The law of 15 March 2023 entered into force on 23 March 2023, implementing the EU Regulation 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology (“DLT”) (the “Blockchain III Law”).
Through the continuous evolution of its legal framework, the Luxembourg legislator legally recognizes the existence of DLT in the financial sector and adopts a dynamic approach attracting financial players using DLT in order to improve competitiveness while providing legal certainty in this constantly evolving environment.
1. Implementation of the DLT Regulation
With the adoption of the Blockchain III Law, the Luxembourg legislator goes a step further in its implementation of Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructures based on DLT (the “DLT Regulation”), which establishes as a transitional regime that will need to be reviewed within three years following its entry into force in order to either be renewed, extended, modified, repealed or set into a permanent regime.
The DLT Regulation entitles national competent authorities to temporarily exempt market infrastructures intending to use DLT from some specific requirements typically applicable to traditional market infrastructures as set out by the existing legislation.
The introduction of DLT has demonstrated that these requirements tailored to traditional financial instruments are not fully adapted for this new environment and lack technological neutrality.
In order to achieve technological neutrality, the law should not impose or even favor one technology over another when different technologies can satisfy the same objectives. In that respect, the Luxembourg legal framework is in constant evolution so as to become an even “friendlier” jurisdiction for DLT players.
2. Existing legal framework
Through the Blockchain III Law, Luxembourg maintains its pioneer role and continues to strengthen its legal framework following the adoption of two initial sets of legislative texts, the laws of 1 March 2019 (the “Blockchain I Law”) and of 22 January 2021 (the “Blockchain II Law”) respectively.
While the Blockchain I Law introduced the possibility to hold securities accounts, register and transfer securities using DLT in order to provide investors with greater legal certainty, the Blockchain II Law on the other hand, recognised the ability to use new secured electronic registration systems, such as DLT or distributed electronic databases in the context of issuances of listed and unlisted dematerialized securities by legally clarifying the notion of account registration in order to ensure issuances and the circulation of dematerialized securities within the DLT environment.
The Blockchain II Law further extended the scope of entities able to act as central account keepers to EU credit institutions and investments firms if the latter meets the technical and organizational requirements to operate such activities. The Blockchain III Law now goes a step further.
3. Blockchain III law
The Blockchain III Law now introduces ad hoc changes to the existing (i) law of 5 April 1993 relating to the financial sector, as amended (the “Financial Law”), (ii) law of 5 August 2005 on financial collateral arrangements, as amended (the “Financial Collateral Law”) and (iii) law of 30 May 2008 relating to markets in financial instruments, as amended (the “Financial Instruments Markets Law”).
3.1 Amendments to the Financial Law and the Financial Instruments Markets Law
The Blockchain III Law clarifies the definition of “financial instruments” through several amendments to the provisions of the Financial Law[1] and the Financial Instruments Markets Law[2] extending the notion of “financial instruments” to those instruments issued and represented under the DLT.
3.2 Amendments to the Financial Collateral Law
The Financial Collateral Law’s broad definition of financial instruments, already included transferable securities within the meaning of Directive 2002/47/CE[3] and did not impose any criteria of negotiability or fungibility of such instruments, establishing a harmonized legal framework applicable to financial collateral arrangements in order to promote an effective functioning for the European financial market as well as its stability[4].
The Luxembourg legislator evidences once again its intention to promote Luxembourg as a creditor friendly jurisdiction for transactions and issuances involving DLT by clarifying that financial instruments registered or existing in securities accounts held within or through DLT fall under the scope of the Financial Collateral Law.
By its legislative initiatives, the Luxembourg legislator now allows relevant financial players to use DLT on the financial market and as collateral hence providing greater legal certainty.
[1] Article 1 point 8 of the Financial Collateral Law has been amended.
[2] Article 1 point 26 of the Financial Instruments Markets Law has been amended.
[3] Directive 2002/47/CE of the European Parliament and of the Council of 6 June 2020 on financial collateral arrangements.
[4] Article 1 point 19 of the Financial Law has been amended.
Contact us
Cédric Raffoul
Partner, Avocat à la Cour au Barreau de Luxembourg, PwC Legal
Tel: +352 26 48 42 35 60
Email
Sixtine Auguet
Senior Associate, Avocat à la Cour au Barreau de Luxembourg, PwC Legal
Tel: +352 26 48 42 35 59
Email
Maureen Bayart
Junior Associate, Avocat au Barreau de Luxembourg, PwC Legal
Tel: +352 26 48 42 35 55
