Legal development

Blockchain III

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    On 9 March 2023 the Luxembourg parliament (Chambre des Députés) approved the bill of law 8055 (the "Luxembourg Blockchain III Law") amending, among others, the law of 5 August 2005 on financial collateral arrangements (the "Financial Collateral Law") in order to explicitly recognize the possibility to take collateral over financial instruments registered on securities accounts using electronic registration mechanisms (dispositifs d'enregistrement électroniques), including distributed ledger technology ("DLT"). Once the waiver of the requirement for a second vote in the parliamentary chamber is approved, the Luxembourg Blockchain III Law will enter into force.

    The recent amendments are a part of Luxembourg's strategy to create a highly innovative hub for DLT related transactions and issuances by recognizing the full array and life circle of issuances, transfers, collateralisation and settlement of securities using DLT.

    Blockchain I and II

    Originally, in March 2019 Luxembourg had introduced the possibility to hold securities accounts as well as register and transfer securities using technologies such as DLT by amending the law of 1 August 2001 on the circulation of securities (the "Luxembourg Blockchain I Law"). However, native issuances of securities on blockchain were only made possible by way of the law of 22 January 2021 (the "Luxembourg Blockchain II Law").

    In this respect, the Luxembourg Blockchain II Law introduced a new type of issuer account held with a settlement organisation or a central account keeper for the purpose of registering securities issued using DLT. This means that no other record of the existence of such securities is required any more allowing them to be settled within a DLT environment. Previously, even if transfers on blockchain were recognised by law, securities needed to exist independently in the form of a global certificate, registered or bearer securities.

    We had covered the amendments introduced by the Luxembourg Blockchain II Law in more detail in a previous legal update.

    Blockchain III

    The Luxembourg Blockchain III Law now completes the Luxembourg DLT legal framework by explicitly recognizing that financial instruments registered on securities accounts using DLT fall under the definition of "financial instruments" in the Financial Collateral Law and as a result can constitute financial collateral under that framework.

    In other words the Luxembourg Blockchain III Law now removes any uncertainty with respect to the question whether the creation, perfection and enforcement rules set out in the Financial Collateral Law can also be applied to collateral held in DLT securities accounts. As no other provisions of the Financial Collateral Law have been amended by the bill of law it has now become evident that the general rules as regards the creation, perfection and the enforcement of collateral arrangements are indeed applicable when such DLT securities are used for financial collateral.

    Given that the Financial Collateral Law had originally been implemented with a view to providing a highly flexible, creditor friendly and efficient collateral framework the Luxembourg Blockchain III Law is a further logical step into this direction and will considerably enhance the existing framework by extending its application to innovative structures based on DLT.

    Regulation (EU) 2022/858

    Additionally, the Luxembourg Blockchain III Law contains a further amendment important in the context of the implementation of Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology (the "DLT Pilot Regime Regulation"). For a period of six years the DLT Pilot Regime Regulation allows national authorities to exempt certain DLT market infrastructure frameworks from the standard requirements applicable to "traditional" market operators. The aim is to reinforce legal certainty and security around the issuance of financial instruments using DLT while ensuring that such financial instruments can be traded within the existing legal frameworks as adapted by the DLT Pilot Regime Regulation.

    In this respect the Luxembourg Blockchain III Law amends the definition of financial instruments in both (1) the Luxembourg law of 5 April 1993 on the financial sector and (2) the Luxembourg law of 30 May 2018 on markets in financial instruments by explicitly extending the notion of financial instruments to those instruments issued under the DLT Pilot Regime Regulation.

    For more information on the DLT Pilot Regime Regulation we invite you to take a closer look at our Ashurst in-depth legal update on the topic.

    Should you require any assistance or further information on these new developments please do not hesitate to contact our Luxembourg Ashurst team.


    Authors: Fabien Debroise, Partner; Anna Kozakiewicz, Associate

    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.

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