On 14 February 2019, the Luxembourg Parliament adopted the bill (the "Bill")(*) amending the law dated 1 August 2001 on the circulation of securities (the "Securities Law").
The Luxembourg Government has, over the last years, been in a constant effort to understand, support and promote new initiatives and technologies aiming at digitalizing the financial and insurance sectors. One of those ground breaking technologies being of course the blockchain technology.
Blockchain technology although rather complex is often marketed as an easy and decentralized way of conducting complex transactions in a secured environment(**). The applications of this technology are described as endless by blockchain gurus but are in most cases either stretching our current legal framework or creating out of scope applications which would require a specific legal framework.
First seen as a bold step from the Luxembourg Government to include the blockchain technology in the Luxembourg legal framework applicable to dematerialized securities, it is fair to say that this Bill has met some but not all of the market's expectations.
Such expectations were high. Professionals of the finance sector and notably account keepers were expecting the Bill to permit an unrestricted application of the blockchain technology to their day-to-day securities' management services without it jeopardizing their role as general intermediary. On the other hand, the blockchain enthusiasts were keen to see the "token" defined as ownership title, potentially replacing dematerialized financial instruments.
The Bill focused on inserting a new article 18 bis in the Securities Law which allows the account keeper (i.e., any financial institution or professional authorised to maintain securities account in Luxembourg) to hold securities accounts and book securities on a securities account in or via an electronic secured booking system, including decentralized electronic registers or data bases. It also specifies that any successive transfer recorded via an electronic secured booking system as described above would be considered as constituting a book transfer between two securities accounts. The use of such electronic secured booking system will not impair the fungible nature of the securities.
Although the Bill provided a partial recognition of the blockchain technology and in particular the use of a decentralized ledger to record securities transaction it has not fully provided a legal status to the token as dematerialized instrument. As rightfully stated by the Conseil d'Etat, granting a legal status to the token as dematerialized instrument would open a broader discussion as to the modalities of the transfer of legal title to a token, the enforceability of such transfer towards third parties, the validity and perfection requirements applicable to a pledge taken over such an instrument.
In our view however the Conseil d'Etat only scratched the surface of what the discussion on granting a legal status to the token will really be about. Think initial coin offerings, for example: would those not fall automatically within the scope of the prospectus regulation framework if the token was to considered as dematerialized security or instrument? Think of token trading platforms: would those not require a license as securities trading platform? Think of professionals providing blockchain based booking system for tokens: would those not require an authorisation as account keeper?
This is certainly a very interesting discussion which may prove quite disruptive for the current Luxembourg legal framework. One further important question is whether Luxembourg may start this discussion on its own without the support of its European neighbours. In any case, we are very excited to continue this discussion.