Digital Assets

Digital assets are a new asset class based on distributed ledger technology (DLT) which is currently conquering the financial market and financial service sector. Digitally represented assets are not issued or guaranteed by any central bank or public body. Thus, they symbolize independence, efficiency, swiftness and progress.  

In addition to classic crypto currencies (Ether, Bitcoin & Co.), such asset class also comprises other tokenized assets and crypto securities. The financial market’s digitalization now allows to trade not only crypto currencies but also corporate shares, securities, loans, tangible assets (such as real estate, commodities, infrastructure, works of art or cars) and digital assets (such as compositions, digital paintings, photographs) which are digitally represented by means of DLT.  

Digital assets provide for an easy, fast and efficient access to the capital market and offer various business opportunities, by allowing you to either trade on your or on your client’s behalf, create your own trading platform, act as depositary or even issue digital assets in order to raise capital (ITO/ICO).  

With many years of experience, profound know-how in banking, capital market and IT law, as well as longstanding tangible asset experience, we have built up expertise in digital assets, which forms the basis for comprehensive advisory services. 

The creation of digital assets is based upon distributed ledger technology (DLT). Blockchain is the best-known DLT. The basis of this decentralized system is a database maintained by all participants. It documents and stores all transactions for all participants. This is possible thanks to a peer-to-peer network to which all participating computers connect. The asymmetric cryptographic process used to generate and verify digital signatures ensures that the transaction cannot be forged. As the digital asset transactions are each stored on the DLT, the same digital asset cannot be issued twice and the associated transaction cannot be reversed. This ensures protection against counterfeiting and a high level of transaction security. 

With DLT or blockchain, digital assets are managed and transferred using software. This software is called a wallet. Wallets are comparable to a digital purse. Every transfer of digital assets from the wallet must be signed by the token holder using a private key. 

Two types of wallet providers have evolved – custody wallet providers and non-custody wallet providers.

In addition to these private keys, there are also “public keys”, comparable to the IBAN. In contrast to private keys, public keys can be passed on regularly. 

A token represents an asset that is stored on the basis of distributed ledger technology (“DLT”). The value of a crypto token can be based on various functionalities, properties or rights associated with the token. Based on this, one can distinguish between three simplified categories of crypto tokens: 

• Currency token: function of a means of payment 
• Investment tokens: membership rights or claims under the law of obligations with tangible assets 
• Utility tokens: used in order to purchase goods or services 

A wide range of sub-categories has formed under these categories. Tokens can also comprise a combination of several categories (so-called hybrid tokens).  
Categories of digital assets

Digital assets offer much more opportunities than merely serving as digital alternative to a means of payment. An entirely new field of economic activity has developed around these opportunities, which includes in particular the following financial products and services: 

In Germany, classic initial public offerings (IPO) are only possible for stock corporations, European stock corporations (Societas Europaea, SE), and partnerships limited by shares (KGaA) under strict regulations. The issuance of securities is also subject to strict legal requirements.  

Initial coin offering (ICO) or initial token offering (ITO) based on tokenization provides for a new form of corporate financing in particular for small and medium-sized enterprises, irrespective of their legal form. In return for capital, security tokens can be acquired which, depending on their structure, either convey participation and dividend rights (equity tokens) or establish a claim to repayment and interest on the invested capital (debt tokens). Once issued, these tokens can also be traded on a secondary market. 

Since this quickly evolving legal field is subject to permanent change and is also strongly influenced by new legal acts at European level, it is strongly recommended to seek legal, tax, and, if applicable, economic advice during an ICO’s planning and implementation.  

Our lawyers specializing in capital market and corporate law and our tax consultants can provide you with both legal and tax advice on an ICO. Our auditors are also available to provide you with an economic assessment of your business model. 

EU Commission’s Digital Finance Package 

The increasing importance and number of various digital assets required a regulatory framework that adapts to and creates a secure legal basis for current developments. On September 24, 2020, the European Commission therefore presented the “Digital Finance Package”. It contains comprehensive legislative proposals and strategies intended, on the one hand, to promote innovation and technical development in the digital financial sector and to provide a regulatory and harmonized framework in the European Union on the other. 

The digital finance package’s main legislative proposal is the proposed regulation for “Markets in Crypto Assets” (MiCA). Such regulation is mainly intended to provide for EU-wide legal certainty on the crypto assets market, promote innovation and strengthen consumer and investor protection on the crypto assets market.  

In addition to MiCA, the digital finance package also includes a proposed regulation to regulate DLT-based financial market infrastructures. The regulation aims to facilitate and promote the necessary structures on the financial market and to create a secondary market for tokenized securities. Furthermore, the digital finance package includes the proposed regulation on a “Digital Operational Resilience Act” (DORA).  

The EU Markets in Crypto Assets Regulation of May 31, 2023 (Regulation (EU) 2023/1114, MiCAR) came into force at the end of June 2023. The Regulation created a comprehensive regulatory framework for cryptocurrencies and other digital assets that had previously been lacking. In addition to creating a uniform European legal framework for digital assets, the Regulation’s main objectives are to prevent the misuse of cryptocurrencies, promote innovation and ensure comprehensive investor protection. Following its publication in the Official Journal of the European Union on June 9, 2023, the MiCAR will be fully applicable from December 30, 2024. 

With the MiCAR’s entry into force and application, currency and equity tokens must no longer be issued or offered without a corresponding license from the competent national supervisory authority. Furthermore, providers of certain services in connection with crypto assets will in future also require a license from the German Federal Financial Supervisory Authority (BaFin). Thus, the MiCAR sets out clear requirements in order to be authorized as issuer of crypto assets in the European Union and contains corresponding obligations on the publication of white papers and regulations on official procedures. The MiCAR also introduces provisions on protection and regulations to prevent market abuse in connection with crypto assets.

On December 14, 2022, the European Parliament and the European Council adopted Regulation (EU) 2022/2554 on digital operational resilience in the financial sector (Digital Operational Resilience Act, DORA). It was published in the Official Journal of the European Union on December 27, 2022 and came into force on January 17, 2023. It will apply from January 17, 2025. DORA’s objective is to strengthen the financial sector’s digital operational resilience. Financial companies should be able to adequately address risks arising from the use of information and communication technologies (ICT). First and foremost, DORA includes various regulations on risk management, information exchange and risk allocation when using third-party ICT providers such as cloud service providers. 

While the German legislation addressed the digitalization of securities rather hesitantly with the introduction of the German Electronic Securities Act (eWpG) in 2021, it is now clearly driving forward the financial market’s digitalization in 2023. In November 2023, the Financing of Future-Proof Investments (Financing for the Future Act) was adopted with the goal of facilitating companies’ access to the capital market, as the law allows, for the first time, share issues on the basis of DLT technology. Shortly before this, the German Federal Ministry of Finance published an initial draft law on the digitalization of the financial market in October 2023 in order to implement the European MiCA and DORA regulations. 

With the Act on the Introduction of Electronic Securities (eWpG), the German legislator opened up German law to the electronic issuance of securities as early as June 3, 2021. This was the first time the legislator abolished the previously mandatory requirement that securities had to be embodied by a physical certificate. Securities had already been traded electronically, in particular without the delivery of physical certificates. However, the parties had to make use of the complex system of central custody and several intermediaries. In this respect, the eWpG creates the basis for the digitalization of securities law and its future-oriented opening to new technologies, and allows for securities to be placed on the capital market faster and more cost-efficiently, without the involvement of intermediaries. As a first step, however, the eWpG currently only enables the issue of electronic bearer bonds. With the “Future Financing Act”, the legislator has decided to open up German stock corporation law to electronic shares using the eWpG. 

Another national legislative initiative to promote the capital market is the Future Financing Act, which was approved by the German Federal Council on November 24, 2023. 

The legislator adopted a comprehensive package of measures. It is intended to strengthen Germany as a financial center and ease barriers to capital market access. The German legislator expects for the law to have an incentive effect which is going to strengthen the capital market and channel capital flows into up-and-coming companies. 

In addition to various tax incentives, the legislator plans to facilitate capital market access for start-ups as well as small and medium-sized enterprises by lowering the minimum amount of expected market liquidity for an IPO from the current 1.25 million euros to one million euros. Furthermore, the draft law creates incentives for employee participation in the company and reduces barriers to digitalization. 

The option to issue shares on the basis of distributed ledger technologies such as blockchain is a seminal step in this respect. In future, registered shares are to be issued and transferred electronically via a central securities register or a crypto securities register. This will be supplemented by measures to increase the security of investments in crypto assets that are held in intermediary custody. By introducing these electronic shares, the legislator is now providing for an easier and more cost-efficient way to raise equity capital. In doing so, it is driving forward the digitalization of the financial market. 

On October 23, 2023, the German Federal Ministry of Finance published the first draft bill for a law on the digitalization of the financial market (FinmadiG) in order to transpose the requirements of MiCA, DORA and the amended European Money Transfer Regulation into national law. In addition to amendments to the KAGB, KWG, WpHG (German Securities Trading Act), WpIG (German Securities Institutions Act) and GewO (German Industrial Code), this draft bill provides for the introduction of a law on the supervision of markets for crypto assets (Crypto Markets Supervision Act, KMAG). Thus, digital assets will now also be subject to a regulatory framework at national level.