Germany further broadens the scope of its new legislative regime for electronic securities: On 18 June 2022, the German Regulation on Crypto Fund Units (Verordnung über Kryptofondsanteile – KryptoFAV; link) entered into force. The KryptoFAV introduces the possibility to issue units in common funds (Sondervermögen) via decentralised crypto securities registers which are typically based on distributed ledger technology (DLT).
Background: Fundamental reform of German securities law
In 2021, the German Electronic Securities Act (Gesetz über elektronische Wertpapiere – eWpG; link) fundamentally reformed German securities law. The eWpG made it possible to issue bearer bonds in the form of uncertificated electronic securities via a register. Such bonds in bearer form include, for example, covered bonds (Pfandbriefe), convertible bonds or structured bonds. The eWpG currently does not cover, however, registered bonds or any other types of securities such as shares.
Under traditional German civil law, instruments deemed securities have to be securitised by a physical certificate. Based on the eWpG, issuers now have the right to decide whether they wish to issue bearer bonds in a certificated form or in an electronic form.
Distinction between central registers and crypto securities registers
The eWpG provides for two types of electronic securities registers (and, accordingly, for two types of electronic securities): (i) Central registers (zentrale Register) and (ii) crypto securities registers (Kryptowertpapierregister). Central registers must be kept by the central depository for securities (Wertpapiersammelbank) or, if expressly authorised by the issuer, by a custodian (Verwahrer). Pursuant to the eWpG, the physical global certificate is replaced by the entry of the issue in the central register. Only securities entered into a central register may be eligible for trading on trading venues under the European Central Securities Depositories Regulation (CSDR).
Crypto securities registers, in contrast, are kept by a registrar agent (registerführende Stelle) typically on the basis of DLT. The issuer of crypto securities may designate such registrar agent; otherwise, the issuer itself is deemed to be the registrar agent. The activity of a registrar agent has been defined as a financial service requiring a license for crypto securities registry (Kryptowertpapierregisterführung) under the German Banking Act (Kreditwesengesetz – KWG).
Fund units in electronic form
In connection with the eWpG, the German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB) was amended to enable the issuance of units in common funds in the form of electronic unit certificates (elektronische Anteilscheine) instead of physical unit certificates. For that purpose, the KAGB stipulates that certain provisions of the eWpG regarding central registers and central register securities shall apply mutatis mutandis to electronic unit certificates.
However, in contrast to central registers, the KAGB does not directly introduce crypto securities registers for fund units, but rather stipulates the competence of the German Federal Ministry of Finance and the German Federal Ministry of Justice and Consumer Protection to additionally apply the related provisions of the eWpG to fund units by way of a regulation.
Crypto fund units
With the KryptoFAV, the aforementioned Federal Ministries have now made use of their legislative competence and introduced crypto fund units in common investment funds that are issued via crypto securities registers.
The KryptoFAV stipulates that the basic provisions under the eWpG for crypto securities registers and for crypto securities shall apply mutatis mutandis to crypto fund units with the provisos that
- references to crypto securities and bonds shall be references to crypto fund units,
- references to the terms and conditions shall be references to the fund rules,
- references to the beneficiary shall be references to the investor.
By way of derogation from the eWpG, only (i) the depositary (Verwahrstelle) of the investment fund or (ii) an undertaking instructed by the depositary that is authorised for crypto securities registry under the KWG may act as the registrar agent. When instructing such undertaking, the depositary must ensure that it is able to fulfil its statutory duties in its function as depositary of the investment fund.
It should be noted that the KryptoFAV is limited to units in investment funds in contractual form and does not cover any shares in investment funds in corporate form.