Luxembourg’s Ministry of Finance proposed Blockchain Bill IV, which will offer “greater flexibility and legal certainty for issuers using Distributed Ledger Technology (DLT)”, according to JD Supra.
DLT is being increasingly used in the financial sector and for fund management in Luxembourg for issuing digital bonds, fund administration, collateral management, and tokenization among the use cases.
Key provisions of the proposed Blockchain Bill IV include the following:
- Expanded scope: The bill broadens the Luxembourg DLT legal framework to include equity securities in addition to debt securities. This expansion will enable the fund industry and transfer agents to use DLT for managing share and unit registers, as well as processing fund units.
- New role of control agent: The bill introduces the role of a control agent as an alternative to the central account keeper for issuing dematerialized securities using DLT. This control agent can be an EU investment firm or credit institution that the issuer chooses. This new role does not replace the existing central account keeper, but, as with all other roles, must be notified to the Commission de Surveillance du Secteur Financier (CSSF), which is designated as the competent supervisory authority. Notification should be submitted two months after the start of the control agent’s activities.
- Control agent responsibilities: The control agent will maintain the securities issuance account, verify consistency between issued and registered securities on the DLT network, and supervise the securities custody chain at the account holder and investor levels.
- Simplified payment processes: The bill allows issuers to fulfill payment obligations related to securities (such as interest, dividends, or repayments) as soon as they have paid the relevant amounts to the paying agent, settlement agent, or central account keeper.
- Streamlined issuance and reconciliation: The bill simplifies the process of issuing, holding, and reconciling dematerialized securities using DLT by eliminating the need for a central account keeper to have a second custody layer and by allowing securities to be directly credited to investor accounts or their nominees.
- Smart contract integration: The new processes can be executed using smart contracts with the assistance of the control agent, potentially increasing efficiency and reducing intermediation.
These changes are expected to bring several benefits to Luxembourg’s financial sector, including the following:
- Fund operations: Enhanced efficiency and reduced costs by leveraging DLT for issuance and transfer of fund units.
- Financial transactions: Improved transparency and security.
- Transparency of the regulatory environment: Increased appeal and competitiveness of Luxembourg’s financial center by providing greater legal clarity and flexibility for issuers and investors using DLT.
- Smart Contracts: Potential for automating contractual terms, reducing intermediaries, and improving traceability of transactions through smart contracts.