Germany dares to take the next step

So far, only bonds can be issued electronically in Germany. For example, while Siemens issues a bond on the Polygon Blockchain, the Siemens share may not be embodied in electronic form. Physical documentation is still required for equity capital. For this reason, the Electronic Securities Act (eWpG), which has only existed since June 2021, is to be adapted to shares.

The future financing law

In order to transfer the financial sector in Germany and in particular the existing forms of financing into the digital age, the Ministry of Finance and Justice has initiated the Future Financing Act. In addition to digitization, there are also fundamental issues such as improved employee participation, which Lindner’s ministry wants to implement to promote start-ups and SMEs.

The most exciting change for the blockchain sector as a result of the future financing law concerns the electronic securities law, which, according to the draft bill available to BTC-ECHO, provides for fully tokenized shares. So this next step would heave a completely new asset class on Ethereum, Polygon and Co.

Equity on Ethereum, Polygon and Co.

So far, the greatest feeling in Germany has been crypto securities or security tokens, which could be expanded as bonds to include properties similar to equity, such as participation rights. As a result, bondholders were also able to participate in exit proceeds or profit distributions.

With electronic shares, a separate class of securities, ergo equity, with very clear rules and investor rights is now accessible for companies and investors. Whether a stock corporation decides in the future to issue its shares via blockchain or traditionally via securities certificate is up to its free choice. In terms of technology neutrality, there will then be two parallel “securitization systems”.

However, one has to admit that crypto securities do not necessarily have to be issued on a public blockchain. While this is the trend among banks – Deutsche Bank has used Ethereum and Siemens and Hauck Aufhäuser Lampe Polygon respectively – there are exceptions. The securities institute of the savings banks, Deka, for example, issues its crypto securities with a closed DLT solution called Swiat.

Intermediaries: Two disappear, a new one joins

A key difference between traditional stocks and crypto stocks lies in their registrar management. From a technical point of view, this newly created intermediary would not be needed, but the legislator stipulates that there should be a BaFin-licensed body that keeps track of who owns electronic securities: the so-called crypto securities register keeper.

In return, you can save yourself a central depository and custodian bank, i.e. avoid two middlemen. This not only saves money, but also time. Just think that it often takes two days plus for a transfer to take place at the central depository – no longer up to date and thanks to blockchain no longer necessary. One consequence is that this also reduces the costs of providing liquidity.

Especially since the programmability of securities offers completely new possibilities, as the former CEO of the Stuttgart Digital Exchange, Dr. Dirk Sturz, explained in the BTC-ECHO Experts Podcast.

Crypto stocks: The big hit?

Even if in the future all forms of securities may only be issued in digital form, there is still a long way to go. It will certainly take a few years before all infrastructures have been converted to the token standard.

Nevertheless, the inclusion of stock corporations is an important step to ensure Germany’s competitiveness. Finally, shares can be issued purely digitally in Switzerland and Liechtenstein due to different legal requirements. However, stock corporations are much more common there than in Germany. While in Germany the vast majority of corporations are GmbHs and there are only very few AGs, the opposite is true in Switzerland and Liechtenstein.

What about digital GmbH shares?

Accordingly, it is to be hoped that more companies will decide in the future to set up a publicly traded stock corporation in order to enrich our capital market. Ultimately, it is above all the public tradability on exchanges that is so tempting for small investors.

The reform could have a much greater impact if tokenization were extended to all forms of equity. So it would not only be shares, but also GmbH shares that could be issued and traded in digital form.

Measured by the extent of the German GmbH landscape, that would be a real game changer. Ultimately, small investors could then invest directly in German medium-sized companies, provided that a stock market listing is sought. So far, however, it is not known that such an expansion of the eWpG is planned.

In the next step of the Future Financing Act, a hearing of associations will take place until April 12th. The current draft bill is therefore not yet final and should therefore still be interpreted with reservations.