Blockchain Law IV: Luxembourg’s New Push for Digital Securities

On 19 December 2024, the Luxembourg Parliament adopted the Law[1], which introduces a new status of control agent for issuers who wish to use DLT for the issuance and custody of dematerialised securities. The Law aims to enhance the attractiveness and competitiveness of the Luxembourg financial centre by offering greater flexibility, security, and transparency to issuers and investors. This initiative is part of the government's broader strategy to position Luxembourg as a leading hub for financial innovation in the European Union. By leveraging advanced technologies like DLT, the Law seeks to provide a robust legal framework that supports the evolving needs of the financial sector[2].

The Law follows and complements previous legislation already adopted in Luxembourg. Indeed, the Blockchain I, II, and III laws[3] progressively introduced DLT for securities, enabling secure registration, issuance, and transfer of dematerialised financial instruments. Each law has gradually broadened blockchain’s application within the financial sector, strengthening Luxembourg’s position as a leading hub for digital finance and innovation.

The Law now amends several existing laws, including, the Law of 6 April 2013 on dematerialised securities (the “Dematerialised Law”), the Law of 5 April 1993 on the financial sector (the “LFS”) and the Law of 23 December 1998 establishing a financial sector supervisory commission (the “CSSF Law”).

1. Designation of Control Agent

1.1. Definition and Functions

The Law entitles issuers to appoint a control agent, which can either be an investment firm, a credit institution, or a settlement system, to perform the functions of keeping the issuance account, monitoring the chain of custody of the dematerialised securities, and reconciling the issued securities[4]. The control agents will use DLT to secure and share the information on the holding of the securities among the different market participants[5].

The control agent’s functions include more specifically:

• Maintaining the issuance account[6]: the control agent holds and maintains the issuance account within or through a secured electronic recording system, including DLT or database.
• Tracking the chain of ownership[7]: the control agent continuously monitors the chain of ownership of dematerialised securities held in the securities accounts.
• Verifying issued securities[8]: the control agent ensures that the total amount of issued securities recorded in an issuance account matches the sum of securities recorded in the securities accounts of accounts holders.

The use of the control agent will not be mandatory, as the current system remains in place. It will serve as an alternative to the existing framework, which is currently based on the central account keeper and secondary account keepers[9].

Additionally, the control agent will not be required to manage payment procedures related to securities, which can instead be handled by the issuer or a paying agent [10].

1.2. Organisation and technical requirements

Pursuant to Article 21 bis of the Dematerialised Law, as amended, control agents are required to have a robust internal governance framework, including a clear organisational structure, effective risk management processes and appropriate IT systems[11].

It is also required that any person wishing to engage in control agent activities have to notify the Commission de Surveillance du Secteur Financier (the “CSSF”) at least two months before starting the activity, providing the necessary information to justify compliance with legal conditions[12].

1.3. Benefits

This new model is an alternative to the existing model that requires the establishment of a two-tier custody chain between the central account holder and the secondary account holders. One of the key benefits of this approach is the enhanced security and efficiency it offers. By using DLT, the control agent can ensure that all transactions are transparent and immutable, reducing the risk of fraud and errors. Additionally, this model can significantly reduce the administrative encumbrance on issuers and intermediaries, leading to cost savings and faster processing times.

2. Amendments to Existing Laws

The Law further provides for some targeted amendments to the LFS and the CSSF Law reflecting the introduction of control agents functions in the Dematerialised Law[13]. It sets out the organisational and technical requirements that the control agent must comply with and the prior notification that it must submit to the supervisory commission[14].

These amendments are crucial for ensuring that the new framework operates smoothly and that control agents adhere to high standards of governance and security. By clearly defining the roles and responsibilities of control agents, the Law aims at fostering a trustworthy environment for digital securities[15]. This is expected to attract more international investors and issuers to Luxembourg, further boosting its reputation as a forward-thinking financial centre.

Furthermore, the Law introduces a new opportunity for banks and investment firms, allowing them to act as central account keepers for both non-listed debt instruments and non-listed equity securities. This innovation highlights the potential of the Law to improve market practices[16].

Conclusion

The Law marks an important step to ease the use of DLT in the financial sector and to consolidate the positioning of the Luxembourg financial centre as a reference hub in the European Union for the use of DLT, especially in the field of issuance of dematerialised securities. By embracing new technologies and adapting its legal framework accordingly, Luxembourg is setting a precedent for other financial centres to follow.

The Law not only supports innovation but also ensures that such advancements are implemented within a secure and regulated environment. This proactive approach is likely to yield long-term benefits, including increased market confidence, enhanced operational efficiency, and a more dynamic financial ecosystem.

For further details on the Blockchain Law III, we invite you to consult this link. Should you require any additional information or assistance, please do not hesitate to contact us.