More than three decades ago, Luxembourg took the first steps toward becoming a major hub for the establishment and the distribution of investment funds in Europe, then across the world. Now it has the chance again to become a global leader in embracing fund industry tokenization.
Since the creation of the European Union’s single market, the Grand Duchy has built up its technical and product expertise as a center of excellence for the establishment, incorporation, servicing, and distribution of both retail and alternative funds. The next step is for blockchain technology to bring enhanced speed and efficiency to fund services.
Already, Luxembourg benefits from a global reputation for capability and expertise that has made it the global leader for funds that are distributed in more than one country. Promoters draw on its image of professionalism and high service quality, as well as strict regulatory compliance. The addition of tokenization adds a new digital layer to the already world-leading ecosystem.
The Grand Duchy offers a wide range of options in terms of investment vehicles, the range and capabilities of service providers, and the infrastructure required to incorporate and service funds. It already has a long history of innovation and transformation in the financial industry, stretching back to becoming a hub for Euroloan activity in the 1960s and challenging Switzerland as a European leader for private banking services in the 1980s.
Luxembourg became the EU’s dominant center for investment funds and pooled investments as the first member state to adopt the UCITS Directive in 1988 – a lead it has never lost. The introduction of tokenized investment processes is simply the latest adaptation for an industry that has repeatedly demonstrated its capacity to embrace new challenges.
The development of digital asset expertise has been underway in the Grand Duchy for several years. KPMG Luxembourg was among the instigators of the pioneering FundsDLT distribution platform, created to digitalize and automate clearing and settlement processes and transfer agency functions using blockchain technology. This has already yielded a significant advance in the use of digital ledgers and the digitalization of assets including fund shares, units and interests.
The regulatory framework introduced by the government and overseen by the CSSF has provided a regulatory environment enabling the rapid adoption of blockchain. The technology is simple to use and designed to remove from fund transactions the stress, inefficiency and lengthy processing time that comes with reliance on paper, spreadsheets, PDFs, e-mails and faxes.
The CSSF’s forward-looking regulatory oversight has been particularly important in bringing blockchain technology to the fore – starting with its rapid recognition of ownership recorded on a blockchain as equivalent to assets in a custodian bank.
Other aspects are critical, too. The competitive taxation system in Luxembourg has been an important factor in the growth of the investment fund sector and promises also to be a significant benefit for the development of tokenized assets. With players in the blockchain world seeking to tokenize shares, real estate and other assets, Luxembourg is the perfect environment for establishing special purpose vehicles and other entities as well as funds, thanks to its comprehensive regulatory framework.
Further opportunities lie in the ability to mutualize functions such as know-your-customer due diligence for the fund industry, which could avoid continuing duplication of tasks as well as making them much quicker and more efficient.
Asset managers are driving the business case for digital ledger technology to simplify their upstream value chains and make life simpler for the end-investor. They have put pressure on asset servicers to develop a channel to accept data and information flows from the FundsDLT blockchain.
Asset servicers are often reluctant to embrace new technology because they are unsure of how to transform their legacy business into a new value chain. However, they don’t necessarily need to change fundamentally what they already have.
A good example is the online banking revolution, which has been advanced as much by the establishment of new brands and services by traditional banks as by disruptive new market entrants. Millennial and Gen Z customers may not know or care that the digital bank they use has been created by Barclays, JPMorgan or BNP Paribas.
Meanwhile, it’s important that the country should enjoy a reputation throughout the world as a leader in the embrace of digital technology within the investment industry. The government, organizations such as Luxembourg for Finance, and the financial industry itself are helping to spread the word globally by financing incubators and easing access for dynamic fintech firms, while the University of Luxembourg is heavily involved in the development of innovative financial technologies. All this and more are vital in competing with rival centers such as London, San Francisco and Singapore.
One huge advantage is Luxembourg’s international scope – it oversees more fund assets than any jurisdiction worldwide apart from the US state of Delaware, where the focus is very much on the domestic market. Investment products from the Grand Duchy are distributed in more than 80 countries across the globe, including in the Middle East, Asia, and Latin America.
Digital technology promises a wide range of benefits to the business environment, with efficiency gains vital in light of the Grand Duchy’s constantly growing need for specialist skills, especially in IT roles. In a highly competitive international marketplace, embracing blockchain is set to give Luxembourg fresh impetus as an innovative global financial leader.
Said Fihri is a partner and head of fund distribution and of digital ledger services at KPMG Luxembourg.
