“For higher institutional adoption of Security Tokens, tradability is key.”
Tokenization offers many advantages on both the investor and issuer sides. With the help of tokenization, for example, assets, rights, and obligations can be digitally divided into individual fragments and thus made accessible to a larger group of investors. An important criterion for the subscription of a Security Token for potential investors is the possibility to trade this token on a secondary market. The following blog post was written by Maximilian Portenlänger, Head of Securitization at Bankhaus von der Heydt, for our whitepaper “Secondary Markets for Security Token”. The whitepaper is part of a series titled “STO 101: Anatomy and Context of Security Token Offerings”. More information on this series can be found here.
Security Tokens are transferable and fundamentally tradable assets that are digitally mapped via a blockchain and embody debt claims/rights against the issuer that are comparable to shares or bonds. Fixed or variable interest claims are often linked to Security Tokens. They offer the possibility to invest in a wide range of assets or participate in their performance.
This is currently still a very young market, which is still in the early stages of its development. For further growth, the tradability of the Security Tokens and additional legal framework conditions are desirable.
The tradability of Security Tokens is ensured via a liquid secondary market. This is an essential step to making the assets attractive to a broad range of investors. The ability to trade Security Tokens in a liquid trading setup is of particular importance for their acceptance. Already today, Security Tokens can be traded on peer-to-peer platforms. In addition, there is the possibility of trading Security Tokens via centralized providers. Here, licensed proprietary traders provide the corresponding liquidity. In this case, Security Tokens can be traded in exchange with the liquidity provider. Genuinely regulated marketplaces in the form of multilateral trading facilities (MTFs) for Security Tokens do not yet exist in Germany. Security Tokens are securities in the legal regime, but not in the sense of German civil law.
Security Tokens are not recognized as property and are therefore not subject, for example, to the good faith protection when acquired from a non-entitled party.
For this reason, the protection afforded to investors under civil law in the transfer is therefore reduced in comparison with traditional security. For the classification of Security Tokens as securities under civil law, the issuance of a physical security certificate is required. According to the Federal Ministry of Justice and Consumer Protection, this paper document is “the connecting factor for the transfer” and it serves, among other things, to the protection of potential purchasers in the market”.[1]
In the “dematerialization” of securities, an adequate replacement must therefore be found for the previous securities certificate. Due to the high relevance of the “dematerialization” of assets, the Electronic Securities Act (eWpG) has also been passed. This law regulates the issuance of bearer bonds and unit certificates in investment funds without a certificate and ensures the legally secure acquisition of the security through entry into a digital register. To ensure the protection of investors, the maintenance of a securities register is subject to financial market supervision.
According to the eWpG, electronic security is equivalent to traditional security and investors benefit from the same transfer protection. Depending on whether the electronic security will be registered in a central register or a crypto securities register, the corresponding security will be referred to as central register security or crypto security.
Since crypto securities are also securities in the civil law sense and enjoy good faith protection under property law, the Electronic Securities Act may allow crypto securities to be traded efficiently in the future. This will support the broad acceptance of crypto securities.
Bankhaus von der Heydt is one of the leading banks in Germany that already offer comprehensive solutions for Security Tokens and will also offer solutions for crypto securities in the future.
From the structuring of these assets, custody according to the highest security standards to efficient payment processing, investors can benefit from a one-stop-shop solution. In addition, Bankhaus von der Heydt together with its partners also acts as a liquidity provider and thus already offers a form of a secondary market for Security Tokens today.
[1] Bundesministerium für Justiz und Verbraucherschutz, Gesetz zur Einführung von elektronischen Wertpapieren. December 2020
About the Author
Maximilian Portenlänger is Head of Securitization at the von der Heydt Group and Chairman of the Securitisation Task Force of the LuxCMA. He is committed to the application of disruptive technologies in the financial sector, focusing on blockchain technology and asset tokenization. Maximilian Portenlänger holds a Master of Science (M.Sc.) in Management & Technology from the Technical University of Munich.
About the Company
Bankhaus von der Heydt was founded in 1754 and is one of the oldest private banks in Europe. In addition to the headquarters in Munich, there are further locations in Frankfurt and Luxembourg. The fully regulated bank specializes in asset structuring and servicing, with a particular focus on blockchain technology and digital assets. As a tech bank, Bankhaus von der Heydt occupies a leading position in Germany.
Disclaimer Bankhaus von der Heydt GmbH & Co.KG (VDH) is not responsible for the accuracy of the information. The presentation does not contain any recommendations to buy or sell crypto stocks and is also not to be understood as a market or product analysis, but only reflects the subjective perception of VDH.
Originally published at https://21.finance on April 11, 2022.
