Luxembourg Parliament votes on Blockchain IV Law

On 19 December 2024, the Luxembourg Parliament voted on an amendment to the Law of 6 April 2013 on dematerialised securities, as amended¹ (Blockchain IV) which aims at enabling the financial sector to take advantage of new technologies, while benefiting from enhanced legal certainty. 

Blockchain IV is designed to complement the current framework, offering more flexibility, security and transparency for issuers and investors in the issuance, holding and reconciliation of dematerialised securities.

Blockchain IV is the latest in a series of “Blockchain laws” that outline the rules for issuing, holding and circulating securities within or through secured electronic registration mechanisms, including distributed electronic ledgers or databases (hereafter “blockchain”). The prior laws in this series have gradually integrated blockchain into the Luxembourg securities market. The initial Blockchain I allowed for securities accounts to be held, registered and transferred on blockchain; Blockchain II introduced the issuance of securities on blockchain; and Blockchain III, which aligns with the DLT Pilot Regime, ensured that securities issued on blockchain fall under the definition of “financial instruments” and, as a result, can constitute financial collateral under the framework of the Law of 5 August 2005 on financial collateral arrangements.

Blockchain IV brings two major changes: 

Firstly, banks and investment firms will be able to act as central account keepers not only for non-listed debt securities but also for non-listed capital securities.

Secondly, it introduces the role of a control agent as an alternative to central account keepers and settlement organisations.

This new control agent model is an alternative to the existing model, which requires the establishment of a two-tier holding chain between the central account keeper and secondary account keepers. Dematerialised securities registered in a securities issuance account held by a control agent can be maintained by account keepers in securities accounts held on blockchain. Consequently, in the latter case, the two-tier holding chain would not be required as the legislator decided to make full use of the opportunities offered by blockchain.

Banks, investment firms and other settlement organisations may act as control agents subject to prior notification to the CSSF. The role of the control agent is threefold: 

1. keeping the securities issuance account on blockchain;
2. tracking the chain of custody of securities held in securities accounts on blockchain; and 
3. reconciliation, i.e. verification that the total amount of each issuance registered in securities issuance account maintained on blockchain is equal to the sum of the securities registered in the securities accounts of the account keepers also held on blockchain. 

The adoption of Blockchain IV may significantly enhance transaction speed and transparency, thus facilitating auditing and reporting processes. Additionally, automating the servicing of securities will become possible through smart contracts.

If you have any questions about how Blockchain IV could affect your operations, please feel free to contact us.