Over the past few years, the Luxembourg legislative framework has greatly evolved in order to increasingly enable the use of blockchain technologies at the level of the financial sector. Recent developments demonstrate that the legal framework aims to help integrate digital assets (such as virtual assets, virtual currencies, etc) into the Luxembourg economy, rather than shy away from them.
Three major changes have recently reshaped how virtual assets and blockchain based technologies are apprehended in Luxembourg.
As a reminder, a first step was already taken by the legislator in relation to virtual asset service providers (VASPs). These professionals, because they carry out certain services pertaining to virtual assets, fall within the scope of anti-money laundering and counter-terrorist financing (AML-CTF) measures. Indeed, taking into consideration the AML-CTF risks presented by these activities, VASPs are required to carry out customer due diligence, have adequate internal processes in place to manage their AML-CTF risks, and are subject to the general requirement to cooperate with Luxembourg authorities. Furthermore, as they become subject to the supervision of the Commission de Surveillance du Secteur Financier (CSSF), the AML-CTF law[i] requires VASPs established in Luxembourg or providing their services in Luxembourg to carry out a prior registration with the CSSF. It should be noted, however, that the supervision of the CSSF merely pertains to the AML-CTF framework and does not extend to other aspects.
As a result of the entering into force of the aforementioned requirements, Luxembourg has become a popular jurisdiction for the establishment of VASPs with various entities seeking to obtain their registration. Interestingly, for the time being, it is mainly already previously authorised entities which have been able to succeed in this process (e.g. PayPal, bitFlyer) whilst new entrants in the market have been facing more difficulties. It is the authors’ opinion that these difficulties are not related to a lack of interest from the regulator but to a particular scrutiny from an AML-CTF perspective in order to ensure that no risks are taken in this respect.
Luxembourg is positioning itself as a major player in the digital assets space in order to compete with other large financial centres; and is one of the countries at the forefront of implementing the right legislative framework in order to embrace certain uses of Distributed Ledger Technology (DLT)[ii] with the Blockchain Laws I[iii] and II[iv].
With the Blockchain Law I, Luxembourg enabled financial institutions to hold securities accounts and register the securities held thereon via DLT thereby setting a strong foundation for offering investors a safe and technologically advanced financial system. Indeed, the Blockchain Law I amended the general Luxembourg framework on dematerialised securities and allowed any person authorised to operate securities accounts (comptes-titres) to register and transfer the securities on such accounts by using DLT.
As a second step, with the Blockchain Law II, Luxembourg further integrated the use of DLT in the financial markets by allowing for the issuance of securities directly on the blockchain. The Blockchain Law II first inserted a new definition of “issuance account” into the amended law of 6 April 2013 on dematerialised securities (the 2013 Law), expressly allowing such accounts to be held, and the securities records therein to be affected, by using DLT. Consequently, not only can a security circulate via the blockchain (this being the result of the Blockchain Law I), but it can also be issued directly on such blockchain under the form of a native token. Secondly, the Blockchain Law II amended the law of 5 April 1993 in the financial sector, in order to allow EEA[v] investment firms and credit institutions to act as central account keepers for unlisted debt securities. Provided that they meet the appropriate technical and organisational requirements to carry out such activities, these entities are able to hold the aforementioned securities issuance accounts. They furthermore do not need to obtain a specific authorisation to do so. It is very probable that the aforementioned changes will entail interest in the market, both for already established entities and new players.
In the meantime, project owners are exploring the various uses of DLT in innovative ways. For example, reliance on securitisation vehicles issuing tokens which are subscribed to by retail and institutional investors. The underlying assets are various, such as diamond mines, real estate, agricultural land, etc. These projects generally relate to areas of public concern such as access to real estate in an expensive market or the preservation of natural resources. Indeed, beyond giving access to a market generally reserved to professional investors, project owners are also conscious of the demand of the public for environmental and sustainable investments. With digital assets, these projects owners are capable of meeting both demands. In addition, institutional entities are also on their side testing proofs of concept and exploring how they may use DLT at their level. For example, last year, the European Investment Bank issued a digital bond on a public blockchain.
In response to the interest of the financial sector in tokenisation projects and the increased number of questions raised in this respect, the CSSF has published two sets of FAQs on digital assets, one targeting undertakings for collective investment (UCIs), and another targeting credit institutions. Both FAQs contain practical guidance on whether UCIs and credit institutions may invest in digital assets or carry out activities in relation thereto. These FAQs also address the risks deriving from digital assets and how to mitigate them. The FAQs are there to answer some of the questions raised by the industry in relation to digital assets and are to be adapted as the case may be.
In addition, end of January 2022, the CSSF published a white paper on DLT and blockchain. This white paper provides theoretical background on DLT and blockchain, by defining what DLT is, which types of DLT exist, and further sets out specific use cases. It also includes practical steps to be taken by regulated entities wishing to use DLT and blockchain technology for the provision of their services, including risk mitigation measures. The publication of the FAQs and the white paper sends a strong message to the Luxembourg financial industry. It shows that the CSSF has delved into this subject matter and has the necessary expertise at its level to accompany regulated entities in this new technological shift.
Finally, the Luxembourg Stock Exchange (LuxSE) published in January 2022 guidelines for the registration of certain DLT financial instruments onto its Securities Official List (SOL). Subject to compliance with certain requirements relating to the instruments themselves and the issuer, DLT financial instruments may be admitted to SOL. SOL is the specific section of the official list of the LuxSE where securities are listed without admission to trading on the EuroMTF market or the regulated market (Bourse de Luxembourg) of LuxSE. Registration on the SOL essentially provides issuers with increased visibility and increases the outreach to potential investors. Shortly after the publication of these new guidelines, LuxSE reported that Société Générale became the very first entity to list DLT financial instruments on the SOL (the listed securities being OFH tokens natively issued on the Ethereum and Tezos public blockchains).
All these recent developments show that Luxembourg is determined to remain a strategic financial centre in Europe. It is in this context striking a difficult balance between favouring innovation but at the same time ensuring that adequate safeguards are in place to protect the financial centre. In any case, the interest of the market is there and we will certainly see an increased number of projects succeeding in this field in Luxembourg.
[i] The Law of 12 November 2004 on the fight against money laundering and terrorist financing, as amended (AML-CTF Law).
[ii] Distributed ledger technologies, such as the Blockchain.
[iii] Law of 1 March 2019 amending the Law of 1 August 2001 on the circulation of securities.
[iv] Law of 22 January 2021 amending the Law of 5 April 1993 on the financial sector and the Law of 6 April 2013 on dematerialised securities.
[v] European Economic Area.
Aurélia is Partner in the Banking & Finance team of CMS Luxembourg. She is a regular author for various law journals and publications.
Sarah is Managing Associate at CMS Luxembourg, specialising in Banking & Finance and Insurance & Reinsurance Law.