Tangible assets 2.0: What actually are crypto securities?

The term “crypto” sounds like blockchain, Bitcoin & Co. But crypto securities can do much more: They combine the features of traditional securities such as stocks or bonds with the technology of cryptocurrencies. Learn more about the basics of crypto securities, legislation and the difference between existing digital assets such as security tokens.

‍

Tokenize traditional assets

On June 10, 2021, the law on electronic securities (eWPG for short) came into force. For the first time, it was possible to issue (crypto) securities purely digitally without physical documents, which can represent real assets such as stocks, bonds or other financial instruments in digital form on a blockchain. This tokenization allows assets to be traded and managed more efficiently by representing them on a decentralized platform. The technical basis is Distributed Ledger Technology (DLT). Crypto securities can be issued as a complete issue through a collective entry or as an individual entry. They are legally equivalent to traditional securities, but must be listed in a special register, the so-called crypto securities registry, be listed. This register is maintained either by central depositories or by decentralized blockchain networks.

Three things are essential for issuing crypto securities: Labeling as a crypto security, publication in the Federal Gazette and a notification to BaFin supervisory authority, which keeps a list of current crypto securities. In July 2024, for example, a “new addition” with a signal effect for the entire banking sector was Crypto security issued by Förderbank KfW in accordance with the Electronic Securities Act (eWPG) in the amount of 100 million euros.

There are different approaches to regulating crypto securities internationally: In the USA, for example, crypto securities fall under the jurisdiction of the Securities and Exchange Commission (SEC). A distinction is made here between utility tokens (not regulated) and security tokens (regulated like traditional securities). The SEC sets strict rules for issuing tokenized securities. At European level, the European Union is working to create a legal framework for crypto securities. The draft of MICA regulation (Markets in Crypto-Assets Regulation) provides a comprehensive set of rules for the regulation of crypto assets, including securities.

‍

Cryptosecurities vs. security tokens

With regard to Germany, companies had the option of issuing tokenized securities as security tokens even before the eWpG came into force. In contrast to cryptocurrencies or security tokens, crypto securities do not require a license for the crypto custody business, but are classified in the custody business.

In the case of tokenized bonds, the rights and obligations for issuers and investors are linked to the tokens via the underlying bond conditions. When the tokens are transferred, the rights associated with the token are also transferred to the new token holder. According to the construction chosen by the legislator that crypto securities can only be available if they are entered in a crypto securities register, security tokens will not represent crypto securities without such registration and will remain as a legal alternative.

Token issuers can therefore choose between issuing a crypto security or a classic security token. Registration in a regulated register and the new submission process therefore distinguishes the new crypto securities from “classic” tokenization as security tokens.

In detail, the following features of crypto securities and security tokens can be distinguished:

Crypto securities:

• liability: The crypto securities registry administrator is liable as part of regulated activities, which provides additional legal protection.
• transferability: The transfer is always carried out via the legally regulated register, which ensures clear and transparent processes.
• transparency: All entries in the register are valid and can be viewed by the public, which leads to a high level of transparency.
• Protection of good faith: Available because the register serves as an official reference for ownership, which protects ownership.
• Liability in case of insolvency: Priority — in the event of insolvency, holders of crypto securities have a higher priority in satisfying their claims.

Security Token:

• liability: Issuers are responsible for issuing the tokens, but the secondary market is not covered, which means less liability coverage.
• transferability: The transfer depends heavily on the design of the token and may therefore vary.
• transparency: There is only a small amount of publicly available information, mostly just the white paper (WIB) and the prospectus.
• Protection of good faith: Not available, which means that ownership is less legally secure.
• Liability in case of insolvency: Subordinate — in the event of insolvency, security token holders are often treated as secondary.

The bottom line is that crypto securities represent an exciting development of the financial market, as they combine traditional securities with the benefits of blockchain technology. This gives private investors regulated access to asset classes, some of which were previously reserved only for institutional investors.

‍