What are dematerialised securities, and why do they matter for Luxembourg?
19 February 2021
Securities – whatever the type – have traditionally required significant and physical paper trails necessary for proof of ownership and transfer.
While rather uncommon, paper documents linked to securities can present a forgery risk, or more frequently, these essential documents can be destroyed, damaged, lost or misplaced, creating practical and legal challenges and issues of proof for the owner of such paper-backed certificate. Transferring physical certificates related to the sale and purchase of securities from one party to another (often through an escrow or depositary agent) is also burdensome and can delay transfers.
Dematerialisation is essentially the process by which physical documents and certificates are changed into and then used in electronic format. While dematerialised securities are nothing new, laws and regulations have to be updated from a legal perspective to ensure today’s technology, documentation, electronic ledgers and databases are correctly used and protected and that documents are processed uniformly and correctly.
In late January, the Luxembourg government introduced a new bill to modernise the country’s present legislation around dematerialised securities. While Luxembourg already had legislation in this respect, the new laws aim to expand the current law’s scope so that Luxembourg’s players in the space can advance and seek new opportunities through digitisation.
An outline of the new bill
The bill is an extension of Luxembourg’s present laws, rather than entirely new legislation which allows for electronic registration systems. It mainly focuses on the potential use of new technologies, blockchain and tokenisation.
The bill reflects the need for clarity on Luxembourg’s legislation around dematerialised securities. It’s hoped the bill will allow relevant Luxembourg players to innovate and use technology and digitisation instead of physical ownership documents in relation to securities.
The bill also aims to ensure companies use the appropriate systems and have the proper controls and infrastructure to support dematerialised securities, so there is a level playing field for all firms in the space.
What does the new bill mean for Luxembourg?
Luxembourg has a solid reputation as a world-class financial centre. The country is home to leading FinTech, RegTech and WealthTech companies, amongst other technology players linked to the global financial services sector. Dematerialised securities are attractive, but the systems behind them are complex, and the right legislation needs to be in place to safeguard their use so as to give full comfort and trust to the players in the market. The update to Luxembourg’s regulations offers clarity and the path for innovation around dematerialised securities, and we expect that to be welcomed in the Luxembourg industry.