Blockchain Law passed in Luxembourg
By Annie-Laure Mahieu, Project and Research Assistant @The LHoFT Foundation
WOO! But what is the Law about?
On 14thof February, the Luxembourg parliament passed Bill 7363 into Law on Blockchain and the circulation of tokens as dematerialized securities.
This addendum to the Law of 2001 on the circulation of securities was proposed by the Minister of Finance, Pierre Gramegna, at the end of September 2018 and approved unanimously with 58 votes in favor and 2 against it.
The possibility to issue dematerialized securities had already been introduced into Luxembourg Law in 2013. Bill 7363 is a new amendment that qualifies tokens as dematerialized securities and sets up a legal framework for the use of distributed ledger technologies (DLT) in the context of their circulation.
COOL! So, what does all that mean?
From now on, securities may also be registered in an account and transferred using secure electronic registration mechanisms such as distributed ledger technologies (i.e. Blockchain). One of the particularities of DLTs highlighted within the text is the fact that every issuance, transaction and exchange is recorded on it. Once transactions have been verified and included on a block, they can no longer be removed. This is the principle of immutability. The second principle of a DLT technology is its traceability. A distributed ledger is a secure database that keeps a record of every movement of an asset, from its first issuance on the DLT to its last ownership. The protection of this data is ensured for every transaction added to the distributed ledger as it is encrypted and “hashed” into a code. This traceability at the level of the transaction ensures the security of the system. DLT technologies are being recognized by the Luxembourg Law as a new way of managing securities accounts. While there were already some conditions for the dematerialization foreseen in the previous legal framework, this constitutes an additional alternative.
The parliamentary comments stated that they currently see the use of tokens as the easiest mean to manage securities accounts when using the DLT technology. The Luxembourg Law defines a token as a secure digital asset stored on a DLT: essentially a security. From a technological point of view, it is a new type of dematerialized security bearing the same rights as other forms of dematerialized securities, e.g. debt or equity securities issued and recorded electronically (using a database). Thus, both issuers and investors have a greater flexibility than before. On top of this, considering tokens as dematerialized securities falls under the scope of the amended Law of 5 August 2005 on financial collateral arrangements, reinforcing the security for investors.
SO, this sounds like progress!
Yes, this Bill provides a definition of tokens and enables the use of distributed ledger technologies to manage their circulation. The bill is in line with financial innovation and promotes the digitalization of the economy and the financial sector. Clarifying the use of DLT and tokens in the securities industry and setting a clear legal framework around their use will contribute to driving new innovation and financial services forward. This law will have a positive impact the traditional financial sector as well as new developments in Fintech.
The Fintech community has warmly welcomed this new Law and that it brings more legitimacy to a number of businesses operating in Luxembourg. Having a government that sets a legal framework in favor of the safe use of new technologies in the financial sector contributes to Luxembourg’s image as a great place for innovative companies to settle down and develop their business.
LHoFT CEO Nasir Zubairi commented : “Though some would suggest that existing regulation was adequate, this new rule is welcomed in that it provides clarity on the settlement of securities by blockchain, removing ambiguity for Fintech firms and traditional institutions who are looking at Blockchain/DLT technologies as a means for reducing cost and optimising securities processes.”