Almost one and a half years after publishing a key issues paper on the regulatory treatment of electronic securities and crypto-tokens, the German government has come up with a ministerial draft bill enabling the issuance of electronic bearer bonds. If this "test run" proves to be successful, a later application to further types of bearer securities is possible.

Unlike in some other EU jurisdictions, the German rules governing the issuance and the transfer of securities are still based on in rem principles. In case of bearer bonds this means that the holder of the bond has an in rem title in the certificate representing the bond or a fractual in rem right in the global certificate right (i.e. a co-ownership right). The draft bill now introduces the possibility of issuing bearer bonds in electronic form. However, it still upholds the in rem principles applicable to securities issued in paper form. Thus, the overall intention of the draft bill is to allow the issuance of electronic bearer bonds, while aligning the rules governing the issuance and transfer of such bonds to the extent possible with the rules applicable to securities issued in paper form. 

Therefore, according to the draft bill, electronic securities are going to be classified as an “in rem item” within the meaning of Sec. 90 of the German Civil Code (similar to the “classical” paper-based bearer bonds). While other solutions could have been adopted, the legislator used this legal fiction because the draft only introduces a new possibility to issue such securities, but does not intend to change the overall legal framework for securities.

As an electronic security is issued via an entry into electronic securities registers, the German legislator intends to strictly regulate such registers and their operators. Electronic securities registers are defined as central registers of electronic securities operated by an authorized central securities depository (e.g. Clearstream). The term “electronic securities registers” also includes  ̶  as a subset  ̶ so-called crypto-securities registers, which are "kept on a decentralized, forgery-proof recording system in which data are recorded in chronological order and are protected against unauthorized deletion as well as against subsequent modification". The wording of the draft bill is supposed to ensure the technological neutrality of the law. However, the current aim is to cover so-called distributed ledger technology ("DLT"), especially blockchain. 

The operation of a cryptosecurities register shall be a financial service within the meaning of the German Banking Act ("KWG") and will therefore require a license. After the amendment of Sec. 33 subs. 1 sentence 1 no. 1 c) KWG, the initial capital required for such license pursuant to Sec. 33 KWG shall amount to €730,000. It may be the case that the operation of a cryptosecurities register to some extent overlaps with the regulated activities of a central securities depository, resulting in a license requirement pursuant to Article 16 of the Regulation on Central Securities Depositories ((EU) No. 909/2014, "CSDR"). This should be checked in advance, so that a potential business operation can be structured outside of the scope of the CSDR. 

Although there surely will be some changes to this first draft, it is very welcome that the German legislator is pursuing its goal of digitalization. As soon as the final act comes into force, it will be interesting to see how this pilot project will be accepted in the market and applied in practice. The classification of electronic securities as an “in rem item”, while sometimes difficult to understand, ensures that the well-established German law rules on the issuance and transfer of securities also apply to electronic securities. Thus, the draft bill avoids the legal uncertainties, which would be associated with a comprehensive reform of the German securities and depository law. Thereby, it offers the issuer a comfortable opportunity to explore new ways of issuing securities within a well-known (and proven) legal framework. The so-created legal certainty should revive the market for electronic securities, especially those issued on a DLT basis. Another positive aspect is the intended supervision of cryptosecurities registries by the German Federal Financial Supervisory Authority, which should enhance the reputation of DLT-based securities among investors.