Blockchain III Law: Luxembourg Implements EU DLT Pilot Regime and Recognizes the Use of DLT for Financial Collateral | Dechert LLP

On March 9, 2023, the Luxembourg Parliament passed the Blockchain III Law.¹ The Blockchain III Act – which was published on 17 March 2023 – amends, among other things, the Financial Sector Act² and the Financial Security Act.³

The Blockchain III Law is a new step in the process of modernizing Luxembourg’s legal framework to embrace the digital era, following respectively the Blockchain I Law,⁴ which introduced the ability to hold securities accounts as well as register and transfer securities using technologies such as distributed ledger technology (“DLT“),⁵ and the Blockchain II Act⁶ which expressly recognized the possibility of issuing dematerialized securities through DLT (such as blockchains) by introducing a definition of “issuance account” in the Luxembourg Law of 6 April 2013 on dematerialized securities.

The changes introduced by the Blockchain III law mainly implement the EU’s DLT Pilot Regime Regulation.⁷ Traditional regulatory requirements prevent DLT market infrastructure operators from designing solutions for trading and settling transactions in digital assets due to concerns that these solutions will weaken the existing requirements and safeguards applicable to traditional market infrastructures. The EU’s DLT pilot regime specifically allows national supervisory authorities to temporarily exempt DLT market infrastructure8 that is exclusively used for financial instruments issued, registered, transferred and stored using DLT (“DLT financial instruments”) from certain requirements imposed by existing legislation for traditional market infrastructure.

By applying the principle of technology neutrality, the EU DLT Pilot Regime amends MiFID⁹ by specifying that “financial instruments” include DLT Financial Instruments.¹⁰ Among other things, the EU DLT Pilot Regime also made changes to MiFIR¹¹ and CSDR.¹²

The Blockchain III Act amends the definition of “financial instruments” in the Financial Sector Act to include DLT financial instruments. This change came into effect on 23 March 2023, which was the date on which the EU DLT Pilot Regime came into force.

In addition, the Blockchain III Act amends the Financial Security Act by clarifying that the term negotiable 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 change took effect when the Blockchain III Act went into effect on March 17, 2023.

The amendment to the Financial Security Act is important for players in the financial market because it allows DLT financial instruments to be used as financial security in accordance with the Financial Security Act, which further increases the attractiveness of the Financial Security Act which already provides a very flexible, creditor-friendly and effective legal framework for security. Creditors now have the same level of protection against security arrangements over DLT Financial Instruments as against security arrangements over traditional assets such as shares, bank accounts, receivables or receivables, including with respect to the creation, perfection and enforcement of security arrangements.

The Blockchain III Act 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 the lawyer Gauthier Van Gysel for his help 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 Act of 5 August 2005 on arrangements for financial security, as amended; c) the Act of 30 May 2018 on markets for financial instruments, with amendments; and (2) implementation of Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructure based on distributed ledger technology, and amending Regulation (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, with amendments.

3) Luxembourg law of 5 August 2005 on financial security agreements, as amended.

4) Luxembourg law of 1 March 2019 amending the law of 1 August 2001 on circulation of securities with amendments.

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) law of 5 April 1993 on the financial sector, as amended, and (2) law of 6 April 2013 on dematerialized securities.

7) Regulation (EU) 2022/858 of the European Parliament and of the Parliament and of the Council of 30 May 2022 on a pilot scheme for market infrastructure based on distributed ledger technology, and on the amendment of Regulation (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 that prevails over national law. It is an optional regime that is open to regulated market participants who can request an extension of their authorisation, as well as to new players who can apply for permission 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 for 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 to the Directive to include instruments issued using DLT.

11) Regulation (EU) No. 600/2014 of the European Parliament and the Council of 15 May 2014 on markets for financial instruments and amending Regulation (EU) No. 648/2012.

12) Regulation (EU) of the European Parliament and of the Council No. 909/2014 of 23 July 2014 on the improvement of securities settlement in the European Union and on central securities depositories and on the amendment of Directive 98/26/EC and 2014/65/EU and Regulation (EU ) No. 236/2012.