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Germany Introduces Draft Bill on Blockchain-Based Digital Securities

Aug 20, 2020

Last week Germany’s Federal Ministry of Finance (BMF), together with the Federal Ministry of Justice and Consumer Protection (BMJV), introduced a draft bill on blockchain-based digital securities. The German Finance Ministry published a statement wherein the institution will be working on a draft law with the primary goal of creating a legal framework for digital securities, including the issuance of tokenized assets.

It was decleared by official draft bill that main objective for these changes and adaption of legal framework to new blockchain technologies is to strengthen Germany as a business location and to increase transparency, market integrity and investor protection. At the moment laws in Germany states that financial instruments that are classified as securities must be secured in a document. Therefore, blockchain technology could help to guarantee liquidity by providing a digital replacement for paper certificates.

Proposed legislation also brings clarity on regulations of digital securities. Particulary, a summary of the draft bill states that new regulations differentiates between the keeping of a central electronic securities register by a central securities depository and the keeping of registers for issuing electronic bonds made possible by distributed ledger technologies. Also, draft bill declares that German Federal Financial Supervisory Authority (BaFin) would serve as a significant regulator in the field of blockchain-based e-stocks. Regulator would be responsible for monitoring the issuance of digitized securities, as well as the maintenance of decentralized ledgers.

The lawmaker stats that the issuance of digital securities is not restricted to private systems. Instead, it would also be possible to be done on public blockchains. This would create the potential for securities, according to German law, to be issued on Ethereum, currently the most popular platform to issue digital assets on. Aditionally, if the legal framework is established, the procedure would be eligible for digitizing stocks or investment funds. The intentions of institutions is clear - embrace and leverage blockchain technology. Germany is the major influential participant in the EU and naturally, it wants to take a significant role in the new paradigm of digital securities and the blooming decentralized finance sector.

At the beginning of 2020, Germany had allowed local banks to sell cryptocurrencies to their customers. After approving the sale, 40 banks had reportedly applied for crypto custody licenses by February 2020. Earlier this year, BaFin also officially classified cryptocurrencies as financial instruments, following regulatory recommendations from the Financial Action Task Force (FATF). Local German legislator looking to increase the attractiveness of their financial sector allowing companies to issue and manage digital assets, and a legal framework would only encourage new advanced technologies to be even on a larger scale.

Recent draft bill is not specifically targeted towards blockchain-based assets, but it poses further development opportunities for the adoption of the novel technology in Germany. The drafted law is part of the government’s long-term pro-blockchain strategy.

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