LuxSE’s recent move into the DLT space gives a glimpse of what is to come for international capital markets
Digitalisation is taking all industries by storm, and capital markets are no exception. As more and more industries kick-start their digital transformation, a growing number of financial institutions seek to leverage technological innovation to improve their business processes and end-user offering.
DLT shaping new trends in capital markets
Despite still being in its early stages, the use of distributed ledger technology (DLT) is garnering increasing interest in financial markets. That is because the technology represents an important step towards the digitisation and modernisation of financial markets and can contribute to creating a more open and accessible financial system.
Due to their innovative characteristics, native security tokens – financial instruments that are issued on a distributed ledger, allowing for a fully digital issuance and servicing process – are also making headlines within international capital markets. They have the potential to significantly improve efficiency and transparency and make financial transactions safer and more resilient – all while offering benefits similar to traditional securities.
Issuers and investors alike can benefit from the tokenisation of debt securities, which helps automate a wide number of tasks, streamline the entire issuance process and significantly shorten the time required to settle a transaction.
Admitting DLT financial instruments
Striving to stay at the forefront of technological innovation and help shape the future of capital markets, the Luxembourg Stock Exchange (LuxSE) announced in January the admission of the first financial instruments registered on a public DLT on its Securities Official List (LuxSE SOL).
This constitutes a major step towards the digital transformation of LuxSE, and an early building block in its contribution towards price discovery, data and transparency of financial instruments issued using DLT. This new offering provides the exchange’s customers and partners with comprehensive services and solutions to help them meet their evolving business needs in tomorrow’s digital economy.
Facilitating indicative price and data dissemination
Given the complex nature of security tokens, LuxSE’s new service is limited, in the initial phase, to experienced issuers and applicants with a proven track record in capital markets transactions. Moreover, LuxSE will for the time being only admit tokens that represent financial instruments priced in fiat currency and qualifying as debt financial instruments.
As is the case for other securities registered on LuxSE SOL, security tokens are not admitted to trading on LuxSE’s markets. However, the registration of DLT financial instruments on LuxSE SOL provides enhanced visibility to security tokens and their issuers, and facilitates the dissemination of indicative prices and securities data on this new form of financial instruments.
Teaming up with a pioneer in the field
The three series of security tokens admitted on LuxSE SOL are digital covered bonds and structured products that have been issued and deployed by Societe Generale’s digital assets arm, Societe Generale - FORGE (SG - FORGE), natively on the Ethereum and Tezos public blockchains respectively.
A milestone for EU financial markets
The admission of these security tokens is a major milestone – not only for LuxSE, but for European Union financial markets as a whole, as this marks the first time an exchange in the EU admits security tokens.
More importantly, this admission represents a unique, innovative, robust, and publicly accessible solution for issuers and investors of these instruments, and a sign of what is to come across capital markets in the near future. Other issuers in Europe and beyond are expected to follow suit as more and more market participants look to capitalise on this disruptive technology.
EU to ease the way for digital financial services
This admission takes place within a larger context marked by the acceleration of market digitalisation using blockchain technology, notably through the expected adoption of the EU pilot regime for market infrastructures based on DLT.
The pilot regime is expected to enter into force in 2023 and last between three and six years, permitting the processing of security tokens through market infrastructures in compatibility with applicable EU regulations.
The pilot regime also marks a significant step in the EU’s ambitions to modernise and prepare capital markets for a digital future, and more importantly, support and strengthen digital innovation while protecting consumers and maintaining market integrity.
The views, thoughts and opinions contained in this Focus article belong solely to the author and do not necessarily reflect the WFE’s policy position on the issue, or the WFE’s views or opinions.