eWpG: What the Electronic Securities Act means for financial market participants
On June 10, 2021, a law came into force with which the digitization of the German financial market picked up steam: the Act on the Introduction of Electronic Securities, or eWpG for short. It serves to modernize German securities law and associated supervisory law. In addition, the eWpG is one of the central components of the federal government's blockchain strategy and the joint key issues paper of the Federal Ministry of Finance and the Federal Ministry of Justice on electronic securities. But what potential does eWPG actually have?
Source: to Blockchain Strategy of the Federal Government
Why does Germany need an eWPG?
First of all, this creates eWPG legal framework to modernize the German capital market so that it remains competitive by international standards. Because in other countries, such as France or Luxembourg The issuance of securities as physical documents has been a thing of the past for some time — thanks to the option of registration in a securities register.
In addition, the eWPG should facilitate and accelerate processes. According to German law, a document was mandatory for all types of securities until 2021. Their existence enables the securities to be transferred in accordance with property law principles and an illustration of civil law good faith protection regulations. However, since trading securitized securities is made more difficult by the actual change of ownership of the securities certificate, Germany has so far used global certificates at Clearstream Banking AG. Securities trading can thus be carried out for the most part through transactions between different securities accounts without the need for an actual change of ownership. However, this construction requires time and money.
But even with electronic securities, traffic protection and legally secure purchase must be ensured. It is therefore necessary to replace the paper document adequately — with an entry in an electronic register.
What does eWPG include?
The eWpG comes from the blockchain strategy published by the federal government in 2019, in which the legislator provided for the opening of German law for electronic securities. The eWPG is intended to improve the conditions for financial technological innovations while ensuring investor protection. In Germany, the eWPG therefore laid the foundation for the digital issuance of securities and thus for trading without physical documents.
The eWPG currently provides for two types of electronic securities registers: centralized securities registers and decentralized crypto securities registers. The only difference between the two types of securities is the type of electronic securities register used. While central register securities are entered in a central register (§ 12 eWpG), crypto securities are entered in a so-called crypto securities register (§ 16 eWpG) on the basis of a distributed ledger technology (DLT). Maintaining such a register is a new financial service subject to authorisation and subject to supervision by the Federal Financial Supervisory Authority (BaFin).
The first development of the eWPG took place in June 2022 in the form of Crypto Fund Shares Regulation (KryptoFAV) in force. This new regulation has broadened the scope of the eWPG and since then has also made it possible for providers of investment funds to issue electronic share certificates as so-called crypto fund shares by registering in a crypto securities register.
Financial market players, companies and investors benefit
The introduction of digital securities, the eWpG and its accompanying regulations have led to significant changes along the securities value chain. In a decentralized and pseudonymous online ecosystem, capital market transactions could take place on a peer-to-peer basis and using distributed ledger technology. Financial service providers, companies and investors can benefit equally from this.
For example, the industrial group has Siemens a blockchain-based bond in February 2023 placed. It comprises a volume of 60 million euros and has a term of one year. Hauck Aufhäuser Lampe Privatbank AG acted as registrar for the transaction. DekaBank, DZ Bank and Union Investment invested in the security. In this context, Siemens referred to the advantages of digital securities. Accordingly, a paper-based global certificate and central clearing can be dispensed with, and the role of market maker is also eliminated, as direct sales to investors are possible without intermediate sales to banks. Strategic reasons also played a role. It is not only customers who would be supported in their digital transformation. Their own finance department is also taking this path to test and use the latest digital solutions.
Thanks to the eWPG, private investors are creating new and simplified forms of investment. For example, you can obtain fully regulated, digital access to institutional investment strategies via an online investment platform. Electronic securities therefore provide an alternative to those that have existed for years Security Token which, however, remain a legal option for issuers of digitized assets.
