Introduction of Electronic Fund Shares in Germany

On 16 December 2020, the German Federal Cabinet adoptedthe draft law on the introduction of electronic securities(Gesetz zur Einführung von elektronischen Wertpapieren –eWpG) jointly submitted by the Federal Ministry of Finance(Bundesfinanzministerium – BMF) and the Federal Ministryof Justice and Consumer Protection (Bundesministerium fürJustiz und Verbraucherschutz – BMJV). Aim of the new law is tomodernize the securities law and thus to strengthen Germanyas a financial center, especially in the field of digitization.

The new law will enable the issuance of German-lawsecurities in purely electronic form without the requirementfor a physical security as well as the issuance of cryptosecurities enabling the implementation of distributedledger technology-based instruments. The original scopeof the draft law (Referentenentwurf dated 11 August 2020)provided for an exclusive application to bearer bonds(Inhaberschuldverschreibungen). Electronic shares of acorporate nature, e.g. stock, are out of scope due to furtherrequired work on the corporate law implications but thescope may be widened accordingly at a later stage.

In addition to the introduction of electronic securities in the formof bearer bonds, the new draft as of 16 December 2020 containsa proposed amendment to the German Capital InvestmentCode (Kapitalanlagesetzbuch – KAGB) to the effect that sharecertificates (Anteilscheine) of German investment funds in thecontractual form of Sondervermögen, that do not have legalpersonality, (elektronische Anteilscheine – electronic fund shares)can also be issued in electronic form. According to the draft law,electronic fund shares may only be registered in bearer form.

The new law does not foresee for the possibility to issueelectronic fund shares in the form of crypto securities accordingto the eWpG. Shares in investment funds of a corporate typesuch as those of a German investment stock corporation(Investmentaktiengesellschaft) or investment limited partnership(Investmentkommanditgesellschaft) also remain out of scope.

To implement electronic fund shares, certain provisions relatingto electronic securities within the ambit of the eWpG shall applymutatis mutandis according to an amendment of Sec. 93 CapitalInvestment Code. The rules concerning electronic securities as stipulated in the eWpG shall apply to electronic fund shares ina manner that the provisions of the eWpG relating to electronicsecurities shall be construed to refer to electronic fund shares,those relating to the terms and conditions of the securities shallbe read to refer to the fund rules (Anlagebedingungen) and thoserelating to the bearer shall relate to the investor.

According to the corresponding references to the eWpGelectronic fund shares (inter alia)

• must be registered in a central electronic securities register (zentrales elektronisches Wertpapierregister) as an issuing mechanism which is operated by a duly authorized central securities depositary or a nominated depositary subject to technical security and data compliance standards, and
• have fundamentally the same legal status as a paper security and are deemed a physical (in rem) instrument.

Due to the fact that as regards investor transparency the fundterms are governed by the provisions of the Capital InvestmentCode, there is no requirement that these are also filed – and thusavailable to the public (Niederlegung) with the central electronicsecurities register.

The proposed introduction of electronic fund shares is awelcome step to foster the digitization of the German capitalmarket. Fund shares of Sondervermögen are a commonretail investment product and also the standard institutionalinvestment fund (Spezial-AIF) is set up in this format. In itssubmission to the consultation of the draft law, the GermanAlternative Investment Association (BAI) proposed theintroduction of this new electronic financial instrument: cf.