Financial Crime World

Luxembourg Pioneers Blockchain Security Measures in European Capital Market

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Luxembourg has made a groundbreaking move in the adoption of blockchain technology in capital market operations. The European Investment Bank (EIB) has issued two fully digital bonds on a blockchain, marking a first for bonds with these specific characteristics for the European institution and for Luxembourg.

A First for Bonds

The €100 million bond and £50 million bond were issued between November 2022 and January 2023, governed by Luxembourg law and admitted to the Luxembourg Stock Exchange’s Securities Official List. This milestone demonstrates Luxembourg’s commitment to embracing blockchain technology in capital market operations.

Blockchain Adoption in Luxembourg

Luxembourg has been at the forefront of adopting blockchain technology since passing three laws since 2019 designed to secure financial market activity:

  • The Blockchain 1 Law clarifies that DLT-based systems can be used to hold and transfer securities.
  • The Blockchain 2 Law allows authorized issuers to use DLT for issuing and converting dematerialized securities.

According to Steve Jacoby, Regional Managing Partner of Continental Europe at Clifford Chance:

“The law is there, above all else, to create legal certainty with regards to a new technology and to give confidence to market players by clarifying certain legal aspects on the use of this technology.”

Advantages of Blockchain Technology

Jean-Louis Schiltz, Senior Partner at Schiltz & Schiltz, highlights the far-reaching advantages of DLT technology:

  • Instantaneous transactions: Blockchain ensures that transactions are instantaneous and secure.
  • Secure transactions: You can only cancel them via a transaction in the opposite direction.

However, Schiltz also warns that current players should start considering reinventing their operations and services, as none of the three Blockchain laws affect the architecture of the system and therefore the role of intermediaries. Blockchain technology has the potential to reduce costs by cutting intermediary involvement within the securities execution-delivery chain.

Conclusion

Luxembourg’s proactivity in adopting blockchain technology means it offers a legal framework for financial services firms that is adapted to the requirements of the DLT Pilot Regime, which will come into force on March 23. The new Blockchain 3 Law will bring Luxembourg’s system into line with European Regulation. With its innovative approach, Luxembourg is paving the way for other countries to follow suit in embracing blockchain technology in capital market operations.