Luxembourg has continuously been an attractive hub within the EU for its financial services activities. Today, Luxembourg is emerging as a hub for FinTech and RegTech. Its pragmatic approach to laws and regulations was already demonstrated in 2013-2014 when the country’s financial sector regulator took an early stance on the regulation of virtual currencies and authorized several cryptocurrency exchanges as payment institutions. Moreover, since then Luxembourg has also made it possible to legally issue “dematerialized securities”.
More recently, the Luxembourg’s Chamber of Deputies, the country’s parliament passed the blockchain bill (the Blockchain Bill) and amended the Law on the Circulation of Securities (the Law on Securities), dated 1 August 2001. In view of technological developments, the Blockchain Bill clarifies the existing provisions of the Law on Securities so that securities may also be registered and transferred using secure electronic registration mechanisms. According to the drafters of the Blockchain Bill, the purpose of this bill is to create a legal framework for the circulation of securities through new secure electronic registration technologies with the aim of enhancing legal certainty in this area.
Although the Blockchain Bill remains technologically neutral, blockchain most aptly assists as a technology that could serve as a distributed electronic register and an electronic registration device. The Blockchain Bill will likely facilitate the use of blockchain technologies in financial services and in the process of trading securities. Hence, it is highly anticipated that the transfer of securities will be more efficient as a result of reducing the number of intermediaries in the trading process. Furthermore, by using blockchain technologies, (i) transaction costs will be lower; and (ii) risks associated with intermediaries will be eliminated.
Therefore, the Blockchain Bill provides a robust and innovative legal framework for financial market participants by bringing transactions performed using blockchain and distributed ledger technologies at par with traditional ones.
The Blockchain Bill
The Blockchain Bill introduced a new Article 18a into the Law on Securities. This Article regulates holding of securities accounts and registration issues within or through secure electronic registration devices. As noted, Article 18a does not explicitly mention the blockchain technologies; nevertheless, blockchain is specifically referenced in the explanatory commentary provided to the Blockchain Bill by its drafters.
Article 18a of the Law on Securities permits the registration of securities in the securities accounts within or through secure electronic registration devices, including distributed electronic registers or databases. Successive transfers recorded in such a secure electronic registration devices are considered like transfers between securities accounts. Accordingly, the flexibility of securities transfers through these new arrangements does not affect the fungible nature of the securities concerned.
Commentators recommend use of a token concept with regard to the operation of the securities accounts. A token is schematically a digital asset stored in a blockchain that, like a title, paper or a classic paperless title, represents the “title”. As the legislators explained, “tokens” in a blockchain are regarded as an electronic asset, which constitute means of representing a security. “Token” can be used as a proof of holding the relevant security; yet it does not confirm the validity of the security and its rights.
As the above demonstrates, to keep pace with technological advances and constant changes; Luxembourg focuses most of its efforts on supplementing guidance and implementation of laws with respect to new technologies rather than introducing entirely new regulatory regimes.
The Blockchain Bill is likely to induce investors to tap in the real potential of blockchain and distributed ledger technologies and to give them confidence in the market and in a wide range of blockchain-related initiatives.
Examples of international practice have demonstrated that financial markets can significantly benefit from incorporation of blockchain technology in its activities. The overall system transparency, fault tolerance, reduction of costs and time consumption are the key reasons why Georgia should consider implementation of similar blockchain technologies for the Georgian financial market.
Georgia has already successfully integrated blockchain technologies in the public sector. The Ministry of Justice of Georgia became a pioneer in introducing blockchain-based mechanism in operations of governmental bodies. The Georgian National Agency of Public Registry initiated the use of blockchain in property-related government transactions, such as registry of real estate titles, which has become a success story broadly known at the international level.
Use of blockchain technologies will simplify access and processing of market transactions thereby demonstrating Georgia’s potential to develop and further advance financial markets.