Developments in Luxembourg legislation have enabled the European Investment Bank, the EIB, to issue for the first time a digital bond under Luxembourg law. In a project codenamed Project Venus, the EIB this week raised 100 million euro by issuing a blockchain-based bond in cooperation with the central banks of France and Luxembourg and backed by a deal team working in five countries.
The bond has a duration of two years with same-day settlement (T+0) and is backed by a multiple blockchains, including a private one. Luxembourg legal teams including Allen & Overy were involved in structuring the legal aspects of this developing technical/financial area. The bond also services as the inaugural issuance on Goldman Sachs’ tokenisation platform – known as GS DAP - and will also be on a second blockchain operated by the French central bank, on which the Luxembourg’s counterpart has issued a digital representation of central bank money.
Allen & Overy senior associate Philippe Noeltner said the deal is “super-important for Luxembourg”, explaining that he and partner Frank Mausen acted as lead counsel on the deal, which was not driven out of London or New York. “That’s truly rare these days,” he said. “It’s something that is very exciting for the market because it’s giving us tremendous know-how. It’s giving us tremendous exposure. It’s really shifting Luxembourg from being this back-office place to being a more deal driving jurisdiction.”
On Luxembourg’s Official List
The new EIB bond is the first syndicated bond by a public institution to be admitted on the Luxembourg Stock Exchange’s Securities Official List.
Law firm Allen & Overy advised the bank consortium involved in the deal. This included Goldman Sachs Bank Europe, Santander Corporate and Investment Banking and Société Générale, with a team involving its Luxembourg, Germany, Spain, US and France offices, and led by partners in Luxembourg and Madrid.
The EIB itself was advised by Clifford Chance by their experts in Luxembourg, Frankfurt and Paris.
Luxembourg solution possible
According to Frank Mausen, capital markets partner at Allen & Overy, when the EIB issued its first digital bond in 2021, “Luxembourg could not offer a solution that was legally robust.” However, since then, Mausen explained, the Luxembourg government took the opportunity and the experience they gained from the French deal to amend Luxembourg law to fill that hole.
“We have now a legal framework that allows the issue of tokens of securities in a native fashion, so directly on the blockchain,” Mausen explained. “We can also hold and settle securities and ensure servicing of those securities in the blockchain. So we have now an entire lifecycle governed by Luxembourg law.”
Mausen said that this was already possible under Luxembourg law as it currently stands, but he said that the forthcoming third blockchain law, currently pending in parliament, will expand the toolbox considerably by allowing securities interests to be registered on blockchain under certain circumstances. “Luxembourg would be the first country to have such legislation,” he said.
Lux ahead of the game
Mausen said during a recent visit to the US, they spoke to players who told them that “Luxembourg is far more advanced than for instance the US.” He explained that progress there is stymied by disagreements between various authorities.
This, he said, gives Luxembourg “a card to play”, drawing a parallel with this country being the first to implement UCITS legislation. “Hopefully if we can position ourselves quickly with a modern framework that embraces this change, where we create an ecosystem in Luxembourg,” he said. “In a couple of years, time, if you talk about DLT security, you’ll say ‘there’s Luxembourg, they know how to structure such deals’.”
Central bank money virtualised
The deal included French and Luxembourg banks providing a digital representation of euro central bank money in the form of tokens. The deal “asked the central banks to provide central bank money on the blockchain to have on-chain settlement,” explained Noeltner. Noeltner said that the central banks used their national frameworks to allow their central bank obligation to loan money to be tokenised and put on-chain to represent the settlement values.”
As a senior lawyer, Mausen reflected on the change in legal work indicated by his firm’s involvement in this deal. “The role of lawyers is changing. When I started my career, I was only speaking to lawyers and in-house counsel at banks,” he said. “Since a couple of years, when we’ve had what we call the Luxembourg toolbox, we have a lot of solutions on how you can structure a deal and so we are more and more involved in the structuring of these, together with the business people. And now and this new technology, but we are not only speaking now to legal and business but also to IT guys.”