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Synergies and security: crypto shares as risk minimisers (5/6)

The global defense landscape is evolving rapidly, with emerging technologies and geopolitical challenges creating new opportunities and risks for start-ups and investors alike. 

In this context, crypto shares have emerged as a potential game-changer, offering a range of benefits that can help drive innovation and growth in the sector.

Crypto shares can minimise risks and create synergies. Find out how these innovative financial instruments can be combined with established financial channels and what security mechanisms they offer.

  • The outstanding advantage of crypto shares is that they can be issued without an intermediary, resulting in considerable cost and time savings. They are decentralized, meaning they can also be OTC (Over The Counter) traded outside of a regulated market and offer a high level of transaction security. By issuing them, young companies in particular can gain access to innovative investors and use the Distributed Ledger Technology (“DLT”) to organize the exercise of shareholder rights and the payment of dividends.

  • The good news is that companies do not have to decide whether they want to issue conventional shares or crypto shares. Crypto shares do not take the place of conventional shares, which are securitised in a certificate; rather, they form an additional alternative in which securitisation takes place through entry in the crypto securities register provided that the company's articles of association expressly permit this. Thus, only the range of securitisation options has been expanded since crypto shares, like all electronic shares in general, do not constitute a new type of share, but are treated in the same way as documentary shares under stock corporation and securities law.

  • But it gets even better: insofar as this is expressly permitted by the company's articles of association, companies can issue both conventional shares and crypto shares at the same time and can decide at a later stage to swap one form of share for the other. This is of particular importance for any IPO possibly planned at a later date.

  • However, the legislator has only permitted the option of securitisation by means of the crypto securities register for registered shares, arguing that only registered shares allow for an effective money laundering check. This argument is not convincing, as a reliable money laundering check is indeed possible for bearer shares precisely because they are issued via the Distributed Ledger Technology (DLT). It is to be hoped that this misjudgement will be corrected in the course of the next money laundering reform.

  • As explainded above, to securitise crypto shares, entry in a crypto securities register is required; in addition, as with all shares, entry in the share register is mandatory, as only the shareholders entered in the share register can assert rights and obligations in relation to the company. In other words, entry in the crypto securities register is not sufficient for the assertion of rights and obligations in relation to the company; instead, an entry in the share register is required, which, like all electronic shares, is held by a custodian or central securities depository.

  • On the other hand, with regard to the keeping of the crypto securities register, the issuer can decide whether this is also carried out by the same body as the share register or by the issuer itself, which reduces the number of intermediaries and, thus, costs.

  • The great advantage of crypto shares, however, is their transferability by means of the DLT, which allows consistent traceability and whose operation and maintenance can also be ensured by the issuer, provided that it has a license for the crypto securities register or uses a corresponding financial services institution.

  • Last but not least, the exercise of voting rights and the automatic counting of votes can take place via DLT, which means that each vote is clearly assigned and formal errors in the counting process are prevented, thus eliminating the risk of a resolution being contested on this basis.

As a summary:

While crypto shares represent a novel approach to defense financing, they are not intended to replace traditional funding models. In fact, one of the key strengths of crypto shares is their ability to be combined with established financial channels to create powerful synergies and mitigate risks.

For example, a defense start-up could use crypto shares to raise initial seed funding from a diverse pool of investors, while also pursuing more traditional venture capital or government grants to support later-stage growth and commercialization. By diversifying their funding sources in this way, start-ups can reduce their reliance on any single investor or market, while also tapping into the unique benefits offered by each financing model.

Similarly, investors can use crypto shares to build more balanced and resilient portfolios, by combining these digital assets with more traditional equity stakes or debt instruments. This approach can help spread risk across different types of investments, while also providing exposure to the potential upside of disruptive defense technologies.

As the defense sector continues to evolve and adapt to new challenges, crypto shares represent a powerful tool for driving innovation, collaboration, and growth. By offering a secure, transparent, and efficient mechanism for start-ups to raise capital and connect with investors, crypto shares can help unlock the full potential of the global defense innovation ecosystem.

We invite start-ups, investors, policymakers, and other stakeholders to join us in exploring the opportunities presented by crypto shares in the defense sector. Whether you are an entrepreneur looking to bring cutting-edge technologies to market, an investor seeking to support the next generation of defense innovators, or a government leader looking to foster a more agile and responsive defense industrial base, crypto shares offer a range of benefits that can help you achieve your goals.

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