On 26 January 2021 a new bill of law of 22 January 2021 (the "Bill") modifying (1) the law of 5 April 1993 on the financial sector (the "Financial Sector Law") and (2) the law of 6 April 2013 on dematerialised securities (the "2013 Law") has entered into force in Luxembourg.
The Bill introduces important modifications to the legal framework applicable to dematerialised securities by explicitly allowing for the issuance of dematerialised securities directly using distributed ledger technology, such as blockchain (the "DLT").
Previously the law of 1 August 2001 on the circulation of securities, as modified most recently on 1 March 2019, in a first step by the Luxembourg authorities towards establishing a legal framework for DLT, allowed accounts to be held and securities to be registered on such accounts pursuant to technologies such as DLT. However, securities in such accounts continued to need to exist independently in the form of a global certificate, registered or bearer securities.
The Bill further extends this legal framework in the following two aspects.
Issuer Account
First, the Bill introduces a new definition of "compte d'émission" ("Issuer Account"). This Issuer Account corresponds to an account held with a settlement organisation or a central account keeper for the purpose of registering securities issued using DLT.
Accordingly that oversight in the Luxembourg legal framework for the issuers of dematerialised securities has been tackled. The Issuer Account will be primarily held using DLT and no other record of the existence of such securities is required. Such securities will also only be settled within a DLT environment.
The main advantage of using DLT rather than traditional methods for issuing securities is that the DLT creates a network of data shared among peers participating in the DLT that is safe and effective, without requiring recourse to a number of usual intermediaries. Indeed the technology itself guarantees the validity of transactions effected by allowing verification by the participants, and so intermediaries are not required to guarantee their legitimacy. These advantages of DLT (blockchain) have also been highlighted by the Luxembourg Conseil d'Etat in its opinion on the Bill, where it notes that the use of such technology may reduce costs of transactions for issuers.
Central Account Keepers
The second major innovation introduced by the Bill is the amendment to the definition of the central account keepers under the 2013 Law.
Prior to the Bill, only entities having received a dedicated authorisation as a financial services provider under article 28-11 of the Financial Sector Law (the "Central Account Keepers") from the Luxembourg financial sector authority, the Commission de Surveillance du Secteur Financier (the "CSSF") or settlement organisations were entitled to hold securities accounts for the issuers in Luxembourg.
The Bill now also allows credit institutions and investment firms to operate as Central Account Keepers for the purpose of holding Issuer Accounts using DLT, without needing to obtain any additional authorisations from the CSSF.
However, these entities have to be able to demonstrate that they:
- dispose of appropriate security controls and IT systems for the purpose of their role as central account keepers and allowing for the registration in an account of the entirety of securities in every issue they handle;
- are in a position to secure book entry transfers of securities;
- are able to verify if the total amount of any issue they handle and that has been registered in an Issuer Account is equal to the aggregate sum of all securities registered in the securities accounts of their account holders; and
- allow for the exercise of rights attached to such securities.
It is worth noting that only settlement organisations may hold securities that are to be admitted to trading with a stock exchange in the European Union.
The Bill is an important innovation to the Luxembourg legal framework affecting the operations of many market participants which are now vested with additional capabilities and may offer their clients a wider range of services in the rapidly evolving Fintech market. This Bill also demonstrates Luxembourg's greater efforts to keep its legal system up to date with technical developments and strengthen its position as one of the most important financial hubs in the European Union.
The Bill can be accessed via following the link. We expect unofficial coordinated versions of the modified laws to become available on the CSSF's website in the near future.
Authors: Anna Kozakiewicz, Associate and Katia Fettes, Senior Associate
