Crypto security, cryptographic instrument or DLT financial instrument?
Anyone seeking to issue securities using distributed ledger technology (DLT) faces a fundamental choice: an eWpG crypto security, a cryptographic instrument or a DLT financial instrument under the DLT Pilot Regime. The choice determines not only the legal framework but the entire operating model, from issuance and custody to settlement and trading.
In this article, we compare the three structures and explain their operational implications.
Crypto security under the eWpG. A crypto security is a financial instrument regulated under prospectus, supervisory and civil law, within the meaning of MiFID II. It is recorded in a crypto securities register under the German Electronic Securities Act (eWpG). The available structures are broad, including bonds (bearer debt securities), fund units, registered shares and structured certificates.
Cryptographic instruments. This category includes tokenised securities issued outside the eWpG under the EU Prospectus Regulation, as well as tokenised other asset rights under the German Investment Products Act (VermAnlG). These instruments are mainly used for debt, typically crowdfunding or subordinated corporate financing. Other asset classes are possible, but often subject to restrictions.
DLT financial instrument under the DLTR. A financial instrument under MiFID II that is issued, traded or settled on a DLT market infrastructure under the DLT Pilot Regime (Regulation (EU) 2022/858). Eligible instruments include shares, bonds, other permitted forms of debt and UCITS.
For institutional investors and scaling across the EU, the eWpG crypto security is currently the most attractive model. Cryptographic instruments offer greater flexibility in structuring, while the DLT Pilot Regime represents the strategic target model.
| Crypto security (eWpG) | Cryptographic instruments | DLT financial instrument (DLTR) | |
|---|---|---|---|
| Advantages | High legal certainty, protection for good-faith acquirers and an established German legal framework | Greater scope to design and develop smart contracts; direct peer-to-peer transfers without prior onboarding with the register operator | EU-harmonised market infrastructure; enables DLT-based trading and settlement |
| Disadvantages | Primarily a national regime; requires a register operator; cross-border recognition of the register's legal effect is not fully harmonised | No protection for good-faith acquirers; limited legal certainty; classification varies across EU Member States | Pilot status; authorisation and volume limits; few authorised DLT market infrastructures so far |
| EU scalability | Currently the most attractive model; some other EU jurisdictions have comparable register regimes | Of selective interest for specific asset classes and bespoke setups, such as DeFi; few product-level scaling benefits | Strategic target model for a scalable pan-European capital market |
Under the volume limits in Article 3 DLTR, shares are eligible only if their market capitalisation is below EUR 500 million, and bonds only if their issuance volume is below EUR 1 billion. The total value per DLT market infrastructure is capped at EUR 6 billion. The transition strategy applies once it reaches EUR 9 billion. The EU Commission's Market Integration and Supervision Package (MISP) may relax these limits in future.
The biggest operational difference concerns the register: crypto securities require a register operator regulated in Germany, while cryptographic instruments do not. This affects all four stages of the value chain.
Crypto securities can only be issued through a crypto securities register operator regulated in Germany. Cryptographic instruments are issued under national law and do not require a register operator. DLT financial instruments are subject to the combined requirements of national law and the DLT Pilot Regime.
For crypto securities, the custody requirements depend on how the securities are registered. A collective registration requires deposit business and, where applicable, qualified crypto custody under the German Banking Act (KWG), if the custodian bank does not secure the keys itself. For individual registration, qualified crypto custody is sufficient. Cryptographic instruments also require qualified crypto custody. DLT financial instruments follow the custody rules applicable to their underlying form.
For crypto securities, settlement takes place by registering or transferring ownership in the crypto securities register. Settlement between two custodian banks is possible only if both are participants in the register. Foreign custodian banks must have notified their deposit business in Germany under the passporting regime. Cryptographic instruments settle finally upon transfer.
If a trading venue is involved, settlement in both cases runs through the DLT MTF or DLT TSS. For crypto securities, the DLT MTF or DLT TSS also maintains the records, so the register and the DLT MTF or DLT TSS must be synchronised. For cryptographic instruments, the records maintained by the DLT MTF or DLT TSS are authoritative.
Crypto securities and cryptographic instruments can be traded bilaterally over the counter (OTC) or, provided the Pilot Regime requirements are met, on a DLT MTF or DLT TSS. DLT financial instruments are traded on a licensed DLT MTF or DLT TSS.
There is no one-size-fits-all solution. The eWpG crypto security offers the greatest legal certainty today and is the first choice for institutional investors. Cryptographic instruments suit specific asset classes and bespoke setups. The DLT Pilot Regime is the target model for a scalable pan-European capital market, but for now it remains constrained by its pilot status and volume limits.
The key is to align the chosen structure with the operating model from the outset. Register operation, custody permissions, settlement processes and access to trading venues must all fit together.
