Since digital currencies were first introduced, Germany has been taking an active approach. BaFin, the German financial regulator, classified cryptos including Ethereum and Bitcoin as units of account and financial instruments back in the year 2011.
Security tokens have been making a lot of headlines in recent times with addition from Germany. The word “security tokens” refers to the digital tokens that are backed by real-world securities. Such tokens have multiple advantages and are generally offered through what is called a Security Token Offering (STO). STOs are regulated by applying rules that determine how participants and token issuers could interact in the space.
BaFin’s Views on Token Offerings
BaFin issued warnings pertinent to ICOs in 2017 and stated how it is essential to consider each token offering on a case by case basis. The regulator proposed examining the tokens and classifying them subsequently into utility tokens, security tokens or cryptocurrency.
BaFin proclaimed how a detailed consideration of the technical and contractual aspects of an ICO was necessary to determine if the issuer needed approval and was obligated to publish a prospectus. There were no security tokens issued, however, at the time of the aforementioned announcement.
Security Tokens and STO Regulations in Germany
Recently BaFin clarified the tokens as digital assets, in other words, a separate security class. Since they are traded in the financial markets as financial instruments, they must be considered securities. For a token to be classified as a security, it must be transferable, equivalent with securities-like rights, and tradeable on the market.
A significant move recently came in when BaFin approved an STO project. In the year 2018, Bitbond, a Berlin-based startup reached out to the BaFin and proposed its detailed framework that described a tokenized bond creation.
The company had submitted its prospectus in October 2018 to the German regulator. The authorities examined the project and approved the token offering in January 2019. With this step, it has become the first STO in Germany. This is an important move ahead in view of the fact that BaFin has been turning down several companies’ projects earlier, citing ‘non-competence’. Germany has become one of the leading countries in the STO space with the regulated Security Token Offering approval.
Security tokens such as those approved by the regulator are often backed by classic bonds. The key to the power of the security tokens is that they eliminate any financial intermediaries, which means subscribers do not need to pay any commission or premium. Liquidity in the space is expected to improve as more traditional players participate in the ecosystem and the growth is improved.
The German regulators have approved an STO project and indicated some important characteristics of security tokens along with the advantages and risks of digital tokens. The approval of the first STO by the German authorities is being considered as a landmark initiative regarding the STO regulations in Germany. The German regulators’ approval came in at an important time in the security token ecosystem. This action is one step towards a path-breaking success for the global security tokens landscape.
This article is published in collaboration with Bitbond.