Distributed ledger technology (DLT), a term increasingly used and known because of the growing use of blockchain technology. DLT is becoming known to the wider public as a digital system or platform consisting of separate, connected devices, which platform is used to record transactions in multiple places at the same time. More formally, Commission de surveillance du Secteur Financier (the CSSF) has defined DLT as a technology allowing a network of independent and often geographically dispersed computers to update, share and keep a definitive record of data in a common decentralised database in a peer-to-peer way, without the need for a central authority.
In recent years, DLT has attracted increasing interest, leading to the development of various types of DLT suitable for a wide range of fields such as securing transactions and, for instance, personal identification, or smart contracting (being individual pieces of code for defining relationships and interactions between different parties).
In line with this trend and following the European Union, Luxembourg is pursuing and supporting this development. Consequently, on 9 March 2023 the Luxembourg parliament (Chambre des Députés) approved the bill of law n°8055 (Blockchain Law III). By doing so, various Luxembourg law provisions are updated in view 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 distributed ledger technology (the DLT Pilot Regime Regulation).
To improve the legal framework required to support the development and use of DLT, the Blockchain Law III updates key Luxembourg laws with respect to the notion of “financial instruments” used therein. More specifically, the Blockchain Law III updates (i) the law of 5 April 1993 on the financial sector (the Law on the Financial Sector), (ii) the law of 5 August 2005 on financial collateral arrangements (the Collateral Law), and (iii) the law of 30 May 2018 on markets in financial instruments (the MiFID Law).
Clarifying the notion of financial instruments in various Luxembourg laws
- Changes made to the Law on the Financial Sector
To enhance legal certainty and ensure that financial instruments issued using DLT can be traded on the markets under the existing Luxembourg legal framework, the Law on the Financial Sector now clarifies that the notion of financial instruments includes financial instruments issued using DLT in accordance with the DLT Pilot Regime Regulation.
- Changes made to the Collateral Law
The Blockchain Law III further recognises the possibility of using DLT technology for financial collateral arrangements. The law clarifies that the key notion of financial instruments also includes financial instruments registered or existing in securities accounts maintained in or through secure electronic recording devices, including distributed electronic registers or databases. Such instruments can, in the future, constitute financial collateral under the Collateral Law. Consequently, the favourable regime for financial collateral arrangements created by the Collateral Law will now also apply to financial instruments registered on securities accounts using DLT.
- Changes made to the MiFID Law
Lastly, the Blockchain Law III extends the definition of financial instruments in the MiFID Law by introducing issuance via DLT pursuant to the DLT Pilot Regime Regulation.
Implementation of a pilot regime
It should in addition be noted that the DLT Pilot Regime Regulation (which is directly applicable in Luxembourg) introduces a new category of market participants: market infrastructures using DLT, and specifies the requirements in relation to DLT market infrastructures and their operators. This implies that specific permissions are required to operate DLT market infrastructures. Furthermore, rules are introduced (i) concerning a pilot regime for market infrastructures based on DLT, (ii) concerning the testing of DLT market infrastructures, and (iii) to allow temporary exemptions for certain DLT market infrastructures from specific requirements applicable to traditional actors of the financial sector under the EU financial services legislation. Without the latter, operators could be prevented from developing solutions for the trading and settlement of transactions in crypto-assets.
Finally, in the context of the Regulation, on 8 March 2023, ESMA released its guidelines setting out standard forms, formats and templates to apply for the authorisation to operate certain DLT for competent authorities as well as applicants for such authorisation.
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