Investment funds on the blockchain – not so long ago it seemed like a dream of the future. But this picture has changed dramatically. Even the German legislator sees great potential in distributed ledger technology (DLT) and pushes regulation forward. Additionally, small, resourceful providers are making a dent for investment funds in the crypto world. They put a kind of digital clone on the blockchain.
The “law for the introduction of electronic titles” in clumsy official German is a real breach in the dam. This work revolutionizes German financial law by modifying other rules such as the capital investment code and by allowing the purely electronic issuance of securities. Until then, securities were literally tied to paper – with the exception of Bunds. Collective certificates had to be printed and stored in safes, which was a laborious process. The law now allows purely virtual registration of securities in an electronic register.
real breakthrough
The new regulations initially only covered bonds and funds – the latter with one restriction. “There is a difference between a central electronic ledger and a decentralized ledger for cryptographic securities,” says Tanja Aschenbeck, who heads the financial services department at law firm Osborne Clarke in Germany. “The capital investment code only opens up the possibility of registration in a central electronic register”, specifies the lawyer. “Basically, a fund share is issued electronically, but not mapped to a blockchain.”
However, the new ruleset contains an opening clause for a settlement. The Department of Finance and the Department of Justice followed up this summer. “It actually enables the issuance of crypto fund shares in a literal sense,” says Aschenbeck. The regulations specify certain safety standards. The register should be a tamper-proof system of record and record entries in chronological order and protect against further modification. “These formulations are aimed at blockchain technology,” explains the lawyer. “But the wording of the regulations is deliberately left open. The legislator wants to establish technology-neutral regulations.”
Clean clones
In addition to the avenues opened up by the Electronic Securities Act and the Crypto Funds Ordinance, some resourceful vendors have blazed their own trail in the blockchain world. Munich-based boutique Gridl Asset Management has announced that it has tokenized its mixed fund Gridl Global Macro UI with Bankhaus Scheich. The Bavarians made it public in the spring, i.e. before the entry into force of the Crypto Funds Ordinance. How did the parties proceed?
You can read how the German fund industry assesses the opportunities opened up by the E-Wertpapiergesetz and the Crypto Fund Ordinance in the full article version of FONDS profi issue 3/2022. Registered users can also find the article here in the e-magazine.
To do this, the actors created a kind of digital clone of the fund. “We have created a special-purpose vehicle. This buys the fund shares,” says Björn Weigel, head of digital assets at Bankhaus Scheich. “As a market maker, we then trade the special purpose vehicle tokens, so a buyer can always trade a token for a share of funds.” The advantage of this construction: Digital negotiability allows economies of scale. In addition, the shares of the fund would be divisible, which would allow access to larger groups of buyers. “Fund providers are opening up new customer groups with tokenization,” says Weigel.
But does the path via a crypto clone also have legal validity? “According to the current legal situation, a tokenization of fund shares is entirely possible, provided that this only means a kind of digital image of a classic approved fund”, says lawyer Aschenbeck of Osborne Clarke . “In terms of civil law, there is no difference between the ownership of a conventional fund share and a symbolic fund share in this sense.”
provisional solution
But why did the pioneers choose the detour via a special-purpose vehicle, when German lawmakers now allow the issuance of crypto funds? “For us, this represents an interim solution,” says Weigel, the crypto fund’s obstetrician. “We see it as a transition technology until a final solution on blockchain becomes possible.” Because the options created by the German legislator have so far been limited to the regional level.
“Germany is a pioneer in this field,” admits Weigel. “From a European point of view, however, the field remains a niche. Because the most important locations for UCITS are simply Luxembourg and Ireland.” The German legislator has thus made a dent. However, it will likely take some time before crypto funds become mainstream. (ert)