The Validity of eSignatures in Fund Subscriptions According to eIDAS 2.0

Documents created on a computer are printed, signed by hand, and scanned again. This not only raises costs and wastes resources but also impedes digitalization in the organization as a whole.

This was a point raised by the Bundesdruckerei when explaining the purpose of the eIDAS regulation.

For private market fund subscriptions, the reliance on manual processes is increasingly viewed as a liability and a frustration. Fund managers are dealing with an industry where compliance with strict regulations is critical.

This is particularly true in the European Union, where KYC and AML requirements, enforced by the 4th and 5th AML Directives, demand rigorous identity verification and transaction monitoring. 

These regulations are designed to ensure a secure financial environment, but they also add layers of complexity to the subscription process.

One area where perceptions are changing is in the adoption of electronic signatures. Many in the industry have traditionally viewed wet-ink signatures as the ultimate proof of authenticity. However, the introduction of the eIDAS regulation in 2016 has started to shift this mindset. 

eIDAS legally validates electronic signatures across the EU and provides a robust framework that ensures they are as binding as traditional signatures. 

Despite initial skepticism, electronic signatures have proven to be highly secure under eIDAS. The regulation ensures that electronic signatures are uniquely linked to the signatory, meaning that each signature is created with specific data that identifies and authenticates the individual signing the document.

This unique link is established through advanced cryptographic techniques, such as the use of private keys in a public key infrastructure (PKI), which guarantees that only the intended signatory can create the signature. 

eIDAS not only makes electronic signatures legally binding across the EU but also facilitates cross-border transactions, which are common in private market investments. 

The adoption of electronic signatures has been particularly strong in the Banking, Financial Services, and Insurance sectors (BFSI), which accounted for 40% of the eSignature market in Europe in 2023. 

This adoption in highly regulated sectors proves the reliability and security of electronic signatures, making them an increasingly attractive option for funds that must balance compliance with operational efficiency.

Introduction of eIDAS 2.0 and Its Impact on eSignatures in Fund Subscriptions

On April 30, 2024, the European Council approved an important amendment to the eIDAS Regulation, leading to the implementation of Regulation (EU) 1183/2024, also known as eIDAS 2.0. 

This update marks a significant shift towards harmonizing digital identity and trust services across the European Union, addressing many of the challenges identified in the original regulation.

As Christoph Busch, a legal expert at the University of Osnabrück, notes, In order to remedy the weaknesses of eIDAS 1.0, in June 2021, the European Commission published a proposal to revise the eIDAS Regulation.

The proposal seeks to address the shortcomings of the existing regulatory framework and extend its benefits to a broader range of use cases in the private sector.

Christoph Busch

Professor & Legal Expert at the University of Osnabrück

One of the most impactful changes introduced by eIDAS 2.0 is the European Digital Identity Wallet (EUDI Wallet). This wallet is designed to streamline electronic identification and authentication across borders, making it easier for fund managers and investors to verify identities and sign documents using qualified electronic signatures. 

The EUDI Wallet could serve as a means for the adoption of digital services by providing a unified approach to identity management, which is crucial for cross-border transactions. - industry expert Alejandro Leal. 

This development is set to enhance the efficiency and security of fund subscriptions, particularly in cross-border contexts. eIDAS 2.0 also introduces new types of trust services that directly impact how funds manage electronic documents and data. 

These include the Electronic Ledger Service, which ensures the integrity and accuracy of data records—critical for maintaining transparent and auditable fund operations. Additionally, the Electronic Archiving Service offers robust management of electronic documents, ensuring their durability and integrity over time. 

As the regulation evolves, it also imposes stricter security standards for these trust services, further reducing the risk of fraud and identity theft and thus boosting confidence in digital transactions across the EU.

Misconceptions About Electronic Signatures in The Private Market 

Despite the growing adoption of electronic signatures in the private market, several misconceptions still exist that can hinder their broader acceptance. 

These misconceptions often stem from a lack of understanding about the legal framework, security features, and overall efficacy of electronic signatures, particularly in sectors that demand high levels of security and compliance, such as private equity and venture capital.

Myth 1: Electronic Signatures Are Less Secure Than Wet-Ink Signatures

A common misconception is that electronic signatures are less secure than traditional wet-ink signatures. 

In reality, electronic signatures, especially those validated under regulations like eIDAS 2.0, offer enhanced security measures such as: 

• Advanced encryption
• Audit trails 
• Biometric authentication 

This makes eSignatures more secure than a handwritten one. As emphasized in the eIDAS 2.0 framework, 

eIDAS 2.0 introduces stricter security standards for trust services, reducing the risk of fraud and identity theft.

This level of security is fundamental in the private market, where the integrity of signed documents is paramount.

Myth 2: Electronic Signatures Cannot Be Used for Complex Legal Agreements