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 is the focus of his work. In his guest article he addresses the question of how crypto securities differ from security tokens.
This article is first on the Fin Law Blog published.
In Germany, the Electronic Securities Act (eWPG) came into force on June 10, 2021. Since then, companies have had the option of issuing bonds as electronic securities. A special case of electronic securities are crypto securities, which are electronic securities that are entered in a crypto securities register. The eWPG itself does not stipulate that crypto securities must have any relation to cryptographic technologies. It merely stipulates that crypto securities registers must be kept on a forgery-proof recording system in which the data is logged in the time sequence and saved against unauthorized deletion and subsequent changes. The legislature made a conscious decision in favor of technology-neutral regulation in order to record blockchain and other distributed ledger technologies as the technical basis for crypto securities registers, but not to exclude future technologies.
Even before the eWPG came into force, companies had the option of issuing securities in tokenized form as so-called security tokens. In the case of tokenized bonds, the rights and obligations for the issuer and the investor are linked to the token via the underlying bond conditions. When the tokens are transferred, the rights associated with the token are also assigned to the new token holder. According to the construction chosen by the legislator that crypto securities can only be available if they are entered in a crypto securities register, security tokens without such an entry will not represent crypto securities and will remain a legal alternative. Token issuers can therefore choose between issuing a crypto security or a classic security token. But what are the advantages and disadvantages of the two variants?
First of all, crypto securities must be entered in crypto securities registers. The registration requirement is associated with not inconsiderable additional work for issuers. It is true that the eWPG gives issuers the option of entering all the information required by law in the crypto securities register themselves, as the registrar. In practice, however, it will be easier and therefore more frequent to commission a specialized service provider, which of course involves additional costs. A clear advantage of crypto securities is the protection of good faith granted by the eWPG. If an investor acquires a crypto security from an unauthorized seller, the investor can still become the new legal owner of the crypro security as long as he was not aware of the lack of authorization of the seller. This property enables reliable transmission and thus, in the future, exchange trading in crypto securities. The protection of good faith can therefore be clearly classified as an advantage of crypto securities.
One advantage of classic security tokens is the possibility of safekeeping by crypto custodian service providers. In contrast, an approved custodian bank is required as the depository for the safekeeping of crypto-securities that are considered securities within the meaning of the Depot Act. In view of the rather manageable regulatory requirements for crypto custodians compared to custodian banks, classic security tokens can therefore in all probability be stored more cheaply than crypto securities.