Luxembourg’s Legislative Shift: Expanding Blockchain Regulations

Luxembourg is taking steps to enhance its legal framework surrounding blockchain technology, particularly in the realm of securities. A new bill aims to broaden the scope of existing regulations to include new issuance models and asset classes, specifically targeting unlisted equities and units in collective investment schemes managed through distributed ledger technology (DLT).

The Evolution of Luxembourg’s DLT Regulations

Luxembourg has been a pioneer in embracing blockchain technology within its financial sector. The country first introduced DLT-based securities regulations in 2019, focusing on unlisted digital bonds. This framework allowed these bonds to be issued and managed under a specialized structure, positioning them on equal footing with traditional securities. A central feature of this framework is the role of a « central account keeper, » a regulated entity responsible for managing the issuance and settlement of these digital bonds, akin to a central securities depository (CSD).

However, the current system has faced criticism for its limited scope, particularly its exclusion of unlisted equities and the operational constraints of the central account keeper model. In response, Luxembourg’s government has proposed significant updates to address these issues.

Key Proposals in the New Bill

The newly introduced bill seeks to introduce several pivotal changes to Luxembourg’s DLT regulatory framework:

1. Creation of the « Control Agent » Role: The bill proposes a new role, the « control agent, » which can be assumed by qualified investment firms or credit institutions. The control agent would have three primary responsibilities:

• Overseeing the issuance account.
• Monitoring the custody chain of securities.
• Ensuring the accuracy and integrity of securities account records.

This new role offers an alternative to the central account keeper, providing issuers with more flexibility in how they manage their DLT-based securities.

2. Revised Payment Processes: The bill also outlines new procedures for distribution payments within the control agent model, providing clarity on the conditions under which payment obligations are considered fulfilled by the issuer. 

3. Inclusion of Unlisted Equities: A significant expansion in the bill is the inclusion of unlisted equity securities within the DLT framework, allowing these assets to be issued and managed using blockchain technology.

Implications for the Financial Sector

These proposed changes are likely to have a considerable impact on various stakeholders in Luxembourg’s financial sector:

• Issuers: Companies issuing DLT-based securities will have more options, allowing them to choose between the traditional central account keeper model and the new control agent structure.
• Financial Institutions: Entities looking to act as control agents will need to ensure they meet the new regulatory requirements, including having the necessary licenses and operational capabilities.
• Investors and Custodians: Those holding or managing DLT-based securities will need to adapt to the new regulatory environment, particularly in terms of compliance and operational procedures.

Looking Ahead

The bill is still under consideration in Luxembourg’s legislative process, with the earliest potential enactment by the end of this year. If passed, these changes could further solidify Luxembourg’s position as a leader in blockchain regulation, offering a more flexible and inclusive framework for the issuance and management of digital securities.