operator and a custodian is not required.