Fund units on the blockchain – draft crypto fund units ordinance (Kryptofondsanteileverordnung)

On 6 September 2021, the German Federal Ministry of Finance and the German Federal Ministry of Justice and Consumer Protection presented its draft regulation for the introduction of crypto fund units (KryptoFAV). Comments on the draft can be submitted until 6 October 2021.

Concerning this issue, the KryptoFAV is intended to further adapt the legal framework for the use of blockchain in Germany. In order to make Germany (even) more attractive as a “fund location” they extended it to the fund sector. Here the proposal is essentially based on the regulations on electronic securities.

Background: Electronic securities

The Electronic Securities Act (eWpG), which came into force on 10 June 2021, created the possibility of issuing bearer bonds digitally, i.e. without a securities certificate. A security can be issued as an electronic security under the eWpG by making an entry in an electronic securities register. Electronic securities registries are divided into central registries and crypto securities registries. Recently, the ministries had published a draft regulation on requirements for electronic securities registers (eWpRV) This draft contained further requirements for these registers.

Electronic share certificates

As part of the introduction of the eWpG, the German Investment Code (KAGB) was also amended. There, the possibility was created to issue electronic units in investment funds in the legal form of special assets (Sondervermögen). However, the KAGB regulates such electronic units that are entered in a central register only but not a crypto securities register. Crypto fund units are not regulated in the KAGB. However, the KAGB now contains a decree competence for the Federal Ministry of Finance and the Federal Ministry of Justice and Consumer Protection to apply the regulations on crypto securities also to fund units.

By proposing the KryptoFAV, the Ministries want to make use of their decree competence and to introduce crypto fund units. This is done by entering units of special assets (Sondervermögen) into a crypto securities register and, thereby, creating crypto fund units.

The KryptoFAV stipulates that the basic provisions for crypto securities shall also apply to crypto fund units. However, crypto fund units cannot be registered with any crypto securities registry. In this concern, the depositary must assume the role of the entity keeping the register. In this way, the depositary should be able to fulfil its duties under the KAGB in relation to the investor.

Criticism of the draft

The first step is to enable the issuance of fund units on blockchain as well. It is largely based on the regulations for crypto securities. Hereby, it creates a homogeneous framework for the “crypto” part of the securities or units.

However, the draft is tailored to existing players in the fund space. Only depositaries can assume the role of the registrar. In this case, depositaries may only be CRR credit institutions for UCITS; CRR credit institutions and CRR investment firms for AIFs. This is already a very high hurdle for start-ups in the crypto space. In the start-up sector, the question arises whether tokenization cannot be chosen in a simpler way via a security token solution. This solution still encounters legal uncertainties and does not enable a bona fide acquisition. However, it does make a register-keeping body redundant. Whether the legislator really intended these effects can be doubted.

Germany’s status in the crypto and fund sector

Germany wants to further establish itself as a fund location and create clear regulatory rules. In addition to the eWpG and the draft KryptoFAV, the Fund Location Act (Fondstandortgesetz) was also introduced in August this year. This allows special funds to invest up to 20% of their assets under management in crypto assets. However, restrictions exist in terms of access to this fund. Only professional and semi-professional investors are allowed to invest in special funds.
In addition, the eWpG is to be re-evaluated three years after it came into force. The inclusion of digital/electronic shares/stocks, which has been called for in part by industry representatives and politicians, could become topical again at that time.

This would further recommend Germany as a location for the crypto sector.