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With the advent of Fintech, capital markets are going through a transformative phase. New opportunities abound, both in terms of increasing efficiency of currently operating markets, but also in terms of bringing liquidity into new markets and asset classes.

Luxembourg’s expertise in this sector makes it home to a wide range of up and coming innovations that will shape Europe’s capital markets of tomorrow.

Blockchain and tokenisation

Blockchain and DLT have impacts both in terms of defining new operating models or improving business models for existing capital markets, or bringing the benefits of market liquidity to new asset classes via a process known as tokenisation.

With regards to established capital markets, Luxembourg has been innovative in terms of providing legal clarity on the use of blockchain and DLT technologies. Luxembourg passed a new law in 2019, permitting the use of distributed ledger technology for the registration of securities. The new law provides greater transparency and legal certainty on the use of distributed ledgers and blockchain technology by deeming it equivalent to other secured electronic recording mechanisms for the transmission of securities. In 2020, Luxembourg started work building on this foundation to expand the legal basis for using new technologies such as DLT in the issuance of securities, and the Grand Duchy also set up a new regime for the registration and supervision of Virtual Asset Service Providers (VASPs) for the purposes of AML and CFT supervision.

Blockchain for market infrastructure

Market infrastructure is a very active field of development of DLT use cases worldwide, and Luxembourg is no exception.

A new Luxembourg based fintech, HQLAx, working together with a major European exchange group, has developed a blockchain-based solution for collateral swaps in the securities lending market. The objective is to help market participants redistribute collateral liquidity more efficiently – by improving the interoperability for different pools of securities and tackling the problem of fragmentation in the market. In December 2019, the solution was launched successfully with the first live transactions executed by Commerzbank, Credit Suisse and UBS.

Another use case currently being developed is FundsDLT, a blockchain based technology platform that enables the reengineering of the fund distribution value chain, from front to back, covering the entire fund lifecycle. The platform allows asset managers, distributors, asset servicers, and the entire supply chain to reduce costs by removing redundant activities, while providing the opportunity to achieve necessary transparency on end investors and creating the foundation for digital fund distribution. In 2020 the project received Series A funding from major Luxembourg market infrastructure providers, and Luxembourg based asset managers.

Luxembourg has been an extremely fertile ground for us to develop our services. The legislation around tokenisation is very forward thinking, and the FinTech community here is super innovative

Luc Falempin
CEO Tokeny

Tokenisation is another emerging use case for distributed ledger technology is the introduction of liquidity into secondary market trading in assets that were previously impossible to trade or highly
illiquid. In such cases, coins on a given blockchain network are used as tokens representing an underlying “real” asset.

Potential underlying assets for such tokenisation are wide ranging and include traditional financial assets, such as securities or other financial instruments, as well as tangible goods, such as real estate, fine art, or even forestry assets. Luxembourg’s strong history in the development of international capital markets is also reflected in the vibrant ecosystem of companies developing such tokenisation services. Tokeny provides solutions enabling firms to leverage tokenisation technology, allowing for fast onboarding, cost-efficient management and rapid transferability of private market securities.

A Europe-wide approach to tokenisation is in the offing. The upcoming Markets in Crypto Assets bill proposed in September 2020 by the European Commission will add further impetus to this sector.

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