The tokenization of assets provides for an increasing merger of traditional and crypto-financial instruments. At the same time, security token offerings (STOs) pose new challenges for regulators worldwide: Which tokens require which regulation? When is a security talk, when is a token an asset?
The Federal Financial Supervisory Authority BaFin has addressed this issue in a specialist article. In it, the agency notes a “paradigm shift” as a result of the tokenization of assets in the form of security tokens.
What is an investment?
The Investment Act, to which BaFin refers in the article, defines an investment as
- Shares which grant a participation in the result of a company
- Shares in a property that the issuer or a third party owns or manages in its own name for foreign account (trust assets)
- Partial loans (equity loans)
- Subordinated loan
- Participation rights
- Registered Notes
- Other investments providing or promising cash settlement in exchange for temporary lending of interest and repayment or assets
Security Token as a separate class of securities
BaFin notes that tokens – as a digitized form of assets – must be regarded as a separate class of securities. This also applies if the tokenized financial instrument is an investment.
” If a financial instrument that is designed or designated as an investment pursuant to § 1 (2) VermAnlG [Vermögensanlagengesetz] is digitized in the form of a freely transferable and tradable […] token, the result is not an investment in the sense of the VermAnlG, but this is a security […] at least if the instrument contains share-like or membership rights or a property law of a contractual nature.
A security is, according to the Prospectus Act:
- Shares and other securities which are comparable to shares or units in corporations or other legal persons, and certificates representing shares
- Debt securities, in particular bonds and certificates representing securities other than those referred to in point (a)
- All other securities which entitle or result in a cash payment for the purchase or sale of such securities, which are determined by transferable securities, currencies, interest rates or yields, goods or other indices or measures
Now the vast majority of tokens or cryptocurrencies can be transmitted very well due to their technical nature. Tradability on the financial market is also given – as Bitcoin exchanges make BaFin a financial market. What distinguishes security tokens from utility tokens and cryptocurrencies, therefore, are the security-like claims that they represent.
Example Bitbond: Germany’s first security token offering
Based on these criteria, it is possible to understand why BaFin, for example, does not consider Bitcoin as a security. Transferable? Check. Tradable? But hello. But do you earn with Bitcoin claims, such as a return or a say in a company? No.
The situation is different with the token “BB1” of the company Bitbond. BaFin classified this as a security – a precedent in German regulatory history. The underlying financial instrument, that is what is tokenized, is a registered bond. This is actually covered by the definition of investment and is not considered as a security – it lacks the free tradability, as a transfer to another person is not provided. This reached Bitbond, however, by pouring the bond in token-form:
“The underlying instrument was originally designed as a registered bond, ie as an investment, and would be subject to VermAnlG.But the transfer to the blockchain, however, the financial marketability significantly increased.The thus tokenized investment was as a security sui generis [own kind] to classify […],
it says in the technical article on.
Benefits for issuers and investors
Among other things, the issuer – in this case Bitbond – has the advantage that the bond can be obtained without the usual securitization in the form of a physical instrument. Proof of ownership is via the token and does not require paper. This in turn means that intermediaries such as Clearstream, a Luxembourg-based international custodian for securities and a wholly owned subsidiary of Deutsche Börse AG, will cease to exist.
Fewer middlemen means leaner processes and leaner processes mean one thing above all else: lower costs. However, investors also benefit from the cost savings because they do not need a custodian bank to acquire a security token, which in turn requires fees; All you need is a wallet.
Other STOs in sight
BaFin speaks of a “paradigm shift” regarding the tokenization of assets – and at the same time reveals that it is currently examining a number of securities prospectuses for pending security token offerings. Bitbond started with tokenization. It will be interesting to see which investments will end up on the Blockchain next – assuming the blessing of the highest German financial regulatory authority.