Asset tokenisation is mainly used in blockchain technology, where assets are fragmented and represented as tokens on a digital ledger (mostly security tokens). This makes it easier for investors and traders to buy, sell and exchange assets, as well as providing transparency and improving the security of transactions.

Peculiarities of asset tokenization in Germany

On 10 June 2021, the Electronic Securities Act (Gesetz zur Einführung elektronischer Wertpapiere, the “eWpG“) came into force, which allows for the issuance of bearer bonds using innovative technologies such as distributed ledger technology (DLT). In particular, the Electronic Securities Act establishes a legal framework for trading rights through electronic securities registries and adds a new category of licence for registering cryptocurrency securities.

The eWpG now allows bearer bonds, mortgage bonds (Pfandbriefe) and certain fund units to be issued in a purely electronic format. Although the eWpG does not apply to registered bonds, registered securities or warrant bonds, generally any bearer-denominated obligation can be the subject of an electronic security. This applies, for example, to ordinary bonds, convertible bonds and bonds with warrants, profit participation certificates, warrants, investment certificates and structured bonds.

In fact, the main purpose of the eWpG is to legalize and regulate the status of “electronic securities”.

Thus, in order to issue an electronic security, the issuer needs to make an entry in the electronic securities register instead of issuing a security certificate.

The eWpG provides for two types of electronic securities registries:

• centralized securities registries;
• decentralized cryptocurrency securities registries, which typically operate based on distributed ledger technology (DLT).

Entries in such registers may be made by:

• securities depository banks;
• custodians*, provided that the issuer expressly authorized this in text form.

*A custodian is any person authorised to conduct custody business in Germany.

According to the eWpG, in order for a security to acquire the status of an electronic security, it only needs to be duly registered in the electronic securities register.

Thus, the tokenization of assets in Germany should be viewed through the prism of electronic shares.

Significance of the Electronic Securities Act

The eWpG effectively allowed the issuance of securities in electronic form, including in the form of crypto-assets. That is, electronic securities are equated to physical securities certificates. The key point in issuing electronic securities is their registration.

Pursuant to Article 13 of the eWpG, the registrar must ensure that the central register contains the following information about the registered security:

• the main content of the rights granted by the security, including the unique identification number of the securities;
• issue volume;
• nominal amount;
• issuer;
• identification as to whether it is an individual or collective record;
• the holder;
• information on the special status of the collective record (if any) in accordance with Article 9.3 of the eWpG.

Similar information is required when entering information into the decentralized register of cryptocurrency securities (Art. 17 eWpG)

It should be realized that the issuance of the securities itself must be conducted in accordance with the rules for the issuance of securities in Germany.

According to Article 3 of the German Prospectus Act, the obligation to publish a prospectus pursuant to Article 3(1) of Regulation (EU) 2017/1129 does not apply to offers of securities:

1. which are issued by credit institutions or issuers whose shares are already admitted to trading on a regulated market if the total consideration for all securities offered in the European Economic Area does not exceed €8 million calculated over a period of twelve months, or
2. the total equivalent value of which in the European Economic Area does not exceed €8 million calculated over a period of twelve months.

A security authorized under the above Act can be used throughout the European Union and the European Economic Area through the so-called European Passport.

Asset tokenisation model, using the Electronic Securities Act

The asset tokenisation model in Germany is an effective way to attract investment and facilitate access to valuable assets, such as real estate, using blockchain technology. The steps for asset tokenisation can be as follows:

• The first step in the asset tokenisation model is the creation of a legal entity that owns the assets to be tokenised, such as real estate. To start this process, the company must register the new legal entity under German law and capitalise it with physical assets to be converted into tokens.
• Once the legal entity is registered and capitalized, the company issues shares in that legal entity. These shares represent ownership interests in the company and will serve as the basis for the creation of digital tokens.
• Next, the company registers these issued shares in a decentralized cryptocurrency securities registry, which is blockchain-based, in accordance with the Electronic Securities Act.
• Once the shares are successfully registered in the blockchain-based registry, the company is ready to offer tokens corresponding to the shares for sale. These tokens can be purchased by investors and traders, allowing them to access valuable assets that were previously less accessible.

Who is the regulator and what is its role?

In accordance with Article 11 of the eWpG, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – “BaFin”) as supervisory authority supervises the maintenance of the electronic securities register in accordance with this law.

The tasks assigned to BaFin as supervisory authority include, among others:

• decides whether to authorize securities registrars (those that maintain central registers or cryptocurrency securities registers);
• supervising registrars that maintain central registers or registers of cryptocurrency securities;
• publication of a public list of cryptocurrency securities on the website www.bafin.de, as required by para. 3 of Article 20 of the eWpG.

Conclusions

By implementing the tokenization of assets through company shares, Germany has regulated the very essence of tokenisation quite clearly. With this move, the constant discussions about the nature of tokens and the rules for their issuance will come to an end. Tokens issued under the procedure of the Electronic Securities Act are usually security tokens.

When building a business model for tokenization of assets using Germany, it is worth considering the specifics of each business and the criteria for exemption from prospectus registration, as such registration may significantly slow down and complicate business operations, both legally and financially.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.

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