On March 9, 2023, the Luxembourg Parliament passed the Blockchain III Law.1 The Blockchain III Act – which was published on 17 March 2023 – amends, among other things, the Financial Sector Act2 and the Financial Security Act.3
The Blockchain III Law is a new step in the process of modernizing Luxembourg’s legal framework to embrace the digital era, following respectively the Blockchain I Law,4 which introduced the ability to hold securities accounts as well as register and transfer securities using technologies such as distributed ledger technology (“DLT“),5 and the Blockchain II Act6 which expressly recognized the possibility of issuing dematerialized securities through DLT (such as blockchains) by introducing a definition of “issuance account” in the Luxembourg Law of 6 April 2013 on dematerialized securities.
The changes introduced by the Blockchain III law mainly implement the EU’s DLT Pilot Regime Regulation.7 Traditional regulatory requirements prevent DLT market infrastructure operators from designing solutions for trading and settling transactions in digital assets due to concerns that these solutions will weaken the existing requirements and safeguards applicable to traditional market infrastructures. The EU DLT Pilot Regime specifically allows national supervisory authorities to temporarily exempt DLT market infrastructures8 which is exclusively used for financial instruments issued, registered, transferred and stored using DLT (“DLT financial instruments”) from certain requirements imposed by existing legislation for traditional market infrastructure.
By applying the principle of technology neutrality, the EU DLT Pilot Regime amends MiFID9 by specifying that “financial instruments” include DLT Financial Instruments.10 Among other things, the EU DLT Pilot Regime also made changes to MiFIR11 and CSDR.12
The Blockchain III Act amends the definition of “financial instruments” in the Financial Sector Act to include DLT financial instruments. This change came into effect on 23 March 2023, which was the date on which the EU DLT Pilot Regime came into force.
In addition, the Blockchain III Act amends the Financial Security Act by clarifying that the term negotiable financial instruments now includes “financial instruments registered or existing in securities accounts held within or through the secured electronic registration mechanisms, including distributed electronic ledgers or databases.This change took effect when the Blockchain III Act came into effect on March 17, 2023.
The amendment to the Financial Security Act is important for players in the financial market because it allows DLT financial instruments to be used as financial security in accordance with the Financial Security Act, which further increases the attractiveness of the Financial Security Act which already provides a very flexible, creditor-friendly and effective legal framework for security. Creditors now have the same level of protection against security arrangements over DLT Financial Instruments as against security arrangements over traditional assets such as shares, bank accounts, receivables or receivables, including with respect to the creation, perfection and enforcement of security arrangements.
The Blockchain III Act constitutes a further step towards the express legal recognition of DLT technology in the financial sector and aims to enable financial market participants to take full advantage of the opportunities offered by this new technology, with full legal certainty.
