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Luxembourg law supports DLT securities as collateral


Last week the Luxembourg parliament adopted a bill that recognizes DLT-based securities as collateral. It also expands the definition of financial instruments to include those issued under the EU’s DLT Pilot Regime, which comes into force later this month.

Rather than making any major adaptations to the laws on creation, perfection and enforcement of collateral arrangements, it extends the definition of financial instruments to include those issued on DLT, as Ashurst and Allen & Overy reported.

Luxembourg has been one of the earliest jurisdictions to support blockchain-based securities. In 2019 it introduced laws that supported the registration and transfer of DLT-based securities. It subsequently extended that to support the issuance of dematerialized securities using distributed ledger or blockchain.

The European Investment Bank has issued three sets of blockchain bonds, with the two most recent ones using Luxembourg law. A €100 million bond was issued using the Goldman Sachs private blockchain solution in November last year, followed by a £50 million bond using HSBC’s Orion enterprise blockchain, mirrored on the public Ethereum blockchain. The latter was advised by Allen & Overy.

DLT Pilot Regime support

Additionally, the definition of financial instruments is expanded in two Luxembourg laws to include those issued under the EU’s DLT Pilot Regime.

The DLT Pilot Regime is a six-year program that relaxes certain laws with limits. Instead of requiring retail investors to use intermediaries, it supports DLT-based exchanges and settlement system operators interacting directly with knowledgeable investors. There is also the option to have a single trading and settlement entity rather than the usual requirement for separation.

However, there are fairly restrictive size limits for individual issuances and the overall volume on the platform. Some larger players have reservations regarding the total €6 billion for securities issuance and €9 billion for total platform market capitalization.

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