Luxembourg introduces new legal framework for dematerialised securities using DLT

The Blockchain Bill IV proposes the following main changes:

• It broadens the Luxembourg DLT legal framework to include equity securities, besides debt securities, enabling the fund industry and the transfer agents to use DLT for the management of share and units registers and the processing of fund units.
• It establishes a new role of control agent, as an alternative to the central account keeper, for the issuance of dematerialized securities using DLT. The control agent can be an EU investment firm or credit institution chosen by the issuer.
• The control agent, which does not offer a centralized account keeping service, (i) maintains the securities issuance account, (ii) verifies the consistency of the number of securities issued by the issuer and the number of securities registered in the DLT network and (iii) supervises the securities custody chain at the account holders and the investors level.
• The control agent is not required to participate in the payment process related to the securities, which can be done either directly by the issuer to the investors or by the issuer to the paying agent, and then by the paying agent to the holders of the securities registered in the DLT network.
• It enables the issuer to fulfill its payment obligations related to the securities, such as interest, dividends or repayments, as soon as it has paid the relevant amounts to the paying agent, the settlement agent or the central account keeper, as decided by the issuer in the issuance documentation.

The Blockchain Bill IV makes it easier to issue, hold and reconcile dematerialized securities using DLT, by (i) eliminating the need for a central account keeper to have a second custody layer and (ii) allowing the securities to be directly credited to the accounts of the investors or their nominees. These processes can be done with smart contracts and the help of the control agent.

The Blockchain Bill IV is part of the Luxembourg government's strategy to foster the development of the digital economy and to position Luxembourg as a leading hub for financial innovation in Europe and beyond.

It builds on the previous laws – Blockchain Law I, II and III – that have created a legal framework for the use of secure electronic recording devices, including DLT, for the circulation of securities.

The Blockchain Bill IV opens up new possibilities and ways of structuring for the Luxembourg fund industry, which is the second largest in the world and a key pillar of the Luxembourg financial center. By allowing the use of DLT for the issuance and transfer of fund units, the bill improves the efficiency, transparency and security of the fund operations, and also reduces the costs and delays that come with the intermediation and reconciliation processes.

The Blockchain Bill IV also enhances the appeal and competitiveness of the Luxembourg financial center, by giving more legal clarity and flexibility to the issuers and the investors who want to use DLT for the issuance and holding of dematerialized securities, whether debt or equity. The use of smart contracts for the issuance and transfer of dematerialized securities using DLT can offer several advantages, such as automating the execution and enforcement of contractual terms, cutting down the need for intermediaries and manual interventions, and increasing the traceability and auditability of the transactions.

The Blockchain Bill IV shows that the Luxembourg government is determined to support the development and the supervision of the DLT-based activities in the financial sector, in close collaboration with industry stakeholders. The bill is a major step towards the modernization and digitalization of the Luxembourg capital markets and the fund industry, and a clear indication of Luxembourg's ambition to stay at the cutting edge of the financial innovation.