Luxembourg’s Blockchain Law IV: groundbreaking new options for issuing DLT securities

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On 19 December 2024, Luxembourg adopted Blockchain Law IV, which has opened up significant new opportunities to use the Luxembourg DLT framework, such as expanding this framework to include unlisted equity securities and facilitating the provision of services to issuers with additional flexibility in terms of custody arrangements. These innovations aim to encourage the financial industry to make use of blockchain and DLT in Luxembourg.

1. Background

In tune with its strategy of fostering innovation and digitalisation in the financial sector, on 19 December 2024, Luxembourg adopted a fourth blockchain law (Blockchain Law IV) that amends the law of 6 April 2013 on dematerialised securities (Law of 2013) in order to substantially broaden the options for issuing and holding distributed ledger technology (DLT) securities.

2. Extending the successful Luxembourg DLT framework for debt securities to equity securities 

In 2021, Blockchain Law II introduced the possibility for credit institutions and investment firms from Luxembourg and other EU Member States to act as central account keepers (CAK) for unlisted debt securities. This law enabled such entities to offer issuers services to issue debt securities in a fully DLT-based manner, including keeping both issuance accounts and custody accounts for these securities on distributed ledger technology. This option has been successfully used in practice by leading financial groups (such as Goldman Sachs) in the context of several major debt issuances by the European Investment Bank.

Blockchain Law IV now expands this possibility to include unlisted equity securities. This is obviously a major development as it now allows for using this successfully tested legislation also for equity securities. For example, this opens up additional possibilities for the investment funds industry to tokenise fund units using a very solid legal basis that already has a confirmed track record for major transactions.

3. Additional flexibility for custody of DLT securities 

Another major impact of Blockchain Law IV is that it introduces far greater flexibility with regard to designating custodians.

The CAK role (which already existed and will continue to do so) requires that the CAK both holds the issuance account and acts as a top-tier custodian for all securities issued. While this gives the CAK greater control to perform reconciliation verifications, it also means that the CAK necessarily needs to act as ultimate (sub-)custodian and other custodians interested in holding the securities for their clients need to open a custody account with the CAK or use sub-custodians that have an account with the CAK.

This will now not be necessary with the introduction of the new role of the control agent, which will no longer act as a top-tier custodian. This means that the securities issued can be booked directly with a variety of custodians without having a (sub-)custody relationship with the control agent.

The role of control agent can be performed by (i) a settlement organisation or (ii) a Luxembourg or other EU credit institution or investment firm. 

The control agent will be able to rely on DLT to:

  • keep and manage the issuance account;
  • monitor the chain of custody for securities issued;
  • ensure that at no time are there more securities in circulation than have actually been issued, by performing reconciliation verifications with custodians.

Accordingly, while the previous model required that the CAK have the dual responsibility of holding (i) the issuance account and (ii) the securities accounts for all securities of a given issue, the control agent only needs to hold the issuance account, while the securities accounts can be held by several different custodians from Luxembourg or another EU Member State.

This new division of responsibilities also impacts the exercise of voting rights attached to the securities and payments from the issuer (e.g. dividends or repayment of principal sums and interest), as the issuer may interact directly with the relevant custodians or intermediaries such as paying agents. 

Given the significance of its role, the control agent will be subject to organisational requirements to ensure it possesses the necessary resources and structure to assume its responsibilities.

To become a control agent under Blockchain Law IV, the Luxembourg or EU institution or firm concerned will have to notify the CSSF at least two months in advance and provide relevant information showing that it has the necessary resources and expertise to perform its role.

This innovative approach has the potential to substantially facilitate new models harnessing the efficiencies of DLT in the context of securities issuance.

How we can help

Contact our top-ranked Fintech team if you require any assistance with understanding and applying the specifics of the new law or with the planning and implementation of DLT projects.