Dechert LLP
The KryptoFAV is complementary to the Law on the Introduction of Electronic Securities1, which came into force in June last year. The core of this omnibus act (Artikelgesetz) was the Electronic Securities Act (Gesetz über elektronische Wertpapiere – eWPG), which applies to bearer bonds.(For further background: Please read our OnPoint “An Overview of German Legislative Initiatives Impacting Asset Managers and Financial Service Providers in Germany and Abroad”) Section 95 of the German Capital Investment Code (Kapitalanlagegestz – KAGB), which was amended when the eWPG came into force, has al-ready made it possible for German investment funds in the legal form of common fund (Sondervermögen) to issue digital fund units. On this basis, the requirement to issue a physical certificate (Urkunde) (e.g., a global certificate, or Gobalurkunde) no longer applies because, in accordance with the amended section 95 (1) of KAGB, the certificate can be replaced by registration in a centralized electronic securities register when fund units are issued to the bearer.
However, thus far, no legal prerequisites have been established to issue crypto fund units, i.e., electronic fund units that are not registered in a central register but in a (decentralized) crypto securities register. The German legislator initially postponed the introduction of crypto fund units in order to properly assess the special features of investment fund units by comparison with securities when considering registration in decentralized crypto securities registers. In particular, it was intended to reflect the depository’s special legal position with corresponding regulations. For this reason, the legislator authorized the Federal Ministry of Finance, together with the Federal Ministry of Justice and Consumer Protection, to subsequently fine-tune the more specific regulations for crypto fund units by empowering them to issue a corresponding regulation2, after taking these special features into account.
The two ministries have now provided for these missing regulations by issuing a joint regulation, the KryptoFAV, and thus created the legal basis that enables the issuance of crypto fund units in Germany. In essence, the regulation, stipulates that the relevant provisions of the eWPG on crypto securities generally also apply to crypto fund units. This is intended to establish a certain synchronization between crypto securities and crypto fund units. As discussed further below, there is, however, a significant deviation in the provisions for the maintenance of the crypto securities register.
This means that German investment fund units in the legal form of a common fund (Sondervermögen) can now also be issued as crypto fund units which are not registered in a central securities register like electronic securities or electronic fund units, but in a so-called crypto securities register. Since, according to the applicable provisions, crypto securities registers must be kept on a forgery-proof recording system where data is logged in chronological order and stored in a way that protects it against unauthorized deletion and subsequent modification the DLT or blockchain is generally used for this crypto securities register.
Consequently, fund management companies can now process fund units “on the blockchain”. for the investment funds that they manage.
Electronic fund units and crypto fund units can only be issued for common funds (Sondervermögen), i. e., investment assets in contractual form, and exclusively as bearer unit certificates. Registered units as well as shares in investment stock corporations and limited partnership interests in investment limited partnerships do not fall within the scope of ap-plication and must therefore continue to issue a physical certificate (e.g., a global certificate, or Globalurkunde).
The regulation includes a clarification that a common fund (Sondervermögen) including its individual share classes can be is-sued in both forms, as crypto fund units and as physical unit certificates, at the same time. This should provide the fund management companies with maximum flexibility.
With regard to the provisions on maintaining the register, however, the regulation deviates from the broader provisions set out in the eWPG. For crypto fund units, the only parties that are allowed to act as registrars are the depository and companies that the depository has commissioned and that hold a license to maintain crypto securities registers. In the draft regulation, the original intention was for the depositories to be the only ones allowed to maintain crypto securities registers.3 This restriction was justified by the fact that the depositary must be enabled to fulfil its duties in accordance with sections 68 et seq. and 80 et seq. KAGB in relation to investors4 but was criticized during the consultation phase of the regulation. In response to this, lawmakers provided for the above-described amendment and provided the possibility for the depository to outsource the registrar function to a third party which has the relevant license. However, the depository must ensure that it can fulfil its legal duties and obligations even where such a delegation is in place.
The advantages of crypto fund units are obvious, especially when issuing and redeeming fund units (so- called fund unit transactions, or Anteilscheingeschäfte). Due to the elimination of the global certificate (Globalurkunde), no further interaction with the central securities depository is required for the settlement of fund unit transactions. The same applies to sales and transfers of fund units in the secondary market. This allows for significant simplifications, since investors can, in principle, enter into direct contact with each other to execute the legal transaction. However, the depository remains involved with the settlement of the transactions. In this regard, there could be further advantages since the value date (currently often T+2) for the settlement to transfer ownership of the fund units could be significantly reduced, which would facilitate the settlement of the fund units on the trade date.
All in all, the adoption of the regulation has been met with a positive response in the funds industry; the possibility of issuing crypto fund units is seen as a sensible and necessary step for the future viability and competitiveness of German fund products.5
The near future will show how intensively the German fund industry will make use of the new possibilities for issuing crypto fund units. It will probably also depend on the fund and investor structure as well as on the processes established in individual cases with regard to fund unit transactions. This is because the investors must also be able to map the crypto fund units in their systems and manage them out-side of the established depository bank system (e.g., within a self- managed “wallet”).
1) Full title of the German Act: Gesetz zur Einführung von elektronischen Wertpapieren v. 3.6.2021 (BGBl. I S. 1423).
2) Section 95 (5) KAGB includes corresponding ordinance authorization.
3) The license to maintain crypto securities registers (Erlaubnis zur Kryptowertpapierregisterführung) according to section 1 (1a) Satz 2 Nr. 8 in conjunction with section 32 (1) sentence 1 German Banking Act (Kreditwesengesetz – KWG).
4) Cf. see reasons for the draft bill: Federal Ministry of Finance
5) Cf. see BVI statement on the draft regulation for crypto fund shares (KryptoFAV): Federal Ministry of Finance
6) Cf. Frank Dornseifer´s (Managing Director at BAI) statement in the article „Bahn frei für die Kryptofonds-Registerführer“ published in Börsenzeiten, 06-17-2022.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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