Luxembourg passes new bill to recognise DLT for issuing and settling dematerialised securities
03 February 2021 Luxembourg
Image: coffeemill/adobe.stock.com
The Luxembourg Parliament has passed a new bill to recognise the use of distributed ledger technology (DLT) for issuing and settling dematerialised securities.
The new bill, the Blockchain II Act 2021, will enable the issuance of dematerialised securities directly in DLT devices.
In addition, it will open the central account keeper role to record and operate DLT issuances of unlisted debt securities to any EU credit institutions or investment firms.
The bill, which was passed by the Luxembourg parliament on 21 January, completes a set of past legislative initiatives in the DLT space that amended the Luxembourg act dated 1 August 2001 on the circulation of securities, as amended to enshrine the use of DLT devices to settle fungible securities.
Allen & Overy suggests that the Blockchain II Act 2021 will “bridge a gap” left by previous legislation and clarifies the fact that central account keepers or settlement organisations may use DLT devices to make records.
It also highlights that central account keepers or settlement organisations may now use private or public DLTs to make records.
Philippe Noeltner, associate at Allen & Overy in Luxembourg, explains: “A legislative amendment was added to the Luxembourg legal framework to specifically enshrine that fungible securities — whether it is debt or equity, Luxembourg or foreign law governed, can be transferred entirely in a DLT environment.”
Noeltner highlights that the amendments in 2019 meant that Luxembourg account keepers were able to plug themselves into a private or public DLT to process their settlement operations. In other words, this amendment allowed transfers of fungible securities to take place directly onto the DLT.
After this amendment was introduced, the needs of the market changed and there was a desire to issue dematerialised securities directly in a DLT environment. Noeltner says because of this need, the Luxembourg law of 6 April 2013 on dematerialised securities, which caters specifically to dematerialise securities, needed to be amended to specify that securities can be issued solely in a DLT environment.
According to Noeltner, the legislation that passed in January will see both issuers and record keepers benefit from a flexible environment to issue securities directly in a DLT environment, which will bring speed, cost saving and transparency.
Noeltner comments: “Issuers will be able to see on a DLT ledger who owns their debt or their shares. Issuers could potentially pre-emptively whitelist their investors, which is really helpful in case you have qualified investor requirements.”
“That's something that the transfer agent or the clearing systems would traditionally do manually or directly on their systems, but without transparency across the securities lifecycle chain,” he adds.
For market infrastructure players, like clearing systems or account keepers, the new bill will allow them to plug their operations into DLT systems to record issuances of dematerialised securities.
Noeltner suggests that they wouldn’t necessarily need to have their own specific infrastructure but instead, they could rely on distributed systems without compromising on security and safety.
"Luxembourg and the wider European financial ecosystem seem very keen to adopt DLT technology to spur innovation in traditional operations," he adds.
Earlier this year in January, Zürcher Kantonalbank (ZKB) and Deutsche Boerse’s post-trade services provider Clearstream processed their first live blockchain-based end-to-end fund transactions, using FundsDLT, a decentralised platform for fund transaction processing.
ZKB was the first to leverage the joint FundsDLT and Clearstream solution, with an end investor placing a fund transaction request via a mobile app directly on the private blockchain.
Clearstream noted that this particular cross-border distribution of an investment fund between Switzerland and Luxembourg showed that DLT can foster more efficient, scalable and faster fund investing for all market participants.
The new bill, the Blockchain II Act 2021, will enable the issuance of dematerialised securities directly in DLT devices.
In addition, it will open the central account keeper role to record and operate DLT issuances of unlisted debt securities to any EU credit institutions or investment firms.
The bill, which was passed by the Luxembourg parliament on 21 January, completes a set of past legislative initiatives in the DLT space that amended the Luxembourg act dated 1 August 2001 on the circulation of securities, as amended to enshrine the use of DLT devices to settle fungible securities.
Allen & Overy suggests that the Blockchain II Act 2021 will “bridge a gap” left by previous legislation and clarifies the fact that central account keepers or settlement organisations may use DLT devices to make records.
It also highlights that central account keepers or settlement organisations may now use private or public DLTs to make records.
Philippe Noeltner, associate at Allen & Overy in Luxembourg, explains: “A legislative amendment was added to the Luxembourg legal framework to specifically enshrine that fungible securities — whether it is debt or equity, Luxembourg or foreign law governed, can be transferred entirely in a DLT environment.”
Noeltner highlights that the amendments in 2019 meant that Luxembourg account keepers were able to plug themselves into a private or public DLT to process their settlement operations. In other words, this amendment allowed transfers of fungible securities to take place directly onto the DLT.
After this amendment was introduced, the needs of the market changed and there was a desire to issue dematerialised securities directly in a DLT environment. Noeltner says because of this need, the Luxembourg law of 6 April 2013 on dematerialised securities, which caters specifically to dematerialise securities, needed to be amended to specify that securities can be issued solely in a DLT environment.
According to Noeltner, the legislation that passed in January will see both issuers and record keepers benefit from a flexible environment to issue securities directly in a DLT environment, which will bring speed, cost saving and transparency.
Noeltner comments: “Issuers will be able to see on a DLT ledger who owns their debt or their shares. Issuers could potentially pre-emptively whitelist their investors, which is really helpful in case you have qualified investor requirements.”
“That's something that the transfer agent or the clearing systems would traditionally do manually or directly on their systems, but without transparency across the securities lifecycle chain,” he adds.
For market infrastructure players, like clearing systems or account keepers, the new bill will allow them to plug their operations into DLT systems to record issuances of dematerialised securities.
Noeltner suggests that they wouldn’t necessarily need to have their own specific infrastructure but instead, they could rely on distributed systems without compromising on security and safety.
"Luxembourg and the wider European financial ecosystem seem very keen to adopt DLT technology to spur innovation in traditional operations," he adds.
Earlier this year in January, Zürcher Kantonalbank (ZKB) and Deutsche Boerse’s post-trade services provider Clearstream processed their first live blockchain-based end-to-end fund transactions, using FundsDLT, a decentralised platform for fund transaction processing.
ZKB was the first to leverage the joint FundsDLT and Clearstream solution, with an end investor placing a fund transaction request via a mobile app directly on the private blockchain.
Clearstream noted that this particular cross-border distribution of an investment fund between Switzerland and Luxembourg showed that DLT can foster more efficient, scalable and faster fund investing for all market participants.
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