In the space of two months, between the end of November 2022 and the end of January 2023, the European Investment Bank (EIB) issued two fully digital bonds on a blockchain, for €100 million and £50 million respectively. A first for bonds with these specific characteristics for the European institution and for Luxembourg. For both bonds, the transaction is governed by Luxembourg Law and the securities have been admitted to the Luxembourg Stock Exchange’s Securities Official List.
The EIB, based in the Grand Duchy, has issued bonds under Luxembourg law before. However, in this particular case, the country’s legislation concerning the use of Distributed Ledger Technology (DLT) in capital market operations became particularly useful. Since 2019, Luxembourg has progressively adopted a set of measures designed to secure financial market activity in the light of new technological developments. Two laws, Blockchain 1 and 2, have already been passed and a third bill was passed on 14 March by the Chamber of Deputies to come into force on 23 March. Their scope, however, is limited to financial instruments – those covered under MiFID. Cryptoassets will be regulated by the MiCA Regulation.
Blockchain 1 Law, passed in 2019, amends the law of 1 August 2001 relating to the circulation of securities which governs the holding and transfer of securities by a Luxembourg account holder. While not changing the traditional obligations in this area, the Law clarifies that DLT-based systems can be used to hold and transfer securities. Transfers recorded in this manner are therefore considered as transfers between securities accounts.
The Blockchain 2 Law amends the Law of 6 April 2013 governing dematerialised securities. In 2021, the legislator specified that authorised issuers could use DLT for the issuing and conversion of dematerialized securities.
The law is there, above all else, to create legal certainty with regards to a new technology and to give confidence to market players by clarifying certain legal aspects on the use of this technology.
“As the law is technology-neutral, there may not have been a compelling need to make the amendments in order to enable activity based on blockchain technology,” observes Steve Jacoby, Regional Managing Partner of Continental Europe at Clifford Chance, and Boika Deleva, Senior Associate in the Banking, Finance, and Capital Markets Department of Clifford Chance Luxembourg. “The law is there, above all else, to create legal certainty with regards to a new technology and to give confidence to market players by clarifying certain legal aspects on the use of this technology. The legislator has added this technological component to an already existing legislative base to ensure that the obligations of the actors involved remain the same,” Deleva and Jacoby continue.
At a European level, Luxembourg is among the only States to have already established rules directly targeting the activity of securities in the form of digitalized tokens. However, these will be important in relation to the European DLT Pilot Regime, effective as from 23 March 2023. This provisional regime is designed as a “testing ground” for the development of DLT within the financial sector. Providing exemptions from certain rules, notably under MiFID and CSDR, it is intended to provide market participants with the opportunity to test the development of European DLT market infrastructure; namely DLT multilateral trading facilities and DLT securities clearing and settlement systems. “By supporting innovation, the EU wishes first and foremost to develop its capital markets. However, by setting up a common regime for Member States, the national legal regime, particularly in terms of the issue and circulation of securities in each State, will enable operations to be carried out under the new pilot regime,” explain Deleva and Jacoby.
Luxembourg’s proactivity in this area via its Blockchain laws means the country offers a legal framework for financial services firms that is adapted to the requirements of the DLT Pilot Regime. “The new Blockchain 3 Law will bring Luxembourg’s system into line with the European Regulation that sets up the DLT Pilot Regime. It ensures harmony between the Pilot Regime, governed by EU law and Luxembourg’s national laws. The quick action by Luxembourg’s legislators is further illustration of the willingness of public sector to proactively stimulate and support digital initiatives emanating from the private sector – a very good thing for Luxembourg’s ecosystem,” says Jean-Louis Schiltz, Senior Partner at Schiltz & Schiltz.
None of the three Blockchain laws affect the architecture of the system and therefore the role of intermediaries, however current players should start considering reinventing their operations and services.
DLT technology has far reaching advantages that will sooner or later appeal to the majority of financial services players. Rapid upstream action to prepare the ground is undoubtedly a bet for the future. “Blockchain ensures that transactions are instantaneous and secure. You can only cancel them via a transaction in the opposite direction,” highlights Schiltz. It should reduce costs by cutting intermediary involvement within the securities execution-delivery chain. According to Schiltz, “none of the three Blockchain laws affect the architecture of the system and therefore the role of intermediaries, however current players should start considering reinventing their operations and services.”