Digitization effects and innovative technologies such as the blockchain increasingly influence the financial market. The German Federal Ministry of Justice and Consumer Protection, together with the Federal Ministry of Finance, has responded with a key issues paper on the introduction of electronic securities.
What changes will result from this for the regulation of securities?
Introduction of electronic form for securities
Currently, German law requires securities to be issued in paper form. In the future, securities will also be accepted by the German legal system in electronic form. Accordingly, the regulation of securities is to be technology-neutral.
One of the advantages of electronic securities is that they could also be issued on the basis of blockchain or distributed ledger technology and would therefore be tradable on the market without the intervention of third parties. The issuance of securities and the settlement of securities transactions could thus be faster and more cost-efficient than at present.
It should be highlighted that electronic form will only be an option and not an obligation. This means that trading in securities certificates will also be possible in the future.
Restriction to electronic bonds
In order to allow for a timely introduction, the legislative project will initially focus exclusively on electronic bonds. The introduction of electronic shares is to take place at a later date.
The law will not only address regulations under civil law, but also under supervisory law. In principle, electronic securities will also be subject to both the German Securities Trading Act (WpHG) and the German Securities Prospectus Act (WpPG). As a result, companies will also have to comply with regulatory obligations when issuing electronic securities, especially with regard to the publication of a prospectus or information sheet.
Creation and transfer of electronic securities
Electronic securities are to be created by entry in a register, following the example of the Federal Debt Management Act. Since incorporeal objects – which include electronic securities – can also be held in safe custody, the regulations on the safe custody of securities apply in cases where electronic securities are recorded in securities accounts, e.g. for the purpose of stock exchange trading.
The Federal Ministry plans to issue additional rules in the future that will cover the acquisition and transfer of electronic securities and the protection of good faith.
Advice on electronic securities
While in other EU countries the paperless issuance of securities is already common practice (e.g. in France or Belgium), in Germany there are still numerous legal and factual obstacles.
The introduction of electronic bonds in compliance with the above-mentioned Key Issues Paper is a first step towards eliminating these. In times of constant innovation and digitization of the financial sector, a timely implementation of the project can certainly contribute to ensuring that the competitiveness of the German financial center continues to be guaranteed.
We would be happy to assist you in complying with all regulatory obligations when issuing electronic securities.
Legal Requirements for the Issuance of Securities on the German Market