On 26 January 2021, a new Luxembourg law dated 22 January 2021 (the “2021 DLT Law”) entered into effect, amending the Luxembourg law of 6 April 2013 on dematerialised securities, and the law of 5 April 1993 on the financial sector.
The 2021 DLT Law introduces two changes, namely: (i) recognising the issuance of dematerialised securities using distributed ledger technology (including blockchain), and (ii) broadening the scope of entities allowed to act as account keeper for unlisted debt securities, by including any EU credit institution or investment firm, provided certain conditions are fulfilled.
1. Issuance of dematerialised securities using distributed ledger technology (DLT)
The 2021 DLT Law is a continuation of the previous effort to bring the Luxembourg legal framework in line with new technological developments and to promote innovation in the financial sector.
The law of 1 March 2019 had already amended the Luxembourg law of 1 August 2001 on the circulation of securities, to clarify that securities account (i.e. the account that investors have at their bank, which reflects their ownership of the securities), for the circulation of fungible book-entry securities, may be kept by relying on distributed ledger technology.
The 2021 DLT Law completes the previous developments by enabling central account keepers and liquidation organisms to also keep issuance accounts (i.e. the record in which the issued securities are registered at the moment of the securities issue) with respect to dematerialised securities by relying on distributed ledger technology. Note that the 2021 DLT Law is technologically neutral and refers to secure electronic recording devices, including distributed registers or databases.
In other words, the Luxembourg legal framework now explicitly recognises the possibility to issue dematerialised securities in tokenised form, and to register the transfer of ownership of these securities using distributed ledger technology. Thus, the entire issuance and circulation process can occur in a DLT-based environment.
2. Enlarged scope of entities allowed to act as account keeper for unlisted debt securities
Before the 2021 DLT Law, the function of central account keeper was reserved to those Luxembourg regulated entities holding a specific authorisation to this effect.
Going forward, for unlisted debt securities, any EU credit institution or (MiFID) investment firm is allowed to carry out the function of account keeper, provided they comply with certain IT control and security requirements. In particular the relevant firms need to be able to:
- Register the securities composing each issue in an issuance account;
- Ensure the circulation of securities by transfer from one account to another;
- Verify that the total amount of each issue and recorded in an issuance account is equal to the sum of the securities recorded in the securities accounts of their account holders; and
- Exercise the rights attached to the securities recorded in the securities account.
This will ultimately enable issuers of debt securities governed by Luxembourg law to rely on a much broader range of account keepers, provided these comply with rules equivalent to those applying to authorised central account keepers, thereby creating a level playing field.
Note that the enlarged scope applies only to unlisted debt securities and hence for equity securities and listed debt securities the previous regime remains unchanged.
What’s happening next?
We expect additional market players to make use of the possibilities offered by the new law, and hence we are likely to see an increased interest in securities issuances via DLT for the year to come. We also expect this trend to spread to the investment funds world in Luxembourg, where more and more DLT-based distribution solutions begin to surface.