On 23 March 2023, the law of 15 March 2023 implementing the EU DLT Pilot Regime1 (the “Law” or the “Third DLT Law”) entered into force and amended (i) the law of 5 April 1993 on the financial sector, (ii) the law of 5 August 2005 on financial collateral arrangements, and (iii) the law of 30 May 2018 on markets in financial instruments.
The main objective of the Law is to clarify that the existing definition of “financial instruments” (which in its current version originates from MiFID II2) includes financial instruments recorded on a distributed ledger. Although the possibility of recording financial instruments on distributed ledgers was not explicitly excluded, the clarification under this new Law provides legal certainty for such set-ups.
In particular, the possibility to create, perfect and enforce financial collateral arrangement over financial instruments held on a distributed ledger was positively received by the Luxembourg financial sector.
As reminder, Luxembourg has already enacted two laws on distributed ledger technology, namely the law of 1 March 2019 (the “First DLT Law”) and the law of 22 January 2021 (the “Second DLT Law”, and together with the First DLT Law and the Third DLT Law the “DLT Laws”). The First DLT Law introduced the possibility to use distributed ledger technology (“DLT”) for account registration and the transfer of securities by amending the law of 1 August 2001 on the circulation of securities while the Second DLT Law has made it possible to issue securities through an account held with a central account keeper or a settlement organisation without the need of any material representation of such securities such as a global note.
With the First DLT Law and the Second DLT Law allowing the issuance, the holding, and the transfer of securities via DLT platforms, the Third DLT Law will complete this DLT legal framework by providing the possibility to create, perfect and enforce financial collateral over securities held on an DLT-based infrastructure.
The DLT Laws ensure that the Luxembourg legal environment remains technology neutral by providing legal certainty with regard to DLT in the context of financial instruments, i.e. the new laws offer the possibility for market participants to use DLT under the same conditions as on conventional infrastructures. For instance, when amending the definition of “financial instruments”, the Third DLT Law does not create a new category of financial instruments, but only specifies that such instruments may also be held on a DLT platform. In other words, the DLT Laws do not have a disruptive effect on the Luxembourg legal framework, but only add an additional layer of legal certainty when it comes to the use of this new technology in the financial sector.
For further information on the EU Pilot Regime, we refer you to the following articles:
Distributed Ledger Technology (DLT) & Blockchain: Whitepaper published by the Luxembourg regulator
PayTechTalk #76 – DLT Pilot Regime – EU establishes a regulatory sandbox for the digital securities market
ESMA Guidelines for operating DLT market infrastructure under the DLT Pilot Regime
1) “EU DLT Pilot Regime” means Regulation (EU) 2022/858 of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology.
2) “MiFID II” means Directive 2014/65/EU of 15 May 2014 on markets in financial instruments (as amended).
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