Luxembourg joins Cryptosecurities Club

While France may have DEEP Securities, Luxembourg now has ‘DEES securities’. These securities refer to securities transmitted by way of a “dispositif d’enregistrement électronique sécurisé” or, freely translated, a ‘secure electronic recording device’. This concept includes distributed electronic registers or databases. In other words, Luxembourg is the latest EU country to implement legislation enabling cryptosecurities.

This happened by means of the Luxembourg Act of 1 March 2019
(hereinafter colloquially referred to as the Cryptosecurities Act), which entered into force on 9 March 2019.

The Cryptosecurities Act modifies the Act of 1 August 2001 regarding the circulation of securities (as amended) by adding an Article 18bis to it. The first paragraph of this new Article 18bis is as follows:

Le teneur de comptes peut tenir les comptes-titres et effectuer les inscriptions de titres dans les comptes-titres au sein ou par le biais de dispositifs d’enregistrement électroniques sécurisés, y compris de registres ou bases de données électroniques distribués. Les transferts successifs enregistrés dans un tel dispositif d’enregistrement électronique sécurisé sont considérés comme des virements entre comptes-titres. La tenue de comptes-titres au sein d’un tel dispositif d’enregistrement électronique sécurisé ou l’inscription de titres dans les comptes-titres par le biais d’un tel dispositif d’enregistrement électronique sécurisé n’affectent pas le caractère fongible des titres concernés.

This paragraph can be freely translated into English as follows:

The account provider may maintain securities accounts and make entries in securities accounts within or through secure electronic recording devices, including distributed electronic registers or databases. Successive transfers recorded in such a secure electronic recording device shall be considered as transfers between securities accounts. The maintenance of securities accounts within such a secure electronic recording device or the registration of securities in securities accounts through such a secure electronic recording device shall not affect the fungibility of the securities concerned.

Luxembourg’s conception of cryptosecurities is both broader and narrower than the implementations of cryptosecurities in France and Delaware, which were discussed in a previous post.

French legislation so far only provides a framework for non-listed securities; Delaware legislation so far only provides a framework for shares and not for other types of securities. The Luxembourg Cryptosecurities Act, by contrast, enables cryptosecurities in all instances where regular dematerialised securities can be issued.

However, by drafting its Cryptosecurities Act from the perspective of the provider of securities accounts, the Luxembourg legislator may give the impression that DLT’s primary added value is to serve as back office technology for intermediaries. In terms of back office technology, DLT may turn out to be somewhat unwieldy compared to the efficient back office software currently used by intermediaries. French and Delaware legislators, on the other hand, drafted their bills from the perspective of the issuer of securities. This leaves more leeway for ‘disruptive’ applications of DLT.

Taming the Intangible: MtGox Judgment Translated into English

A Japanese judgment relating to the MtGox bankruptcy proceedings has been translated into English. The judgment addresses property rights in bitcoins. Under Japanese law, only tangible things can be the object of ownership. This bars bitcoin holders from proprietary protection. In civil law jurisdictions that do not have this corporeality requirement, part of the solution may lie in the analysis of Bitcoin as a multi-party agreement.

MtGox, once the world’s largest bitcoin exchange, filed for bankruptcy protection in Tokyo on 28 February 2014. Bankruptcy proceedings began on 16 April 2014. One unhappy MtGox user brought a lawsuit against MtGox and its bankruptcy trustee in order to retrieve more than 458 bitcoins from the exchange. On 5 August 2015, a lower court in Tokyo, Japan, passed a judgment in this case. In its judgment, the Japanese court takes a stand on the nature of Bitcoin as property under Japanese law. Academics at Oxford University’s Commercial Law Centre at Harris Manchester College have now made available an annotated unofficial English translation of the judgment.

The plaintiff relied on the right of segregation of Article 62 of the Japanese Bankruptcy Act, which, freely translated, provides as follows: “The commencement of bankruptcy proceedings shall not affect a right to segregate, from the bankruptcy estate, property that does not belong to the bankrupt […]”. The plaintiff alleged that the relevant bitcoins, of which MtGox has taken possession, do not fall within the bankruptcy estate, because they are owned by him. He therefore requested that the 458+ bitcoins be transferred to him.

Touching the Intangible

A major hurdle that had to be overcome for this claim to succeed, was to convince the judge that bitcoins can be the object of property rights under Japanese law. Unfortunately for the plaintiff, Japanese law only recognises property interests in tangible things (as per Article 85 of the Japanese Civil Code).

The plaintiff’s reasoning for arguing that a bitcoin is in fact a tangible thing, is paraphrased in the judgement as follows: “The electronic record held on a number of electronic computers embodies the bitcoin and is not merely a record of it, so that bitcoin has an existence; and therefore it is possible to subject it to exclusive control, thus it is the object of ownership, corresponding to a “thing”, that is, a tangible thing, under Article 85 of the Civil Code.” (emphasis mine)

The court is not convinced by the ’embodiment’ argument. It has a strict reading of the corporeality requirement, according to which even things that can be physically observed, such as electricity, are excluded from being a ‘tangible thing’. Referring to Bitcoin’s digital and internet-based nature, the court holds that “it is obvious that bitcoin has no corporeality which occupies space.”

The corporeality requirement in Japanese law seems to be a trace of the influence German law had on the codification and ‘westernisation’ of Japanese law in the late nineteenth century.1 The German Civil Code provides, in its § 90, that “Sachen im Sinne des Gesetzes sind nur körperliche Gegenstände.” It is also interesting to see how closely the Japanese court’s understanding of a tangible thing (“A tangible thing shall be defined as an object which occupies space such as liquid, gas, substance”) resembles German commentators’ understanding (“Körperlichkeit bedeutet das räumliche Zutagetreten von Materie (fest, flüssig, gasförmig) in beherrschungsfähiger Einheit.”).2

While bitcoins are not securities,3 similar discussions can be found in the literature on property in securities. To civil lawyers such as myself, the bone of contention summarized in the MtGox judgment may be reminiscent of the French ‘théorie de la scripturalisation’ which was developed in the 1990s in respect of book-entry securities. French legal scholars sought to extend the protection of bona fide purchasers provided for by Articles 2276-2277 of the French Civil Code to book-entry securities. The problem was that, much like in the MtGox judgment, these rules applied only to tangible things. Therefore, scholars argued that a credit entry in a securities account in fact ‘reifies’ the securities; the credit entry ‘embodies’ the security (cf. the plaintiff’s reasoning above), such that the credit entry must be considered a tangible thing.4

Taming the Intangible

The ‘scripturalisation’ theory may be the closest one will get to touching the intangible. Yet, without the support of express statutory provisions, it is unlikely to defeat rigid corporeality requirements such as the one found in the Japanese Civil Code.

In other jurisdictions, for instance in England and Wales, ownership can also be acquired in intangibles, such as choses in action. In commenting on the judgment, Professor Gullifer, Professor Hara and Professor Mooney give the example of a bank account: “The bitcoin blockchain is merely a ledger, and what is recorded are just transactions relating to bitcoin. In English law, we might think of this as analogous to the ledger of transactions involving a bank account. However (in English law though not, technically, in Japanese law) the bank account itself can be owned since it is a debt owed by the bank to the account holder, that is, a chose in action which is classified as intangible property. The ledger is just a record of transactions concerning this chose in action.” They are of the view, however, that “Bitcoin is definitely not a chose in action. Thus, the bank account analogy does not work, and a different analysis is needed for it to be the object of ownership even in English law.”

In civil law jurisdictions, where the concept of ‘choses in action’ does not exist, part of the solution for providing proprietary protection to a holder of bitcoins may be at hand. One of my colleagues at Ghent University, Simon Geiregat, analysed Bitcoin from a Belgian law perspective.5 He found that bitcoins can be regarded as personal claims (schuldvorderingen, créances, Forderungen). Bitcoin can be regarded as a multi-party agreement. Whoever has a Bitcoin wallet accedes to this multi-party agreement. The Bitcoin user thus becomes the holder of a contractual claim against anyone and everyone else who enters into the agreement. The holder of the Bitcoin wallet can rightly expect that these counterparties will accept her bitcoins if she has a payment obligation towards one of them, unless expressly agreed otherwise. At the same time, she has an identical obligation towards any and all other Bitcoin users. In other words, by acceding to the multi-party Bitcoin agreement, the Bitcoin user acquires a personal claim against (and at the same time becomes obligor of) all other Bitcoin users.6

Moreover—at least under Belgian law—personal claims can be the object of ownership, and proprietary protection of personal claims can be enforced through revendication.7 The only way in which the claim of a Bitcoin user can usefully be redeemed, consists of knowing the private key to a public key on which a so-called ‘unspent transaction output’ is registered.8 In other words: the bitcoins have to be ‘in your account’ for you to be able to spend them. Thus, a revendication would mean that the bitcoins (i.e., the ‘unspent transactions outputs’) have to be transferred to a public key designated by the plaintiff. This is the result that the plaintiff in the MtGox case sought to obtain by bringing the lawsuit. From this perspective, the intangible nature of bitcoins should not prevent the proprietary protection of the holder.

Launch of research project

Distributed Ledger Law (DLL) today announces the launch of its legal research project “” DLL’s founder took up a position as PhD researcher at KU Leuven, Europe’s most innovative university according to Reuters, to engage in a multi-annual research project on the legal aspects of cryptosecurities.

Several jurisdictions have adopted or are currently adopting legislation to permit the issuance of cryptosecurities by private companies. However, the current securities law framework may not be equipped to provide an adequate answer to what cryptosecurities are and how they can be transferred in a valid and effective way. The main reason for this is that the current securities markets are centralised, intermediated, and built on the assumption of imperfect traceability of securities. By contrast, distributed ledger technology is designed to facilitate decentralisation, disintermediation and perfect traceability. The research project seeks to map and mitigate the legal risks that emerge from the clash of these paradigms.

This objective will be pursued by starting from three seemingly simple questions:

  1. To what extent do cryptosecurities differ from traditional securities?
  2. What legal gaps occur when the current legal framework governing the nature and transfer of traditional securities is applied to cryptosecurities?
  3. How can these gaps be bridged?

The project’s full working title is “The Nature and Transfer of Cryptosecurities: Mapping and Mitigating Legal Risk.” Progress updates will be shared here on Distributed Ledger Law.

FCA on regulation of ICOs

Yesterday, the UK’s Financial Conduct Authority (FCA) issued a consumer warning about the risks of Initial Coin Offerings, in which it also briefly touched upon the regulatory treatment of ICOs. Some highlights are discussed below.


Although stating the obvious, the FCA’s description of the risks of ICOs is a good reminder of why one should not tender one’s life savings in yet another $200M+ token sale:

  • Unregulated space: Most ICOs are not regulated by the FCA and many are based overseas.
  • No investor protection: You are extremely unlikely to have access to UK regulatory protections like the Financial Services Compensation Scheme or the Financial Ombudsman Service.
  • Price volatility: Like cryptocurrencies in general, the value of a token may be extremely volatile – vulnerable to dramatic changes.
  • Potential for fraud: Some issuers might not have the intention to use the funds raised in the way set out when the project was marketed.
  • Inadequate documentationInstead of a regulated prospectus, ICOs usually only provide a ‘white paper’. An ICO white paper might be unbalanced, incomplete or misleading. A sophisticated technical understanding is needed to fully understand the tokens’ characteristics and risks.
  • Early stage projectsTypically ICO projects are in a very early stage of development and their business models are experimental. There is a good chance of losing your whole stake.

The FCA goes on to say that “a digital token issued may represent a share in a firm, a prepayment voucher for future services or in some cases offer no discernible value at all.” (emphasis added)


On the question whether ICOs are regulated by the FCA, the FCA makes three caveats:

  1. Some ICOs may involve regulated investments.
  2. Firms involved in an ICO may be conducting regulated activities.
  3. ICOs may fall within the ambit of the prospectus regime.

In the FCA’s words:

Some ICOs feature parallels with Initial Public Offerings (IPOs), private placement of securities, crowdfunding or even collective investment schemes. Some tokens may also constitute transferable securities and therefore may fall within the prospectus regime.

Businesses involved in an ICO should carefully consider if their activities could mean they are arranging, dealing or advising on regulated financial investments. Each promoter needs to consider whether their activities amount to regulated activities under the relevant law. In addition, digital currency exchanges that facilitate the exchange of certain tokens should consider if they need to be authorised by the FCA to be able to deliver their services.

Yours truly is not an English lawyer, so I gladly leave the analysis of what these caveats mean to my English colleagues. One of such English colleagues is Preston Byrne.  In his blog post, Byrne points out that “the key here is that the definition of what a security is, for the purposes of issuing prospectuses is defined in statute, is highly prescriptive, and at least on my reading does not create a broad, flexible, common law-style definition of what a “security” is like the Howey Test does in the US.

As a reminder, the US Securities and Exchange Commission (SEC) recently unleashed the Howey Test on the ICO of The DAO in its Report of Investigation on The DAO.

Although continental token sellers may for the time being find textual arguments in the existing regulatory framework to argue that they are not conducting regulated activities and are not subject to the requirement to draw up a prospectus (that is, until that framework changes to include ICOs…), it will be interesting to see how a US-style functional approach may influence EU financial regulators in assessing token sales. It also remains to be seen to what extent the set-up of the platform and in particular the utility value of the token in question might prevent the token seller from running afoul of securities legislation.

EU looking at blockchain to promote transparency in capital markets

The European Commission is working on the development of a DLT-based “European Financial Transparency Gateway”, said Commissioner Valdis Dombrovskis, in charge of Financial Stability, Financial Services and Capital Markets Union, in response to a question asked in the European Parliament earlier this week. The project aims to connect and make available data which listed companies must report to national databases.

Interesting to see how the same technology was once used by anarchists to hide from government and will soon be used by a supranational organisation in regulating its capital markets. A bitcoin clearly has two sides…

Delaware paves the way for blockchain stock ledger

On 30 June 2017, the Delaware House of Representatives approved a bill amending the Delaware General Corporation Law to provide specific statutory authority for Delaware corporations to use a blockchain for the creation and maintenance of corporate records, including the corporation’s stock ledger.

Links: Synopsis | Bill

Sweden enters second phase of its blockchain land registry project

Sweden is studying the possibilities of using blockchains as a technical solution for real estate transactions. Kairos Future, one of the parties working on the project, has prepared an interesting report, which provides insight in the thought process and the choices made.

Links: Full report | CoinDesk article

Financial Stability Board takes a closer look at DLT

In its report dated 27 June 2017, the Financial Stability Board (FSB) assesses possible financial stability implications from FinTech.  While emphasizing the benefits Distributed Ledger Technology can have for the financial system, the FSB identifies cross-jurisdictional compatibility of national legal frameworks and data privacy as some of the concerns that merit regulators’ attention.

Links: Full report | Executive summary