News - 31.03.2023

Luxembourg Blockchain III Law to strengthen DLT activity

  • FinTech

The Blockchain III Law came into force on 23 March 2023, completing Luxembourg’s DLT (Distributed Ledger Technology) framework. The adoption of the law comes in the context of Luxembourg’s implementation of the EU DLT Pilot Regime.

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Specifically, it extends the notion of financial instruments to instruments issued under the DLT pilot regime in the Law on the financial sector (5 April 1993) as well as in the Law on markets in financial instruments (30 May 2018).

The new Blockchain III Law also strengthens the Collateral Law of August 2005, which is particularly protective of beneficiaries of pledges, when these relate to financial instruments, bank accounts or claims located in Luxembourg.  Its appeal lies in the fact that it does not allow a pledge contract to be blocked by a collective procedure. The new Blockchain law further consolidates it by specifying that it will also apply to securities held on a blockchain.

At the European level, Luxembourg is one of the only states to have established a set of rules explicitly permitting securities operations making use of DLT systems. In 2019, the Blockchain I Law clarified that the holding and transfer of securities was possible on DLT-based systems and that transfers recorded in this way should be considered as transfers between securities accounts. Two years later, the Blockchain II Law clarified that authorised issuers could also use DLT for the issuance and conversion of dematerialised securities.

Since the introduction of the Blockchain laws in Luxembourg, the European Investment Bank has already carried out two fully digital bond issuances on a blockchain, both governed by Luxembourg law. The first issuance took place at the end of November 2022 for €100 million. The second issuance took place in January 2023 for £50 million, with the securities being held in digital securities accounts on the newly established Orion platform that HSBC Bank.

The Orion platform was set up in Luxembourg at the beginning of this 2023 in anticipation of the development of such products. As John O’Neill, Global Head of HSBC’s Digital Assets Strategy, told Delano recently: “We looked in particular at what the laws were, (what) the regime was, around digital assets, and we were very attracted by the regime that exists in Luxembourg (…) a specific blockchain act.” The platform is the first example of a Central Account Keeper, a concept stemming from Luxembourg’s DLT regime, and will allow clients to receive tokenised securities and transfer those securities on chain via Orion.

The objective of this body of legislation on blockchain is to ensure a high level of legal certainty with regard to this new technology and thus preserve the confidence of market participants, as this new technological component is added to an existing legislative base.