Tokenized bonds and deposit business – what do STO issuers need to consider?

Specialist lawyer Lutz Auffenberg and his law firm Fin Law have specialized in the field of fintech and innovative technologies. In particular, blockchain technology and its regulation is the focus of his work. In his guest contribution he addresses the question of what STO issuers need to consider with regard to tokenized bonds and the deposit business.

This article first appeared on the Fin Law Blog.

In addition to the lending business, the deposit business is likely to be the most prominent among the banking businesses. According to the legal definition, it is the case that repayable monies are accepted from third parties without fail. In order to provide business enterprises from the real economy with an alternative to bank financing, the definition of deposit business provides an important exception for cases in which the repayment claim is documented in bearer or order bonds. In the case of tokenized bonds, there is the problem of the lack of securitization, which both the highest court rulings in Germany and the BaFin only consider to be given if the rights arising from the bond are laid down in a paper as a physical object in such a way that they are through the respective holder of the paper can be asserted against the issuer. Tokens as a mere virtual position can therefore generally not trigger the exception for bonds.

The introduction of electronic bonds serves in particular to enable a transfer of non-securitized bonds with protection of good faith, i.e. to allow the purchaser of an electronic security to effectively become the owner even if the seller did not actually own the property and the purchaser did not know this. This is achieved by entering electronic bonds in an electronic securities register. If the bond is tokenized, it must be entered in a special crypto securities register. When electronic securities were introduced, the legislature did not adapt the exception provision in the definition of deposit business, so that only securitized bonds are still excluded from the offense of deposit business. However, the new eWPG expressly stipulates that electronic securities – and thus also crypto securities as a sub-form – should have the same legal effect as securities issued by means of a certificate, unless the eWPG expressly stipulates otherwise. This clear provision should be a sufficient argument in favor of equating cryptocurrency with securitized securities for the purposes of the exemption in the deposit business definition.

Issuers of security tokens do not necessarily have to issue tokens as crypto securities. If a tokenized bond is not entered in a crypto securities register, but is to be issued “classically” without the privileges of the eWPG, there are other options for avoiding deposit transactions by the issuer. The most widespread possibility is the agreement of a qualified subordination agreement in the token conditions, which according to the constant administrative practice of BaFin always excludes the unconditional claim to repayment. Another very attractive option is the provision of standard bank securities such as bank guarantees or comparable insurance for the issuer’s risk of default. BaFin then allows such collateral to be regarded as excluding the deposit business if it is ordered in such a way that it is immediately and easily available to investors in the event of default by the issuer.

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