Luxembourg has established itself as a leading European jurisdiction in fund tokenisation thanks to a robust regulatory framework, mature ecosystem of service providers, coupled with the openness to innovation of the country’s financial sector regulator, the CSSF.
The Grand Duchy’s legal framework permits use of distributed ledger technology (DLT) in all relevant fund lifecycle events including issuance, recording and transfer of ownership, pledging and the trading of fund shares.
The market has benefited from longstanding legislation that has been regularly enhanced over the years, giving Luxembourg a first-mover advantage and providing legal certainty, at times where legal certainty was lacking in other jurisdictions.
Under Luxembourg law funds can issue securities in three different forms, bearer, dematerialised, and registered securities.
The prevalent form is registered securities. While the Luxembourg law on commercial companies of 1915[1] does not explicitly refer to shareholder registers being kept using DLT[2], a DLT-based register can fulfil all requirements of the 1915 law, and hence nothing prevents using a DLT-based register. Helpfully, the CSSF has clarified via a Q&A that transfer agents may keep a fund’s unit/shareholder register using DLT, which has provided further certainty.
For dematerialised securities, the relevant law[3] provides that the securities issuance account can be held using DLT – de facto recognising the issuance of tokenised fund shares/units.
Since ownership of securities (whether registered or dematerialised) is often recorded and transferred via so-called “securities accounts”, the Luxembourg legislator also clarified[4] that such securities accounts can be kept using DLT.
Leveraging these legal provisions, it is hence possible, since a number of years, to issue Luxembourg fund shares and record and transfer ownership of such fund shares by relying on DLT.
Beginning of 2025 a new law[5], the so-called “Blockchain 4 Law”, entered into force and created a new simplified issuance process for dematerialised securities, relying on the newly created role of control agent.
The control agent’s role is to maintain the issuance account of the tokenised shares/units, oversee the custody chain of the shares/units, and ensure reconciliation between the DLT-based issuance account and securities accounts.
This eliminates the previous need for a Luxembourg central account keeper or settlement organisation, which was seen as a constraint under the previous regime, considering only few service providers are operating under such framework. Under the Blockchain 4 Law, the scope of institutions that can act as control agent is much broader, comprising settlement organisations, but also banks and investment firms. Importantly, duly passported EU banks and investment firms can also act as control agent, which can benefit asset managers with an existing EU presence.
Another highlight is the previous requirement for custodians to maintain a custody account with the keeper of the issuance account. This second custody layer falls away, massively streamlining the operating structure and reducing costs.
The ability for the control agent to be a bank or investment firm creates the possibility of a single entity in charge of the distributed ledger to support issuance, custody, transfer of ownership and potentially trading and settlement of the securities (by operating a DLT-based trading facility and/or settlement system). This could lead to the emergence of secondary markets for fund shares/units, a functionality which would notably benefit semi-liquid (retailised) alternative investment funds. Considering the popularity of semi-liquid alternative funds, we would expect DLT-based secondary markets to be one of the major trends of the coming years.
While it is not yet a substantial market trend, asset managers are already operating tokenised investment funds in Luxembourg, either simply experimenting with the technology or via real life use cases (whether ab-initio issuance of such fund shares, tokenisation of already existing fund shares, or using tokenised MMF shares as collateral in derivatives transactions).
While most of the cases involve less publicised initiatives involving alternative investment funds, earlier this year Franklin Templeton made waves by issuing the first fully tokenised UCITS.
We would expect this trend to continue, also boosted by the new Blockchain 4 Law, as institutional interest is building and the need for new solutions emerges, including secondary markets and new distribution models (including B2C models targeting the digitally native population).
Besides tokenisation, another trend will be funds investing in digital assets. There are no significant regulatory hurdles, as robust legal regimes already exist both for digital financial instruments, such as tokenised stocks, bonds and fund shares/units (MiFID 2), and crypto assets, such as CBDCs, stablecoins, or crypto currencies (MiCAR). The Luxembourg fund toolbox already offers solutions for any such investments, the only constraint being the risk-spreading rules which may apply depending on the fund type[6].
The holdup for funds investing in digital financial instruments, rather, seems to be the currently relatively scarce offer of digital financial instruments (while tokenised investment funds exist, ironically, uptake of tokenisation among issuers of regular bonds or stocks seems to be slower). Funds investing in crypto assets are already a reality and we have advised on one of the first of such funds using an authorised AIFM (as opposed to smaller funds using a registered AIFM).
The author, Raoul Heinen is a Luxembourg-based partner with the law firm Linklaters
[1] Luxembourg law of 10 August 1915 on commercial companies, as amended.
[2] While the law, equally, does not explicitly mention that the register may be kept using an Excel table or other software, this was never an impediment to such technology being used.
[3] Luxembourg law of 6 April 2013 on dematerialised securities, as amended.
[4] Luxembourg law of 1 August 2001 on the circulation of securities, as amended.
[5] Luxembourg law of 20 December 2024 notably amending the law of 6 April 2013 on dematerialised securities and the law of 5 April 1993 on the financial sector.
[6] The only notable exception would be Luxembourg UCITS, for which the CSSF currently does not permit any direct/indirect investment in crypto assets, although a fund-of-fund strategy remains possible. This may change with the ongoing review, at EU level, of the UCITS Eligible Assets Directive. Note that investment in tokenised financial instruments is not an issue.
