On 11 August 2020, the German Ministries of Finance, and Justice and Consumer Protection, published a draft bill (the 'Law on electronic securities' Bill) that, if enacted, will introduce electronic debt securities into German law and with that see Germany following the example of other European countries, notably France, on its road to dematerialised securities. The current Bill initially limits the scope to electronic debt securities, while equity securities and investment fund shares could follow at a later stage. These financial instruments were deliberately left out of the Bill by the German lawmakers, given their complexity which, in turn, makes their electronic issuance challenging.
The Bill allows debt securities to be issued by entering them into an electronic register, rather than by way of conventional paper-based issuance, which means that no physical certificate of the securities would exist. However, electronic debt securities are to be treated as if they were paper-based and are considered legal objects. Accordingly, German property law applies and bona-fide acquisitions of such securities will be possible.
The Bill provides for two kinds of electronic securities registers: (a) a central register operated by a central securities depository (CSD) and (b) a decentralised crypto-securities register typicallybuilt on distributed ledger technology.
An administrator for a central register must be an entity licensed as a CSD within the meaning of the Central Securities Depository Regulation. In contrast, an administrator for a crypto-securities register requires a licence under the German Banking Act. It is worth noting that an issuer of crypto-securities could manage the register for its electronic debt securities itself.
Creating electronic debt securities by an entry in a central register would be permitted only if collective entries into the central register are made. The CSD would then transfer the electronic debt securities into the existing securities settlement system which would allow them to be traded on EU trading venues.
Crypto-security registers constitute an equivalent alternative to central registers provided they meet certain standards: in particular they must ensure adequate protection against forgery and unlawful deletion or ex-post amendments of entries. Moreover, crypto-securities registers and issuers using such decentralised registers are subject to enhanced transparency obligations.
Consultation of the Bill is open until 14 September 2020 and its adoption is expected towards the end of 2020.