Clifford Chance
Native issuances of DLT securities in Luxembourg, France and Germany and admission to the Luxembourg Stock Exchange Securities Official List
Over the past few months, capital markets have seen an increased interest in the issuance of securities, notably debt instruments, natively on the blockchain or using other types of distributed ledger technology (DLT). Issuers and promoters, seeking to leverage the increased efficiencies, accessibility and resilience such technology offers, have been assessing different jurisdictions and governing laws to determine the ones that are best positioned for their project and respond genuinely to their needs, including by providing for legal certainty and for an increased secondary market liquidity. Luxembourg, France and Germany have taken the lead by adopting specific legislation allowing companies to issue securities directly on the blockchain, and thus providing the required legal certainty.
Issuance of securities natively on the DLT
Luxembourg law
Luxembourg law[1] allows both foreign and local companies to issue dematerialised securities (including in particular bonds and other debt securities) using DLT and to convert other forms of securities into DLT dematerialised securities.
The issuance or conversion of dematerialised securities is carried out exclusively by registering the securities in a single issuance account, which is held with a settlement organisation or a central account keeper. The issuance account may be held, and the securities records therein may be effected, within or by virtue of DLT. The issuance account acts as the creator account of the securities and and is used for reconciliation with the securities registered in the securities account of the clients of the settlement organisation or central account keeper. Once registered into a securities account, the usual regime of transfer of book-entry securities applies: The accountholder has rights in rem to the securities registered in its account and the transfer of ownership occurs by transfer from one securities account to another securities account.[2]
[For more information on the issuance of dematerialised securities, please see our article: Luxembourg law recognises the use of dlt for the issuance of dematerialised securities.]
French law
French law allows security tokens to be issued, transferred and delivered on a digital ledger (known as a dispositif d'enregistrement éléctronique partagé)[3].
Rather than introducing a new law creating a separate regime for the issuance of security tokens using DLT, French law developed incrementally, adapting the current regime for registered bonds and adding additional mechanisms to protect holders of security tokens issued on DLT (i.e., minimum standards for digital ledgers[4]). Security tokens cannot yet be issued in dematerialised bearer form (au porteur) as would be the usual approach for benchmark bonds in France. They can only be issued in registered form (au nominatif pur or au nominatif administré)[5] and security token issuances under French law cannot be admitted to trading or to the operations of a central securities depositary (CSD)[6].
Despite these limitations, the French regime is relatively advanced compared to other jurisdictions and indeed it was chosen for the inaugural EIB digital bonds issuance in April 2021.
[For more information on the development of the French DLT legal framework please see our briefing : France pioneers blockchain legal framework for unlisted securities.]
German law
German law allows for the issuance of dematerialised bearer securities. The new electronic securities regime supplements the existing regime for bearer securities by deeming electronic securities to be tangibles – and, therefore, be subject to the existing statutory framework for tangibles.
Accordingly, as an alternative to issuing physical notes (global or definitive), issuers in Germany now have the option of issuing native electronic securities through formally depositing the applicable terms and conditions and establishing and maintaining a register of securityholders. The register of securityholders can be either centralised (i.e., maintained by a CSD or a custodian) or decentralised (i.e., maintained using a "tamper-proof system of record", which is technology-neutral but can include DLT). In case of a centralised register maintained by a CSD such as Clearstream Banking AG, it is even possible that the (non-DLT) electronic securities be listed and admitted to trading.
Although we are aware of a number of issuances of electronic securities with centralised registers, there has not been an obvious uptake of decentralised registers. It would be interesting to see over the coming months whether the benefits of the cost savings and efficiencies associated with DLT outweigh the burdens of complying with the German electronic securities regime.
Admission of DLT financial instruments to an official stock exchange list
So far native issuances of DLT financial instruments were done mainly by private placements and their secondary trading remains fragmented requiring the intervention of various actors, such as crypto-assets trading platforms and other intermediaries.
As a natural step forward in increasing the liquidity of native DLT securities, the Luxembourg Stock Exchange (LuxSE) admits, as of January 2022, security tokens qualifying as DLT financial instruments to be registered onto their Securities Official List (SOL), being a section of LuxSE's Official List.
Although the registration on the SOL is done without the admission to trading on one of the two markets of the LuxSE, by providing for clear obligations for issuers of DLT financial instruments and making available key information thereon, the LuxSE intends to bring greater visibility and credibility to such instruments, while at the same time ensuring a level of investor protection and market stability. The registration on the SOL also facilitates the distribution of information on DLT financial instruments allowing to further develop the market for such products, as investors benefit from the dissemination of indicative prices and the guaranteed access to the information notice regarding these financial instruments, among others.
To clarify the eligibility criteria for issuers and guide them through the admission process, the LuxSE published Guidelines for the registration of DLT Financial Instruments onto the LuxSE SOL and frequently asked questions (FAQs).
The Guidelines, which are designed as a flexible instrument, adaptable with market and legal and regulatory developments, currently provide that only DLT financial instruments that fulfil the following criteria to are eligible to be registered on the SOL:
- debt instruments (including structured investment products) offered exclusively to qualified investors, as such term is defined in the Prospectus Regulation[7], or issued in a denomination per unit that amounts to at least EUR 100,000;
- issued by issuers having previously issued securities in capital markets or applicants having a proven track record in capital market transactions; and
- pricing of which is done in fiat currency (although the acquisition price may be paid using other payment means, such as crypto currencies or stablecoins).
The Guidelines provide a list of additional information that would need to be included in the information notice (i.e., the document containing the relevant information concerning the issuer and the securities) for such DLT financial instruments. The information notice should in particular include details on the DLT technology used (including processes, contingency procedures, parties involved, specific risk factors and environmental considerations), as well as a written confirmation that the DLT financial instruments qualify as securities within the meaning of the SOL Rulebook . DLT financial instruments issued as dematerialised securities under Luxembourg, French and German law would qualify as such.
Further to complying with the criteria set out in the Guidelines, to be registered on the SOL, DLT financial instruments would also need to respect the SOL Rulebook, which sets out, among others, the procedure for filing an application, the documents to be provided to the LuxSE and the admission requirements.
This first breakthrough is meant to encourage the market to reach the ultimate goal of fully bringing DLT financial instruments to trading on the LuxSE. The FAQs note that the current regulatory framework applicable in the European Union does not allow DLT financial instruments to be admitted to trading on a regulated market or MTF.
The LuxSE admission of DLT financial instruments forms part of several ongoing initiatives by Luxembourg public and private institutions to develop and facilitate the use of DLT by financial markets actors, noting as an example the publications by the Luxembourg financial sector regulator, the CSSF, including a whitepaper on DLT and blockchain and FAQs on virtual assets addressed to credit institutions and undertakings for collective investments .
REFERENCES
[1] Luxembourg law of 6 April 2013 on dematerialised securities, as amended.
[2] Luxembourg law of 1 August 2001 on the circulation of securities, as amended.
[3] Article L. 211-7 of the French Code monétaire et financier (French Financial Code).
[4] Article R. 211-9-7 of the French Financial Code.
[5] Articles R. 211-2 et seq. of the French Financial Code.
[6] This results from the conjunction of article L. 211-7 of the French Financial Code and article 3(2) of Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories (CSDR).