LUXEMBOURG PARLIAMENT VOTED BILL. NO. 8055 ON CERTAIN ASPECTS OF THE DLT PILOT REGIME APPLIES LAW ON 14 MARCH 2023. IT INTRODUCES SPECIAL RULES FOR FINANCIAL SECURITY ARRANGEMENTS AND IS THE THIRD LUXEMBOURG LAW ON DLT/BLOCKCHAIN (“AWBLOCKCHAIN”).
As a first mover in digital finance, the Luxembourg Parliament passed Bill No. 8055 on certain aspects of the DLT Pilot Regime into law on March 14, 2023. The DLT Pilot Regime allows firms to apply to operate a DLT-based trading facility and/or settlement system for financial instruments within a flexible regulatory environment (“DLT pilot regime“). The bill also introduces specific rules for financial security arrangements and is the third Luxembourg law on DLT/Blockchain (“Blockchain Act III“).
1. Blockchain Law III: security aspects
Blockchain Law III introduces changes to the law of August 5, 2005 on financial securities, as amended (“Act of 2005”), which is the cornerstone of Luxembourg legislation on security arrangements. It is known to provide a very high degree of legal certainty for security arrangements, which has been confirmed several times in case law.
The aim of Blockchain Law III is to expressly confirm that financial instruments recorded in securities accounts held on DLT qualify as financial instruments under the Act of 2005. This in turn means that financial security arrangements (such as pledges) over such financial instruments benefit from the full spectrum of protection in the Act of 2005.
The Blockchain Act III amends Articles 1 – 8) of the Act of 2005 as follows:
“whether these financial instruments are in physical form, dematerialized, transferable by accountingincluding securities accounts within or using secure electronic record-keeping mechanisms, including distributed electronic ledgers or databases; or delivery, bearer or registered, authorized or not and regardless of applicable law;
This change will thus increase legal certainty by allowing e.g. securities accounts on DLT are pledged without changing the effective system in the Act of 2005.
2. What is DLT?
In the spirit of favoring financial innovation and technological neutrality, none of the blockchain laws provide a definition of DLT, as they only refer to “secure electronic record-keeping mechanisms, including distributed electronic ledgers or databases”, (“dispositif d’registrement électronique sécurisé“).
That said, a definition is provided in the DLT Pilot Regime, which defines DLT as “a technology that enables the operation and use of distributed ledgers” and defines distributed ledger as “an information repository that maintains records of transactions and is shared across , and synchronized between, a set of DLT network nodes using a consensus mechanism”.
In layman’s terms, distributed ledgers are a new way of recording transactions in a shared manner which, among other things, opens up new forms of financial service delivery, while providing transparency and robustness, and making unauthorized changes to such records more difficult.
3. Timeline
Blockchain Law III applies from 23 March 2023.
4. Other considerations
Blockchain Law III also introduces changes to other Luxembourg legislation to pave the way for the introduction of the DLT Pilot Regime.
