The Ministry of Finance of Germany recommended that the country should recognize securities based on blockchain as a legitimate financial instrument, and adjust them as such.
Issuing securities in electronic form
In one paper which was published on Friday, the agency said that securities may be issued in electronic form and should not have to be documented on paper. The German law is supposed to be opened up for electronic securities generally, i.e., the currently documentary embodiment of securities has to no longer apply without restriction.
Moreover, legislation should actually create the framework for regulating the digital instruments, with the flexibility to adjust the rules to the fast-changing reality of blockchain technology, the German ministry added. Because the tech standards, as well as requirements, may change rapidly, authorization has to be provided to regulate these specific technical details by legal regulation.
The initiative should begin with electronic bonds and only later move to digital shares, according to the government, as the amount of regulation necessary for the latter is going to delay the timely introduction of any electronic securities. All such securities in Germany have to be registered in a single central registry administered by a government-supervised agency, according to the document, to avoid the possibility of manipulation.
Also, specific separate regulations have to be provided for the acquisition, as well as the transfer of electronic securities and good faith protection. If the digital securities are utilized to trade on the trading venues of Germany, they have to be registered with the central security depository or CSD of the country, according to the ministry. Retail investors need to have the ability to buy tokenized securities just through an intermediary financial institution.
The possibility of digital currencies using the blockchain
Notably, the same document also said that digital securities may use blockchain but don’t necessarily have to. It added that the application of blockchain technology shouldn’t be privileged, particularly regarding the state-of-the-art development of the sometimes high energy requirements of public blockchain technologies and the climatic effects.
This paper even touched the matter of the so-called utility tokens, contemplating that these might be exempt from all those requirements which were placed on securities issuers.
As a rule, the utility tokens don’t constitute securities, investment, as well as other financial instruments under the German Securities Trading Act. In most of the cases, there are not going to be electronic bonds in the future, even though it may be determined by law that a public offer of utility tokens can just take place if the provider has some previously published information sheet.
The recommendations of the ministry came as a draft bill on security token offerings or STOs in the works at the German parliament. The technology actually sounds quite interesting; however, people do not really understand it, as the senator named Thomas Heilmann, who is the member of the Christian Democratic Union or CDU, the ruling political party of Germany, said, adding that the CDU faction in the parliament will support the initiative he had.
Germany may secure a leadership position in tokenized finance
Right now, the bill exists in the form of discussion materials, and it was discussed by the German lawmakers, as well as government bodies behind closed doors, according to the CEO of the blockchain startup Lition, the advising Heilmann on the new legislative proposal, named Richard Lohwasser.
Without the comprehensive regulation of the security tokens in Europe, dealing with them may also mean an entire range of issues: holding a token does not mean holding equity from legal standpoints, dividend payments aren’t legally compliant, and if a token gets sold, the buyer does not acquire constitutional rights to receive dividends.
Being the financial center of Europe, the country may secure a leadership position in tokenized finance as well, according to the document of the Finance Ministry. Germany might even set the tone for the future E.U.-wide security token regulations.
However, the implications may be significant for the global blockchain community, not just Germany, as Lewis Cohen, who is the lawyer at the law firm DLx Law based in New York, said. He concluded that even if the German capital markets aren’t that important at the moment, particularly from the perspective of companies in the United States, the fact that policymakers in Germany are taking active steps in order to encourage the use of security tokens are going to be noticed, and lessons are going to be learned, worldwide. The German experiment is quite essential for creating the model in which the wider blockchain community may learn what workers well and what does not work too.