Issuance Of Dematerialised Securities Using Blockchain Technology – Starting 26 January 2021, The New Law Of 22 January 2021 Applies!

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The law of 22 January 2021 (the “2021 Law”) modernises
Luxembourg’s legal framework on the issuance of dematerialised
securities by expressly confirming the possibility to use
distributed ledger technology.

The 2021 Law stems from bill of law no. 7637, which was
filed with Parliament on 27 July 2021 (see our newsflash of 30 July 2020 for
more information).

The 2021 Law amends the law of 6 April 2013 on dematerialised
securities (the “2013 Law“), which now
explicitly recognises the possibility of using secure electronic
registration mechanisms, including distributed electronic registers
or databases, to issue dematerialised securities. The list of
entities empowered to act as account keeper for (unlisted) debt
securities has also been expanded.

The Luxembourg legislator had already made a number of relevant
changes, in amending the law of 1 August 2001 on the
circulation of securities and other financial instruments (the
2001 Law“) with the law of 1 March
2019. This amendment served to clarify that account-keeping
institutions such as banks could provide securities accounts with
distributed ledger technology. It also introduced a number of
related items, including confirmation that successive registrations
of securities using distributed ledger technology have the same
effects as transfers between securities accounts (e.g.
regarding transfer of ownership).

The 2021 Law introduces two main changes:

1. Clarification: issuance accounts for dematerialised
securities may be kept using distributed ledger technology

When issuing dematerialised securities, a record must be kept of
the number and type of securities issued. This is done in an
“issuance account”. Issuance accounts allow the central
account keeper or liquidation organism to verify that the number of
securities in circulation in securities accounts does not exceed
the total number issued.

An issuance account is not a securities account; it is simply a
record kept for the purposes of the aforementioned reconciliation
checks. Central account keepers and liquidation organisms
responsible for performing these checks are now expressly permitted
to keep such records using distributed ledger technology. This
means that going forward, the major tools for dematerialised
securities can all be kept using distributed ledger technology: not
just securities accounts (permitted since 2019 through the 2001
Law), but issuance accounts as well.

The issuance account has now been defined as an account held
with a settlement institution or central account keeper in which
the dematerialised securities of an issuer must be registered
exclusively. Such an account may be maintained, and securities
registered in it, using secure electronic recording mechanisms,
including distributed electronic registers or databases.

This definition remains technology-neutral, i.e. it
allows for the use of both traditional registers and databases and
distributed ledger technology and databases.

2. More entities will be allowed to act as account keeper for
unlisted debt securities

Currently, only certain regulated Luxembourg service providers
can act as central account keepers under the 2013 Law. Moreover,
they require a specific additional license in order to be able to
perform this function. This situation will remain unchanged in
relation to equity securities. However, for (unlisted) debt
securities, the scope of regulated service providers able to act as
central account keepers will be broadened. This role will now be
open to any credit institution or investment firm authorised in a
Member State of the European Economic Area, provided it has
appropriate control mechanisms and IT security arrangements for
keeping issuance accounts and performing other related tasks, such
as the aforementioned reconciliation checks. Issuers of unlisted
debt securities governed by Luxembourg law will thus have a larger
choice of service providers for this part of the issuance

Henceforth, Luxembourg and EU credit institutions and investment
firms will be permitted to perform this role under the 2013 Law
provided they have suitable control and IT security mechanisms for
keeping central accounts, enabling them:

(i) to record in an issuance account the entirety of the
securities making up each issue admitted to their operations,

(ii) to ensure the circulation of securities by transfer from
account to account,

(iii) to verify that the total amount of each issue admitted to
their operations and recorded in an issuance account is equal to
the sum of the securities recorded in the securities accounts of
their holders, and

(iv) to exercise the rights attached to the securities recorded
in securities accounts.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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