Demystifying the phenomenon of STOs (Security Token Offerings) in Germany
In times of digitisation and the still ongoing (national) hype around security token offerings (STOs) this article aims to shed some light about tokenisation of assets governed by German Civil law and the phenomenon of STOs in Germany.
Based on the description used in English dictionaries, a token is a thing serving as a visible or tangible representation of a fact, quality, feeling etc. In the context of this narrow interpretation, a token itself could not be seriously onsidered as a newly created and solely existing asset.
Tokenisation in the meaning of a digital representation was already possible before the advent of Blockchain and Distributed Ledger Technology.
From a technological perspective, digitisation and tokenisation seems to allow the creation of digital representations of almost every kind of asset (often referred to as “token”). Moreover, tokenisation based on a Blockchain or DLT environment could provide additional benefits because this underlying technology offers among others a transfer function to settle a token across a high number of users without a trusted third party.
Following this concept of a digital representation where a token represents an already existing asset, the transfer of the token and the rights attached to it (ideally in accordance with the “Terms & Conditions”) requires for a simultaneous legally binding transfer of ownership of the token and the rights of the represented asset or the physical asset itself.
This becomes even more important if the provisions of the German Civil and/or Corporate law with regard to the transfer of specific assets such as (units in a company) could not be implemented in a solely digital Blockchain or DLT environment.
Taking note of the differences between the issuance of security token and security-like token realised in Germany raises questions which are based on the motivation and the rationale behind the distinctions made and which lead to (potential) differences in quality and legal certainty of the specific issuance.[1]
From a legal perspective, there are good reasons which will be outlined in more detail in the following sections why only one of these approaches steps in the right direction.
While the issuance of securities in bearer form governed by German Civil law (§ 793 BGB) requires a certificate (e.g. global note) as legal basis for the securities and the corresponding rules for the transfer of ownership for now any other electronically issued instrument claiming to be a security does not fulfil the aforementioned requirements for securities in bearer form. Instead, electronically issued instruments such as security-like token could be classified as (financial) claim (“Forderung”) in accordance with German Civil law (§ 398 BGB). Additionally, the provisions applicable for the transfer of ownership of such other types of assets also deviate from the well-known provisions for the transfer of ownership of securities in bearer form.
In addition, the transfer of other types of underlying assets such as specific investments (“Vermögensanlagen”), limited partner’s interest (“Kommanditanteile”) or other units in a company (“Unternehmensanteile”) as referred to in German Civil law (§ 398 BGB) and/or the relevant German Companies Act are also subject to cession (“Abtretung”) which also includes a requirement of form (“Formerfordernis”).
Furthermore, the transfer of ownership in form of a cession requires — depending on the type of the underlying assets represented by the corresponding token — a kind of declaration of will (“Willenserklärung”) of both parties involved in a transaction of such an asset.
Thereby, the legally binding transfer of ownership of units in specific companies (e.g. Limited Liability Company (“GmbH”), Limited Partnership Company (“Kommanditgesellschaft”)) requires inter alia for a notarial documentation (“notarielle Beurkundung”). As a consequence, investors should be aware that in case where the transfer process of the token as digital representation diverge from the legal provisions applicable for the transfer of ownership of the underlying asset the they will be exposed to the potential risk of a retransfer (“Rückübertragung”) following a transaction. As a result, potential unrealised earnings based on the increase in value of the (security-like) token might be uncertain and the possibility to enforce the rights due to the underlying asset/value might be limited.
Conclusion: At the moment, token issued under German law could not be classified as securities in the meaning of § 793 German Civil law (BGB). Therefore, security-like token are a different type of asset for which the transfer of ownership is governed by the corresponding Civil law provisions for this type of asset (deviating to securities issued in bearer form). Ensuring a legally binding transfer of ownership might require potential investors to take into consideration both, the legal and technological layer of transfer of the (underlying) asset and the digital representation of this asset.
At the same time, there is a great opportunity to review the current existing legal framework for the transfer of ownership for those different investments and/or assets which are subject to cession (“Abtretung”) including a requirement of form (“Formerfordernis”) and to consider reasonable steps to adopt and support innovative technological solutions offered by Blockchain or DLT.
Finally, this rationale is also applicable for the tokenisation of illiquid assets where the token is a digital representation of the (physical) asset or fractions thereof and where transfer or trading of these tokens also imply simplified transfer of ownership in comparison to the represented underlying asset.
[1] Please note that this article aims by no means to judge about the economic success of the company, the project nor the creditworthiness of the issuer in respect of the token rights.
Disclaimer: For the avoidance of doubt, the views expressed are those of the author and not those of the Federal Financial Supervisory Authority (BaFin)
