Luxembourg recently modernised its financial market regulation to embrace technological progress. On 14 February 2019, the Chambre des Députés passed Bill of Law 7363 ("Law 7363") to amend the Act on the Circulation of Securities of 1 August 2001 ("2011 Act"). Law 7363 recognizes secure electronic recording devices such as blockchain technology as valid vehicles to record issuances and transfers of securities.
The Markets in Financial Instruments Directive II (MiFiD II) defines transferable securities as securities being negotiable on the capital market (with the exception of instruments of payment), such as:
The 2011 Act was already previously amended when the legislature promulgated the Act of 6 April 2013, which introduced the generalised right to issue dematerialised securities.
The purpose of Law 7363 is to "enable financial market participants to take full advantage, in complete legal certainty, of the opportunities offered by new technologies in the field of securities circulation".
Law 7363 inserts into the 2011 Act a new Article 18bis that enables securities to be registered in an account and transferred using secure electronic recording devices, in particular based on blockchain/distributed ledger technology. Law 7363 clarifies that the use of secure electronic recording devices does not affect the fungibility of the securities.
The 2011 Act generally applies to securities and other financial instruments, which are received in deposit or held in account by a depositary and which are fungible, whether materialised or dematerialised, Luxembourg or foreign and regardless of the form in which they have been issued under the law governing them (Article 1). The depositary must account for the securities received on deposit or held in account separately from its assets and off-balance sheet (Article 4). The depositor has the same rights as if the securities had remained in his hands. The depositor shall have a real right of an intangible nature, in respect of all securities received in deposit or held in account by his depositary (Article 6). The 2011 Act also regulates bankruptcy, pledge, payments, etc. With the late adoption of Law 7363, these provisions protect holders of tokenised securities as well.
Law 7363 legitimises the use of blockchain on the financial market. A token (digital asset) is stored on the blockchain and represents a security, as much as a paper or dematerialised security would do. The security token can hold the same rights as those attached to traditional dematerialised securities. The security can be traded among financial market participants without the involvement of a third party. Law 7363 is a further step towards legal certainty and security, improving trust and paving the way toward a traceable, decentralised exchange of securities.
A Development Following the French Lead
By issuing this law, Luxembourg is catching up on its neighbour, France. The French Government took two ordinances (ordonnances) in 2016 and 2017, revolutionising the issuance and circulation of securities. On 24 December 2018, the French Minister of Economy and Finance, Bruno le Maire, made a Decree specifying the application of the two previous ordinances.
Ordinance No 2016-520 (France) of 28 April 2016 (articles L. 223-1 to L. 223-13 of the Monetary and Financial Code). The recording of a transfer of a minibon in the electronic device shall constitute a written contract. The ordinance clearly recognises the contractual value of a smart contract. Ordinance No 2017-1674 (France) of 8 December 2017
The report of the ordinance states that "in substance, the ordinance makes it possible to confer the same effects to the registration of an issue or transfer of financial securities in a blockchain as the registration of securities in a securities account. It does not create a new requirement nor does it lighten existing guarantees relating to the representation and transmission of the securities concerned".
Decree No 2018-1226 (France) of 24 December 2018 created Article R. 211-9-7 of the Monetary and Financial Code, reading as follows:
"The shared electronic registration system referred to in Article L. 211-3 is designed and implemented in such a way as to guarantee the registration and integrity of registrations and to make it possible, directly or indirectly, to identify the owners of the securities, the nature and number of securities held.
The entries made in this registration system are the subject of an updated business continuity plan, including an external periodic data retention system.
When securities are registered in this registration system, the owner of these securities may have at his disposal statements of his own transactions."
The Main Contrasts Between Law 7363 (Luxembourg) and the French Legislation
Both Luxembourg and France refer to an "electronic recording device". However, Luxembourg describes such device as being "secure", while France mentions a "shared" system.
Furthermore, whereas the Luxembourgish law only applies to securities received in custody or held in account by a depositary, the framework of the French legislation is broader as it also applies to securities which are not admitted to a central securities depository, regardless of whether the distributed ledger technology is managed by the issuer itself or by an intermediary.
Transactions originating from the Luxembourg Stock Exchange, and therefore traded on a trading platform, must be settled and delivered via a central securities depository, in this case LuxClear, pursuant to Article 3, paragraph 2, of the Central Securities Depositories Regulation (CSDR) directly applicable under Luxembourgish laws. A Luxembourgish company whose shares would be in pure registered form, and therefore not deposited with a custodian, thus does not fall within the scope of the Law 7363 (Luxembourg).
Conclusion
Even though the legal conceptions of Luxembourg and France are slightly different, the regimes of both countries have approximately the same effects. In any case, such evolution in favour of blockchain technology clearly promotes the use of innovative technologies on the financial markets of the two EU Member States.
Margaux Mermin | Lorenz Marek
Act on the Circulation of Securities of 1 August 2001, http://legilux.public.lu/eli/etat/leg/loi/2001/08/01/n9/jo.
Directive 2014/65/EU (MiFiD II) Article 4 (44), https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014L0065.
Draft Law 7363 (Luxembourg) of 27 September 2018, https://www.chd.lu/.
Decree No 2018-1226 (France) of 24 December 2018, https://www.actualitesdudroit.fr/documents/fr/lr/decret/2018/12/24/2018-1226.
Ordinance No 2016-520 (France) of 28 April 2016, https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000032465520&categorieLien=id.
Minibons are cash vouchers, which may be issued up to €2.5 million.
Ordinance No 2017-1674 (France) of 8 December 2017, https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000036171908&categorieLien=id.
Article L. 211-3 of the Monetary and Financial Code (France), https://www.legifrance.gouv.fr/affichCodeArticle.do?cidTexte=LEGITEXT000006072026&idArticle=LEGIARTI000006646497&dateTexte=&categorieLien=cid.
Report to the President of the Republic on Ordinance No. 2017-1674 of 8 December 2017 on the use of a shared electronic recording device for the representation and transmission of securities, https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000036171895.
Lavayssière X., Blockchain et titres financiers : décret minimaliste pour réforme ambitieuse, 28 December 2018,
https://www.actualitesdudroit.fr/browse/tech-droit/blockchain/18564/blockchain-et-titres-financiers-decret-minimaliste-pour-reforme-ambitieuse, accessed on 4 March 2019.
Article R. 211-9-7 of the Monetary and Financial Code (France), https://www.legifrance.gouv.fr/affichCodeArticle.do?cidTexte=LEGITEXT000006072026&idArticle=LEGIARTI000037911185&dateTexte=&categorieLien=cid.
Mathis B., La blockchain pour la circulation des titres : comparaison des régimes français et luxembourgeois,
23 October 2018, https://www.actualitesdudroit.fr/browse/tech-droit/blockchain/16970/la-blockchain-pour-la-circulation-des-titres-comparaison-des-regimes-francais-et-luxembourgeois, accessed on 4 March 2019.
