Reed Smith Client Alerts

German legislators have taken a major step in ushering in a new era of digitalisation of the securities business in Germany. On 6 May 2021, the German Federal Parliament passed the Law on the Introduction of Electronic Securities (elektronisches Wertpapiergesetz, hereinafter referred to as eWpG). With the entry into force of this law, Germany has assumed a pioneering role on the European crypto and electronic securities market.

The draft bill of the eWpG, published on 16 December 2020 and which we reported on in our Client Alert of 23 December 2020, has been passed without any significant amendments.

In general terms, the bill modernises German securities law and associated supervisory legislation by as a first step, initially only for debt securities and, to a lesser extent, shares:

  • Enabling electronic securities
  • Introducing securities trading on the basis of blockchain technology
  • Making this legally secure

Legal situation in Germany under the German Civil Code (Bürgerliches Gesetzbuch)

The German Civil Code requires financial instruments that qualify as securities (Wertpapiere) to be securitised in a physical document, except for securities issued by the federal state (Bund) under the Federal Securities Administration Act (Wertpapierverwaltungsgesetz) or the applicable securities administration acts at the state level.

Under the German Civil Code, the legal basis for electronic trading is a single, physical global certificate, which is held in possession for all investors by Clearstream Banking AG, a subsidiary of Deutsche Börse AG. The investors are co-owners of this global certificate on a fractional basis and – through their custodian banks affiliated with Clearstream Banking AG – co-possessors. This legal structure – a transfer in rem (dingliche Übereignung) as opposed to a pure acquisition of rights – enables a bona fide acquisition (gutgläubigen Erwerb), which in turn serves to protect potential acquirers in the market.

New provisions under the eWpG

Now, in order to ensure the marketability of electronic securities (section 2 eWpG) and crypto-securities (section 4, paragraph 2 eWpG), and thus the legally secure acquisition of these new forms of securities, an entry in a register (Wertpapierregister, section 4, paragraph 1 eWpG) must be made, as an equivalent to the physical certificate in the case of a ‘classic’ issue, if necessary on the basis of blockchain technology. The new provisions are intended to be technology-neutral, meaning that securities issued via blockchain are generally not to be favoured over other electronic forms of issuance.

The entity maintaining the electronic securities register must ensure that the register accurately reflects the existing legal situation at all times, and that entries and transfers are complete and accurate. In the event of a breach of this obligation, the entity shall be liable to pay damages to the party concerned.