Luxembourg is taking a further important step towards improving its innovative DLT infrastructure and framework for issuing financial instruments
On 9 March 2023, the Luxembourg Parliament (Chambre des Députés) approved Bill 8055 (the “Luxembourg Blockchain III Law“) which, among other things, amends the Act of 5 August 2005 on arrangements with financial security (the “Financial Security Act“) to explicitly recognize the possibility of taking collateral for financial instruments registered in securities accounts using electronic registration mechanisms (dispositifs d’enregistration électroniques), including distributed ledger technology (“DLT“). As soon as the waiver of the requirement for a second vote in the Parliament Chamber is approved, the Luxembourg Blockchain III Law will enter into force.
The recent changes are part of Luxembourg’s strategy to create a highly innovative hub for DLT-related transactions and issuances by recognizing the full range and lifecycle of issuances, transfers, collateralization and settlement of securities using DLT.
Blockchain I and II
Initially, in March 2019, Luxembourg had introduced the possibility of holding securities accounts as well as registering and transferring securities using technologies such as DLT by amending the law of 1 August 2001 on the circulation of securities (“Luxembourg Blockchain I Law“). However, native issuance of securities on the blockchain was only made possible through the law of January 22, 2021 (the “Luxembourg Blockchain II Law“).
In this regard, the Luxembourg Blockchain II law introduced a new type of issuer account with a settlement organization or central account holder for the purpose of registering securities issued using DLT. This means that no other record of the existence of such securities is required anymore, so that they can be settled in a DLT environment. Previously, although transfers on the blockchain were recognized by law, securities had to exist independently in the form of a global certificate, registered securities or bearer securities.
We had covered the changes introduced by the Luxembourg Blockchain II law in more detail in a previous legal update.
Blockchain III
The Luxembourg Blockchain III Law now complements the legal framework for Luxembourg DLT by explicitly recognizing that financial instruments registered in securities accounts using DLT fall within the definition of “financial instruments” in the Financial Security Act and as a result may constitute financial security under this framework.
In other words, the Luxembourg Blockchain III Law now removes any uncertainty with regard to the question of whether the creation, perfection and enforcement of the rules laid down in the Financial Collateral Law can also be applied to collateral held in DLT securities accounts. As no other provisions of the Financial Security Act have been changed by the Bill, it has now become clear that the general rules with regard to the creation, perfection and enforcement of security schemes do in fact apply when such DLT securities are used for financial security. .
Given that the Law on Financial Security was originally implemented with the aim of providing a highly flexible, creditor-friendly and efficient framework for securities, the Luxembourg Blockchain III Law is a further logical step in this direction and will significantly improve the existing framework by expanding its application to innovative structures based on DLT.
Regulation (EU) 2022/858
In addition, the Luxembourg Blockchain III Law contains a further amendment that is important in connection with the implementation of Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructure based on distributed ledger technology (the “DLT Pilot Regime Regulation“). For a period of six years, the DLT Pilot Regime Regulation allows national authorities to exempt certain DLT market infrastructure frameworks from the standard requirements applicable to “traditional” market operators. The aim is to strengthen the legal certainty and security surrounding the issuance of financial instruments using DLT while ensure that such financial instruments can be traded within the existing legal framework adapted by the DLT Pilot Regime Regulation.
In this regard, the Luxembourg Blockchain III Law amends the definition of financial instruments in both (1) the Luxembourg Law of 5 April 1993 on the financial sector and (2) the Luxembourg Law of 30 May 2018 on markets for financial instruments by explicitly expanding the term financial instruments to these instruments issued under the DLT Pilot Regime Regulation.
