Germany has passed legislation on the introduction of electronic securities (eWpG), meaning paper certificates will no longer have to be issued in the future for bonds, fund units, and Pfandbriefe.
Pfandbriefe are a type of covered bonds issued by German mortgage banks that are collateralised by long-term assets.
With this new legislation, these securities can now also be created in the electronic register or issued as crypto securities based on a blockchain.
Benjamin Duve, head of digital assets and custody at Commerzbank, explains that the passing of this law offers the opportunity to issue bearer bonds and units of collective investment undertakings in electronic form, using a registrar either for a centralised digital ledger or a distributed ledger.
“The registrar is a new function in the market in Germany. Banks may hold, service and transfer those securities either by means of traditional accounts or by means of a distributed ledger (e.g. blockchain). If the securities are traded on a trading venue, however, due to the Central Securities Depositories Regulation (CSDR), a CSD would need to execute the settlement,” says Duve.
According to Karl-Peter Schackmann-Fallis, executive board member of the German Savings Banks and Giro Association (DSGV), who will be in charge of the German credit industry in 2021, the law on the introduction of electronic securities will make Germany's financial centre fit for new technologies.
Schackmann-Fallis notes that the German banking industry is well prepared for the electronic securities business. He says: "If the technology proves its worth, the legislature should continue the modernisation of securities law in the next legislative period with a fundamental reform of the custody account law.”
Meanwhile, Michael Huertas, partner, co-head financial institutions regulatory Europe at Dentons, explains that the introduction of the eWpG marks a further move forward in the digital transformation and a move away from the need for paper-based certificates for notes (Schuldverschreibungen and Pfandbriefe) as well as fund units.
Huertas explains that a number of other EU jurisdictions, such as Luxembourg have also pushed forward similar reforms.
“All of these seek to further electronify the issuance and servicing of certain financial instruments and to lay the groundwork for increased adoption, for those that wish to, greater use of distributed ledger technology (DLT),” Huertas comments.
While these national developments are welcome, Huertas suggests that unless the European Commission steps in to frame some overarching provisions and drive harmonised rules, this could end up fueling fragmentation at a point where the EU’s capital markets union (CMU) 2.0 project has an opportunity to deliver.
Shares are currently excluded from the new German law and this is an area where further national or preferably EU-level rulemaking would be welcome.
The same also applies to select reforms to the German Custody Act (Depotgesetz) as well as perhaps, in view of the Markets in Financial Instruments Regulation/the second Markets in Financial Instruments Directive Review, further alignment between divergent regimes as they apply across the EU-27.
The new law in Germany is also set to spur innovation in the financial markets. Huertas highlights that in order to help accelerate such change, it is quite conceivable that this will be reliant on the larger market infrastructure providers driving forward the use of new solutions provided these are scalable across jurisdictions and can serve to save costs.
Duve adds: “My positive outlook is: There will be multiple regulatory compliant asset chains in Germany within a year. Many of the new innovative DLT and blockchain based entrants into the asset space we have seen around the world will consider Germany as a hub, with the ability to get the regulatory and legal certainty they are looking for.”
“And among the traditional securities services industry the discussion about a German asset chain is getting more concrete. This would enable us to test and implement starting within less than a year all the innovation offered around digital assets,” Duve concludes.
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