Luxembourg has proposed a groundbreaking law that would enable the use of blockchain technology in investment funds, aiming to solidify its position as a global financial leader.
Finance Minister Gilles Roth tabled the proposed legislation on Wednesday, marking a significant step in integrating advanced technology into the financial sector. Blockchain experts said that, if adopted, it would reinforce Luxembourg’s status as a global financial hub, and set new standards for blockchain integration in investment fund management.
‘Agent of control’
Luxembourg innovative legal concept calls for the optional introduction of a dedicated “agent of control”, a critical role that can be assigned to an investment firm, a bank, or a clearing house. This entitity is to ensure that the use of DLT in managing securities is secure, transparent, and compliant with legal standards, thereby fostering trust and efficiency in the financial sector.
Philippe Noeltner, counsel for global financial markets at A&O Shearman, said the innovative role of the control agent under Luxembourg’s proposed law «essentially allows for a flatter holding chain” of financial instruments issued on distributed ledger technology (DLT) networks.
“This proposal from the Luxembourg legislator represents a significant step towards a more efficient use of DLT in the financial services industry,” Noeltner told Investment Officer. “Market players can issue DLT financial instruments with the option of using a control agent, a Central Account Keeper (CAK), or a Central Securities Depository (CSD). This provides flexibility and choice for issuers and investors alike.”
The bill seeks to enhance efficiency by streamlining fund operations, reducing costs and delays associated with intermediation and reconciliation. Blockchain’s inherent features are expected to improve the transparency and security of fund operations.
The legislation includes updates to the laws of 2013 on dematerialized securities, 1993 on the financial sector, and 1998 on financial sector supervision. These modifications aim to integrate blockchain technology into financial operations and securities management.
Flexibility for issuers
The new regime is optional, allowing issuers to choose between the agent of control model and the traditional framework. This flexibility encourages gradual adoption and experimentation.
The Commission de Surveillance du Secteur Financier (CSSF) will ensure compliance, requiring agents of control to have robust governance and IT systems. Agents must notify the CSSF two months before commencing activities.
Legal experts at AO Shearman praised the proposed law. «The Blockchain Bill IV opens up new possibilities for the Luxembourg fund industry, which is the second largest in the world and a key pillar of the Luxembourg financial center. By allowing the use of DLT for the issuance and transfer of fund units, the bill improves the efficiency, transparency and security of the fund operations, and also reduces the costs and delays that come with the intermediation and reconciliation processes,» they said in a note to clients.
‘More legal clarity and flexibility’
They also noted the broader implications for Luxembourg’s financial sector. «The Blockchain Bill IV also enhances the appeal and competitiveness of the Luxembourg financial center, by giving more legal clarity and flexibility to the issuers and the investors who want to use DLT for the issuance and holding of dematerialized securities, whether debt or equity.”
“The use of smart contracts for the issuance and transfer of dematerialized securities using DLT can offer several advantages, such as automating the execution and enforcement of contractual terms, cutting down the need for intermediaries and manual interventions, and increasing the traceability and auditability of the transactions.»
Luc Falempin, CEO at Tokeny.com, also lauded the initiative. “Once again, Luxembourg is at the front of onchain finance with the Blockchain Bill IV to facilitate the use of DLT for the issuance, holding and transfer of dematerialised securities,” he said on LinkedIn.
“Another positive step forward for Luxembourg’s financial services ecosystem,” said Nasir Zubairi,” CEO of Luxembourg fintech association LHoFT. “It reinforces Luxembourg’s position as a leader in integrating advanced technology, very specifically DLT, into financial services infrastructure and will help ensure further progress in asset tokenisation.”
Different approaches to dedicated oversight roles
Comparable systems in other countries reflect a similar recognition of the need for dedicated oversight roles in blockchain-based financial operations. Switzerland, for instance, utilizes its comprehensive digital asset regulations overseen by the Swiss Financial Market Supervisory Authority (FINMA) and has implemented the SIX Digital Exchange for blockchain-based trading.
Liechtenstein’s Blockchain Act introduces Trusted Technology (TT) Service Providers, akin to Luxembourg’s proposed agent of control, to ensure the integrity and security of blockchain services. In Singapore, the Monetary Authority of Singapore (MAS) oversees blockchain initiatives like Project Ubin, supporting innovation while ensuring regulatory compliance. These systems, like Luxembourg’s proposal, emphasize transparency, security, and legal certainty in the rapidly evolving blockchain landscape.
In the United States, the SEC’s regulatory sandbox allows financial firms to test blockchain-based solutions under regulatory oversight.