Small but mighty: Luxembourg opens its arms to digital assets

As jurisdictions across the world compete for the opportunities and wealth being created as digital assets move from an alternative asset class into the mainstream of traditional finance, Luxembourg has strong rules in place and a supportive atmosphere. Positioned as a major hub for blockchain innovation in Europe, it is a lively place for blockchain businesses and tech start-ups, with plenty of accelerators and incubators to help them grow.

The shifting role of the financial industry

Blockchain and digital assets have the potential to offer substantial advantages to Luxembourg’s economy, especially in key economic sectors such as finance. Predictions suggest that blockchain could contribute to a 2.6% increase in Luxembourg’s GDP and create approximately 6,600 new jobs by 2030.

Indeed, distributed ledger technology (DLT) and blockchain are already transforming Luxembourg’s financial sector, particularly when it comes to securities. Tokenisation, smart contracts and on-chain identities enhance the effectiveness and security of managing investment funds and open up possibilities for all kinds of new financial products and services, with the issuance of digital green bonds in 2023 as just one example of what the future may promise.

Positive legal and regulatory framework

Given the potential economic benefits, Luxembourg has been quick to act. Its legal framework has laid the groundwork for efficient and transparent securities management via DLT. As a regulator, the CSSF (Commission de Surveillance du Secteur Financier) has been forward- thinking and innovative, taking a collaborative approach towards digital assets which is open and helpful towards understanding the needs of the industry.

Luxembourg has taken the lead in regulating blockchain, introducing a sequence of innovative laws that shape its security token framework and has created a clear strategy for the digital asset ecosystem more broadly. Marking a significant step towards the digitalisation of capital markets, the legal framework for digital bonds introduced in 2021 has now been used a number of times by the Luxembourg-headquartered European Investment Bank (EIB) and other players to issue fully native digital bonds.

Luxembourg – a step forward for digital assets custody

Recognising its innovative potential, Luxembourg is now proposing to make its regime more flexible and efficient. While the current law uses a central account keeper, the alternative is to introduce a control agent, which will simplify and avoid the two-layer custody structure, removing costs and intermediaries.

Zodia Custody’s decision to register as a virtual asset service provider (VASP) with the CSSF and seek a MiCA authorisation in Luxembourg reflects the jurisdiction’s forward-thinking approach. Combining a renowned financial hub with an innovative regulator, a positive business environment and a thriving digital asset industry, Luxembourg aligns well with our strategy and represents an excellent place for Zodia Custody to heighten its EU operations. Given its proximity to several other EU states, the Grand Duchy also gives access to a wider talent pool and, with other blockchain and digital assets firms also clustered there, provides good access to exchanges and ancillary services.

Markets in Crypto-Assets regulation (MiCA) implementation

Under Luxembourg’s draft law, VASPs have been given the maximum time to apply for a permit and comply with the new MiCA requirements with the changes due to take effect by 1 July 2026. As MiCA moves towards implementation at the end of this year, the strong prevalence of alternative investment funds and the rise of fund tokenisation puts Luxembourg at the forefront of industry innovation, closely rivalling other key jurisdictions such as Hong Kong and Singapore.

With all these developments combined – fostering innovation, attracting talent and developing future-focused regulation and financial market infrastructure – it is clear that Luxembourg has actively been working to create a supportive technology ecosystem. When it comes to digital assets, Europe’s seventh-smallest country is certainly punching above its weight.

 

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