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The Luxembourg Ministry of Finance has proposed a fourth DLT bill. It would add an optional role of “control agent,” who would be responsible for issuing digital securities, tracking the amount of the issuance, and maintaining a record of ownership.
The European country has been one of the more supportive jurisdictions when it comes to the issuance of securities on distributed ledger technology (DLT)—a decentralized ledger network that uses multiple nodes to ensure data security and transparency, and the technology on which blockchains are built.
Luxembourg is one of the world leaders for fund issuance, second only behind the United States, with around €5 trillion ($5.4 trillion) worth of assets under management in 2022. The country has also proven popular for DLT issuances, with three of the Luxembourg-headquartered European Investment Bank’s four DLT bonds having been issued using the country’s laws.
In 2022, Luxembourg finalized laws supporting native digital securities on DLT, and last year, it completed its DLT framework with the “Blockchain III Law,” which allows the use of DLT as collateral over financial instruments registered on securities accounts.
As things stand, the issuance and record keeping of digital securities are the responsibility of a central account keeper—custodian—or central securities depository.
However, Luxembourg Ministry of Finance stated, in its announcement of the new rules on July 24, that it views the central account keeper role as more onerous than it needs to be because it involves two sets of custodians—the central account keeper and account keeper—having to reconcile between each other.
A DLT shared ledger, it argued, would reduce this reconciliation burden:
“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.”
Adding that a control agent will “make full use of DLT technology, which makes it possible to secure and share information on the holding of securities issued between the various market players for the performance of its role.”
In terms of this new role, the control agent’s responsibilities will include maintaining the issue account, monitoring the chain of holding of securities, and reconciling the securities issued.
An EU credit institution, investment firm or central securities depository can take on the role of the control agent, which is not a custody role, as such, a control agent does not have to be licensed in Luxembourg. However, any entity taking up the role must notify the country’s finance regulator, the Commission de Surveillance du Secteur Financier (CSSF).
The announcement also emphasized that the new regime is optional for issuers and “complements the existing legal framework by recognizing the possibility of relying on new technologies, without compromising certainty and security for issuers and investors,” said the Ministry of Finance.
It went on to state that the new rules’ objective is “to strengthen the attractiveness and competitiveness of the financial center by creating a welcoming legal framework for digital securities, offering more flexibility, security, and transparency to issuers and investors.”
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