Luxembourg’s New Law Boosts Blockchain Use in Securities with ‘Control Agent’ to Oversee Transactions
Key Takeaways
- Luxembourg has established itself as a European pioneer in tokenized securities.
- It has introduced a ‘Control Agent’ designed to oversee the issuance and management of dematerialized securities.
- However, implementing blockchain technology involves many technical and regulatory challenges.
Luxembourg has introduced a new law to enhance the use of blockchain technology in the securities market. The law provides the appointment of a ‘Control Agent’, who has to oversee the issuance of demateralised securities.
The law represents the fourth version of previous laws approved by the Center European Parliament, which aims to facilitate the use of distributed ledger technology in dematerialised securities.
Current Framework for Decentralized Securities
Luxembourg is recognized as a pioneer in Europe regarding tokenized securities. The Country adopted a progressive stance aimed at creating a conducive environment for the issuance and trading of digital assets and has introduced specific legal provisions to address the issuance, transfer, and management of digital securities. It also has a clear regulatory path for market participants.
Luxembourg operates a regulatory sandbox that allows for experimentation with new financial products and services, including tokenized securities. Emphasizing investor protection, the framework includes robust disclosure requirements, anti-money laundering measures, and market abuse prevention protocols.
Furthermore, recognizing the role of Digital Asset Service Providers (DASPs), Luxembourg has implemented licensing requirements to ensure the integrity of the ecosystem.
“The landscape is evolving rapidly, and recent developments, such as the introduction of the ‘Control Agent’ role, indicate Luxembourg’s continued commitment to refining its regulatory framework and solidifying its position as a leading hub for decentralized securities,” legal firm CMS Law-Now said .
Details of Bill of Law 8425
On Jul 24, 2024, Luxembourg introduced bill of law 8425 to its Parliament , aiming to enhance the legal framework for dematerialized securities. It provides increased flexibility, security, and transparency for issuers and investors. The bill builds on the amendments introduced by Luxembourg’s previous Blockchain laws I, II, and III . And it further revises the law of April 6, 2013, concerning dematerialized securities.
A pivotal element of the Bill of Law is the creation of a new role: the Control Agent for the issuance of dematerialized securities. This role can be assumed by an investment firm, a credit institution, or a settlement organization and it is designated by the issuer to manage the issuance account via a secure electronic recording device. This can include distributed ledger technology (DLT) or a database.
The Control Agent’s duties involve monitoring the chain of custody of dematerialized securities held in securities accounts and ensuring reconciliation between the total amount of issued securities recorded in the issuance account and the total recorded in account holders’ securities accounts.
Furthermore, it will leverage DLT to execute its supervisory responsibilities effectively. Moreover, the Bill of Law expands the role of the central account keeper from unlisted debt securities to unlisted equity securities.
This new reliance on the Control Agent presents an alternative to the existing double-layer custody chain model. And it represents a significant advancement in the integration of DLT within the financial sector.
Impact on the Crypto Market
The introduction of the Control Agent and the use of blockchain technology in Luxembourg’s securities market is expected to enhance security, transparency, and flexibility. Blockchain’s immutable ledger ensures tamper-proof records, preventing fraud and providing real-time auditability. This transparency allows issuers and investors access to clear transaction histories, reducing information asymmetry.
By replacing the double-layer custody chain model, the process of issuing and managing securities becomes more straightforward and flexible. This will be supporting a range of digital assets and complex financial products.
However, there are potential downsides and risks. Blockchain systems can experience technical failures and scalability issues. Evolving regulations may create compliance challenges, and jurisdictional differences could complicate cross-border transactions.
Transitioning from existing systems to blockchain may face integration hurdles, and market participants might resist new technologies. The system’s effectiveness relies on the Control Agent’s competence, and any issues could impact overall security.
Despite blockchain’s security benefits, it is still vulnerable to cyber-attacks, meaning the centralized role of the Control Agent could introduce additional risks.
