The crypto security – big hit or overregulation?

Specialist lawyer Lutz Auffenberg and his law firm Fin Law have specialized in the field of fintech and innovative technologies. In particular, blockchain technology and its regulation are the focus of his activities. In his guest post he takes a critical look at the draft law on the introduction of electronic securities.

This article is first on the FIN LAW blog published

With the bill on the introduction of electronic securities, the ministries of justice and finance also proposed the creation of a new regulatory regime for crypto securities in the summer of this year. This is supposed to be a special form of electronic securities which, according to the definition in the current draft law, only differs from other electronic securities in that it is entered in a crypto securities register.

Crypto securities registers are to be kept by companies that are appropriately supervised by the financial supervisory authorities. According to the current idea of the draft bill, they must be kept on a decentralized, forgery-proof recording system in which the data is logged in the chronological order and saved against unauthorized deletion and subsequent changes. According to the justification for the draft, the term crypto securities register is chosen to be open to technology. Since, according to the definition, only decentralized storage methods may be used, according to the current state of the art, ultimately only recording systems based on distributed ledger technologies can be considered. However, the use of public blockchains should not be considered for crypto securities registrars, because, for example, the risk of a hard fork event could not be controlled. Only private blockchains should therefore be of practical use.

What information should be stored in the cryptocurrency registry?

Comprehensive information about registered securities should be stored in crypto securities registers. According to the draft, crypto security registrars must in particular clearly identify the security (e.g. ISIN), information about the issuer, the owner, obstacles to disposal, rights of third parties and information about whether the crypto security is in the name of a securities trading bank or the custodian (collective custody) or registered to the names of the individual owners.

The new regulation is intended to ensure that the holder identified in the crypto securities register is also legally considered the holder. Disposals about crypto securities should only take effect when they are entered in the underlying crypto securities register.

Do tokenized securities have to be entered in a crypto securities register?

The new rules for crypto-securities would not be mandatory when issuing tokenized securities. As things stand at present, it would still be possible to issue “classic” security tokens on a public blockchain, which would be linked to certain investor rights via the underlying token terms. However, the great advantage of crypto securities over unregistered security tokens would be their ability to be acquired in good faith and unencumbered. This property, which according to current securities law is not possible without the physical embodiment of a security, could make crypto securities marketable.