Blockchain III Law: Luxembourg implements the EU DLT Pilot Regime and recognizes the use of DLT for financial collateral arrangements | Dechert LLP
On 9 March 2023, the Luxembourg Parliament adopted the Blockchain III Law.1 The Blockchain III Law – which was published on 17 March 2023 – amends, amongst others, the Financial Sector Law2 and the Financial Collateral Law.3
The Blockchain III Law is a new step in the process of modernizing the Luxembourg legal framework to embrace the digital era, following respectively the Blockchain I Law,4 that introduced the possibility to hold securities accounts as well as register and transfer securities using technologies such as distributed ledger technology (“DLT”),5 and the Blockchain II Law6 that expressly recognized the possibility of issuing dematerialized securities through DLT (such as blockchains) by introducing a definition of “issuance account” into the Luxembourg law of 6 April 2013 on dematerialized securities.
The amendments introduced by the Blockchain III Law mainly implement the EU DLT Pilot Regime Regulation.7 Traditional legislative requirements prevent operators of DLT market infrastructure from designing solutions for trading and settlement of transactions in digital assets due to concerns that these solutions would weaken the existing requirements and safeguards that apply to traditional market infrastructures. The EU DLT Pilot Regime specifically allows national supervisory authorities to temporarily exempt DLT market infrastructures8 that are exclusively used for financial instruments issued, recorded, transferred and stored by using DLT (the “DLT Financial Instruments”) from certain requirements imposed by existing legislation for traditional market infrastructures.
By applying the principle of technological neutrality, the EU DLT Pilot Regime amends MiFID9 by specifying that ‘financial instruments’ includes DLT Financial Instruments.10 Amongst other things, the EU DLT Pilot Regime also made amendments to the MiFIR11 and the CSDR.12
The Blockchain III Law amends the definition of ‘financial instruments’ in the Financial Sector Law to include DLT Financial Instruments. This amendment became effective on 23 March 2023, which was the day the EU DLT Pilot Regime started to apply.
In addition, the Blockchain III Law amends the Financial Collateral Law by clarifying that the concept of book-entry transferable financial instruments now includes “financial instruments registered or existing in securities accounts held within or through the secured electronic registration mechanisms, including distributed electronic ledgers or databases.” This amendment became effective when the Blockchain III Law entered into force on 17 March 2023.
The amendment to the Financial Collateral Law is important for financial market participants because it allows DLT Financial Instruments to be used as financial collateral under the Financial Collateral Law, further enhancing the attractiveness of the Financial Collateral Law that already provides a highly flexible, creditor friendly and efficient collateral legal framework. Creditors now have the same level of protection from collateral arrangements over DLT Financial Instruments as from collateral arrangements over traditional assets such as shares, bank accounts, claims or receivables, including in respect of the creation, perfection and enforcement of collateral arrangements.
The Blockchain III Law constitutes a further step towards the express legal recognition of DLT technology in the financial sector and aims to enable financial market participants to take full advantage of the opportunities offered by this new technology, with full legal certainty.
The authors thank juriste Gauthier Van Gysel for his assistance in the preparation of this article.
Footnotes
1) Luxembourg law of 15 March 2023 (1) amending a) the law of 5 April 1993 on the financial sector, as amended; b) the law of 5 August 2005 on financial collateral arrangements, as amended; c) the law of 30 May 2018 on markets in financial instruments, as amended; and (2) implementing 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, and amending Regulations (EU) No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU.
2) Luxembourg law of 5 April 1993 on the financial sector, as amended.
3) Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended.
4) Luxembourg law of 1 March 2019 amending the law of 1 August 2001 on the circulation of securities as amended.
5) By amending the Luxembourg law of 1 August 2001 on the circulation of securities as amended.
6) Luxembourg law of 22 January 2021 amending (1) the law of 5 April 1993 on the financial sector, as amended and (2) the law of 6 April 2013 on dematerialized securities.
7) Regulation (EU) 2022/858 of the European Parliament and of the Council of Parliament and of the Council of 30 May 2022 on a pilot scheme for market infrastructures based on distributed ledger technology, and amending Regulations (EU) No. 600/2014 and No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU. The Pilot Regime is an EU-wide regime prevailing over national law. It is an optional regime which is open for regulated market participants which may request an extension of their authorization as well as for new entrants which may apply for an authorization to participate in the Pilot Regime.
8) The EU DLT Pilot Regime introduces three categories of DLT market infrastructures: DLT multilateral trading facilities, DLT trading and settlement systems and DLT settlement systems.
9) Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments.
10) Article 18 of the Pilot Regime amends the definition of “financial instrument” in the MiFID II Directive, by amending section C of Annex I of the Directive to include instruments issued by means of DLT.
11) Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012.
12) Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012.
