This article first appeared on Fin Law Blog.
Since last summer, bearer bonds in Germany can also be issued in the form of so-called crypto securities without certification on a certificate under the new Electronic Securities Act (eWPG). Therefore, the legislator has created an opportunity to give holders of security tokens a legal position comparable to ownership of paper documents. Buyers of crypto securities can also become legally beneficial owners if the seller was not the owner at all, as long as they were unaware of the lack of entitlement through no fault of their own. In the case of crypto-securities, the bonus rights are firmly and inseparably linked to the tokens that represent them in accordance with the legal provisions of the eWPG. In addition, companies still have the option to issue security tokens without using the possibilities of eWPG. This may make sense, for example, if the issuer does not want to involve a central registry operator, which needs to be included in cryptosecurity issues. As before the entry into force of the eWPG, a legal mechanism must be found in these cases to ensure that the tokens and the bonus rights are inextricably linked.
In the case of tokenized bonds, the starting point for linking investors’ rights to a token is the terms of the bonds, often referred to as token terms, in which the rights and obligations between the issuer and investors are regulated. contractually. The Token Terms contain, among other things, provisions on return, term, subordination agreements, and termination rights. In the case of tokenized bonuses that are not designed in accordance with the eWPG, the terms of the tokens may stipulate that token holders can only transfer their tokens to another person if they simultaneously assign all rights and obligations arising from the bonus to the buyer. This mechanism can ensure that the position of the token and the investor in relation to the terms of the token are always with the same person. For the mechanism to work reliably, token holders must also be bound by the terms of the token not to assign rights to the security token in any other way, for example, without simultaneous transfer of the token.
The obligation for holders of security tokens to be able to dispose of only the rights to the tokenized bond and only in its entirety through a token transaction on the underlying blockchain represents a restriction on the investor’s right of assignment. Since October 1 of 2021, the German law AGB- A new protection provision, according to which clauses in general terms and conditions that exclude the transfer of money claims against the user of the clause may be invalid. Token terms are formulated for a large number of investor contracts and are therefore always general terms and conditions. According to the explanatory memorandum, the new provision should, contrary to the wording of the law, also include clauses that do not completely exclude transferability, but only limit it. Consequently, the assignment constructions in symbolic terms could be affected by the new legal regulation in the future. The issue is only relevant for security tokens that are to be sold to private investors, as the regulation of contracts between entrepreneurs should have no effect under the new law.
The purpose of the new legal regulation is to protect consumers against businessmen and avoid restrictions on the fundamental right of assignment of the contracting parties in general terms and conditions. The right to assign credits is a consequence of the general freedom of contract and, therefore, an essential right of freedom that consumers should not be deprived of without good reason. However, the new legal regulation is a regulation with the possibility of evaluation. As long as there are good reasons for a restriction on assignment and the consumer’s rights are not unreasonably restricted by the restriction, the restriction on assignment may still be permissible. Allocation restrictions in the Security Token Terms regularly benefit all parties involved. Issuers can be sure that only current token holders are holders of the bonds. Investors can also rest assured that the security tokens they have purchased are actually tied to the investor’s rights to the tokenized bond. Transfer restrictions thus create legal certainty for all parties involved and do not place investors at an unreasonable disadvantage. Ultimately, however, civil courts will have to decide on the effectiveness of assignment restrictions in general terms and conditions in individual cases. The formulation of the restrictions in individual cases, as well as the general construction of the Token Terms, will regularly be of decisive importance in the cases of Security Token offers.
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