Luxembourg Proposes Updates to Blockchain Laws

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 contrôle) 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 digital securities regime: current position

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.

Proposed changes under the Bill

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:

• Maintain the issuance account.
• Monitor the chain of custody.
• Reconcile the positions in securities accounts, to ensure the integrity of the issuance.

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.

Key areas impacted by the proposed changes under the Bill?

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:

• Issuers of DLT-based securities under the Luxembourg regime will have greater options.
• Central account keepers of DLT-based securities acting as agent for the issuer with respect to maintenance of the register constituting the DLT-based bonds and top-tier account holder of the DLT system.
• Securities account holders holding DLT based securities via securities accounts for themselves or third parties (e.g., as custodian).
• Paying agents appointed by the issuer to make payments related to the DLT-based securities (such as interest, dividends, or other sums due on the securities and other corporate actions.)

Areas of impact include:

• Issuers and their agents determining whether to pursue a control agent or central account keeper issuance route. This will involve engaging with the relevant control agent or central account keeper to assess the feasibility of an issuance under the relevant model and reviewing documentation/agreements mandating the arrangement; e.g., agency agreements.
• Ensuring that firms intending to act as control agents have designed relevant systems deployed for settling DLT-based securities, in a manner that is consistent and operationally implements necessary requirements associated with the role of control agent (i.e., notary, custodial chain monitor, and reconciliation body) and the control agent issuance model.
• Ensuring firms intending to act as control agent review their legal and operational documentation to align with the requirements of the control agent model.
• Firms intending to undertake the control agent role ensure they have the relevant licences to perform the role (i.e., as a licenced investment firm or MiFID firm).

Next steps

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.