For several years Luxembourg has been one of the more advanced jurisdictions with respect to supporting the issuance of securities on a distributed ledger (DLT). Now the Ministry of Finance has proposed a fourth DLT bill which adds an optional role of a control agent. They would be responsible for the digital securities issuance and keeping track of the amount of the issuance and who owns what. This appears similar to Germany’s concept of a crypto securities registrar.
Luxembourg is one of the world’s largest jurisdictions for fund issuance. In terms of the number of open ended funds issued, IOSCO statistics for 2022 ranked it as first. However, the net asset value is less than a fifth of the United States. Nonetheless, assets under management in 2022 were around €5 trillion ($5.4 trillion) making it the world’s second largest jurisdiction and the largest in Europe.
The jurisdiction has already proven popular for DLT issuances. Three of the European Investment Bank’s four DLT bonds have used Luxembourg law. Hamilton Lane recently created a digitally native class of fund shares, also using Luxembourg law.
In 2022 Luxembourg finalized laws supporting native digital securities on DLT. Last year it passed an additional law enabling digital securities to be used as collateral and supporting Europe’s DLT Pilot Regime.
Relaxing digital securities laws
Currently the issuance and record keeping of digital securities is the responsibility of a central account keeper or central securities depository. Luxembourg uses the term account keeper as a surrogate for custodian.
It views the central account keeper role as more onerous than it could be because it involves two sets of custodians (central account keeper and account keeper) reconciling between each other. A key benefit of a DLT is the shared ledger which should reduce the reconciliation burden.
The preamble to the Luxembourg law explains the new role: “This new model based on a control agent constitutes an alternative to the existing model which requires the establishment of a double-tier chain of custody between the central account holder and the secondary account holders. Dematerialized securities registered on an issue account held by a control agent can thus be maintained by account holders on securities accounts held within a distributed register.” (Automatically translated)
The control agent
A control agent will control the issuance and monitor the ownership of ‘securities accounts’. Additionally, it will ensure the DLT has a proper record of the number of securities issued, which matches the securities accounts held in custody.
Specifically, the control agent doesn’t have a custody role. An EU credit institution or investment firm or CSD can take on the role of the control agent. While they don’t have to be licensed in Luxembourg they have to give the regulator (CSSF) some notice.
It was already possible for the EU credit institutions or investment firms to take on the role of the (old) central account keeper, but only for unlisted debt securities. That has now been expanded to unlisted equities.
The government said the aim of the legal amendments is to create a “welcoming legal framework for digital securities, offering more flexibility, security and transparency to issuers and investors.”
