What are security tokens?

The Luxembourg Stock Exchange defines security tokens as “financial instruments that are issued and exist on a distributed ledger, allowing for a fully digital issuance and servicing process. Financial instruments issued as security tokens offer investors similar investment characteristics to financial instruments issued in a more conventional way”.

Issuance of financial instruments using distributed ledger technology – popularly known as blockchain – is intended to make transactions more secure and resilient. It offers the potential to improve efficiency and transparency in capital markets significantly as a growing number of market participants adopt the technology (see our article on the CSSF’s white paper on risks and opportunities of blockchain at https://www.cs-avocats.lu/investment_management/cssf-publishes-white-paper-on-risks-and-opportunities-of-blockchain-technology/).

What is the benefit of registering a security token on the official list?

Registering a security token on the exchange’s Securities Official List provides issuers with enhanced visibility. The security tokens and investors benefit from the dissemination of indicative prices and guaranteed access to the token’s information notice.

What kind of security tokens can be admitted?

Only crypto-assets qualifying as debt financial instruments can be admitted on the official list for the time being. Security tokens cannot be traded on the regulated Bourse de Luxembourg market nor on the exchange-regulated Euro MTF market.

What conditions apply to the admission of security tokens on the official list?

Security tokens that qualify as debt instruments must be priced in fiat currency and offers must be limited to qualified investors as defined by the EU’s Prospectus Regulation of June 14, 2017 and/or issued in wholesale denominations (i.e. €100,000). Only experienced issuers or applicants with a proven track record can use the new service. All security tokens must respect the Securities Official List rulebook and the exchange’s guidelines for the registration of blockchain instruments on the Securities Official List.

What information should be disclosed when issuing distributed ledger technology securities?

The information notice should contain the following additional information:
• The processes.
• The distributed ledger technology used.
• Confirmation that a contingency procedure exists in the event of a failure in the distributed ledger technology that allows identification of securities holders, as well as a responsibility and liability statement.
• Reasoned confirmation that the financial instruments qualify as bonds or other debt securities issued by a company, a state or its regional or local authorities, or by an international public body, under the governing law of the instruments.
• Description of the parties involved in issuance, recording, safekeeping, transfer and verification of the financial instruments.
• Description of the payment process if such process encompasses the transfer of settlement tokens.
• Description of the risk factors linked specifically to the financial instruments, the settlement process and the underlying technology.
• Environmental considerations regarding the technology used.

What information on environmental considerations should be disclosed by the issuers of security tokens?

As a minimum, the information notice should state distributed ledger technology used, the consensus mechanism used by this blockchain, and how it is used, whether it provides specific environmental benefits or disadvantages, and/or reasons why this may not need to be considered. This information will be examined by LuxSE.

What are the next steps?

The exchange plans to adapt and improve its services to meet the needs of customers and the emergence of new technological opportunities. For example, the guidelines already cover the use of central bank money in tokenised forms as settlement tokens, although this is not yet available for the time being.