New law of the Federal Government reduces entry barriers in corporate financing and creates new value chain
WeOwn, as a pioneer of decentralised registry solutions for company shares, is optimally positioned for the implementation of the new Electronic Securities Act (eWPG).
The German government is working flat out to implement its blockchain strategy. After the Federal Ministries of Justice and Finance presented a draft bill on the introduction of electronic securities in the summer, the draft law is already a topic in the Federal Cabinet this week. The planned law is an important milestone in the digitalisation of anachronistic, paper-based processes and creates the necessary legal certainty so that the issuance and trading of electronic (crypto)securities can be carried out purely digitally along the entire value chain.
The law distinguishes between electronic securities and electronic crypto securities. While the first category describes securities such as those issued and traded by listed companies on the Frankfurt Stock Exchange, for example, the second category explicitly refers to securities that are stored on a blockchain as a cryptographic token as a digital image of the assets. It is envisaged that both types of securities will coexist in parallel, although there will be differences in the organisational design. By creating a legal framework for crypto securities, the federal government is enabling blockchain-based business models to become more established.
Lower entry barriers for corporate financing
The core element of the new law is the regulation according to which the requirement of paper form will be dropped. This will result in a number of advantages for companies: The issuance of electronic securities for corporate financing will be possible at significantly lower costs, as the entire value chain from the creation and issuance of securities (“tokenisation”) to their trading will be completely digital. This is particularly interesting for medium-sized companies for which a classic IPO is too expensive and too complex, or for companies that have difficulties financing themselves classically via their house bank or KfW due to their business model. For all these companies, the new regulatory framework offers the possibility to collect debt or equity capital from private or institutional investors via a tokenised security.
Due to the significantly lower costs and flattening of regulatory and administrative hurdles, small and medium-sized enterprises (SMEs) in Germany are provided with a very attractive financing instrument. The need for this already exists today. According to an analysis by the European Central Bank, only about 1/3 of SMEs can currently cover their equity needs on the capital market. After the expiry of the federal government’s Corona aid, this capital supply gap will grow significantly again. The new law creates important impulses for financing SMEs in post-Corona times.
Investors, in turn, benefit from comprehensive property protection. The law explicitly equates – for the first time – digital assets with physical objects. Issuers and investors thus benefit from far-reaching regulation that creates legal certainty for all parties.
Crypto securities register: New players in the value chain
The new legislation will not only digitise the value chain, but also create new market segments. Analogous to the market of listed companies, electronic (crypto)securities also need a registrar. Such a (crypto)securities register has the function of transparently managing all shareholders of a company including their shares as well as recording all transfers of shares. With the law, the legislator recognises that blockchain technology is a technology that has been tested in practice and can take over this function. Thanks to decentralised technology, all transactions in the context of share transfers can be stored on the blockchain in a forgery-proof manner and transparently for all parties without the diversions via paper certificates.
The draft law lists in detail the function and tasks of the crypto securities registry. An essential criterion is that “a crypto securities register (…) shall be maintained on a decentralised, forgery-proof recording system in which data is logged in chronological order and stored in a manner protected against unauthorised deletion and subsequent modification”. The entity keeping the register is the entity designated as such by the issuer vis-à-vis the holder. Further sections in the draft law regulate the exact content as well as the publication obligation in the Federal Gazette.
WeOwn as pioneer predestined as technology provider for crypto securities registers
For electronic securities issued as crypto securities, the legislator still foresees that there will be several crypto securities registrars. In contrast to the listed market, where Clearstream has a de facto monopoly in Germany, companies will in future even be able to issue electronic securities themselves, provided they have a crypto securities register. As with listed companies, however, it is likely that companies seeking capital will delegate this task to a specialised crypto registrar in order to comply with regulatory requirements.
As an innovation leader in blockchain technologies for corporate finance, WeOwn sees itself ideally positioned to take a leading role in the emerging market for crypto securities registers. Already in 2018, WeOwn was the first to bring online a digital share register based on a hybrid blockchain developed specifically for the financial market. WeOwn’s software-as-a-service (SaaS) solution has already enabled companies to issue shares and promissory notes and make them tradable via WeOwn’s specialised tokenisation platform since 2019. WeOwn has the technology and expertise needed to run a decentralised crypto securities registry. For Sascha Ragtschaa, the crypto securities register is therefore a consistent strategic further development of the FinTech: “We are in an excellent starting position, as we already combine the experience from the traditional share register business with a blockchain-based register solution for cryptoassets that has been tested in practice.”