Luxembourg Proposes Updates to Blockchain Laws
08 August 2024
The Government of Luxembourg has introduced a bill (the Bill) that will amend various Luxembourg laws focussed on securities issued and transferred on distributed ledger technology (DLT). Specifically, the Bill extends the scope of the existing DLT-based securities regime to include alternative issuance models (via the concept of a "control agent" (agent de contrĂ´le) and alternative asset classes that may be constituted via DLT under Luxembourg law; i.e., unlisted equities and units in collective investment schemes.
We set out in this article the background to the existing Luxembourg DLT-based securities regime, the proposed changes, and the main areas of impact.
Luxembourg law has expressly recognised DLT-based securities for several years, with a specialised issuance model unique to the Luxembourg DLT regime. The first DLT law was passed in 2019, and it has been expanded to put unlisted digital bonds, in particular, and their traditional counterparts on a level footing.
Today, DLT-based unlisted bonds may be issued, provided they are settled and held by a "central account keeper" utilising a two-tier holding structure under the Luxembourg regime. The central account keeper performs notary and central maintenance services with respect to DLT-based unlisted bonds securities, akin to a central securities depositary (CSD); albeit, in most cases, outside the scope of the Central Securities Depository Regulations (CSDR). A central account keeper must be authorised in the EU as a credit institution under the Capital Requirements Directive (CRD) or an investment firm under the Markets in Financial Instruments Directive (MiFID). See our briefing (here), for an example of an issuance of DLT-based unlisted bonds under the Luxembourg regime for the European Investment Bank, with Goldman Sachs Bank Europe SE acting as the central account keeper.
Despite these developments, there have been industry arguments that the current scope of the Luxembourg DLT regime is too narrow in scope and should be expanded to include unlisted equities; and, in particular, fund shares. Similar sentiments have been advocated with respect to the "central account keeper" model, with arguments that this model is restrictive from practical and operational perspectives. The Bill addresses these issues.
The primary non-exhaustive changes proposed by the Bill are:
1. The introduction of a new status of "control agent", which can be undertaken by a MiFID investment firm or CRD credit institution authorised under EU law and appointed by the issuer or by a liquidation body as provided by current law. The "control agent" has three key functions:
The control agent model is an alternative to the existing central account keeper model that requires the establishment of a two-tier custody chain between the central account holder and the secondary account holders. It will be available as an option for issuers, alongside the central account keeper framework.
The conditions for eligible firms wishing to take on the "control agent" role include notifying the CSSF, at least two months before commencing operations, and having sufficient internal governance and professional IT experience and resources.
2. Modifications to the way in which distribution payments are made under the control agent model, including what constitutes "good discharge" of payment obligations from the issuer's perspective.
3. The extension of the scope of application of Luxembourg regime to unlisted equity securities.
The Bill will be of primary interest to firms that have either issued securities under the Luxembourg regime or intend to do so in the short- to medium- term future, which are connected to the issuance process. Specifically:
Areas of impact include:
The Bill has just started its way through the Luxembourg legislative process. This means that finalisation and enactment into law is likely to be, at the earliest, in Q4 of this year.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.