Published on 24 January 2022
Press release

The CSSF published a white paper on DLT and blockchain

Press release 22/01

In light of the many questions surrounding Distributed Ledger Technology (DLT) and blockchain, the Commission de Surveillance du Secteur Financier (CSSF) is sharing its advice on assessing the risks when designing or implementing a project using DLT by publishing a white paper.

DLT, the next step towards the digital transformation?

DLT is a technology that has been used for many years. Its potential has been emphasised in 2008, through the development of the blockchain (which is a particular type of DLT) on which the crypto-currency commonly referred to as Bitcoin still relies. Nowadays, the DLT is seen as the next step towards the digital transformation and even considered by some as potentially revolutionary as many practical applications have been identified or developed in various sectors, notably the financial sectors.

Both the legislator and the financial sector are taking up the challenge of integrating the DLT in a fast-moving environment. Important legal uncertainties around the potential use of DLT or DLT applications have been or might be cleared in the years to come with a view to allow the uptake of DLT, both on National level e.g. with the Blockchain Laws 1 and 21 and on European levels with the European Commission’s ambitious digital finance package2.

Understanding the opportunities without overlooking risks

In this context, over the past few years, the CSSF has been increasingly solicited by financial and non-financial institutions, incumbents and start-ups, wishing to present a large diversity of applications and use-cases of DLT, in various sectors.

Whereas some institutions have an advanced understanding of the risks inherent with this technology, others, which do not necessarily have all the technical skills required for its implementation, may tend to overlook them.

 “As regulators, our job is to ensure the safety and soundness of the financial sector. Regarding financial, we need to balance prudent risk-based supervision with proactive support for positive innovation”, says Cécile Gellenoncourt, Head of Department, Supervision of Information Systems and support PFS.

She specifies: “We apply a principle of technology neutrality and acknowledge that innovative processes and technologies can contribute to the improvement of the provision of financial services.” Thus, when properly used, a DLT, like other technologies, can provide benefits for the financial sector. At the same time, the DLT entails specific risks that must be understood, mitigated and monitored.

Guidance by the CSSF

The CSSF has published a non-binding document in the form of a “white paper” aimed at guiding interested professionals in the conduct of their due diligence process related to the DLT and its use in the provision of services in the Luxembourg financial sector.

This white paper is the result of fruitful collaboration between our ICT risks supervision and financial innovation teams and a panel of external contributors.

According to Cécile Gellenoncourt: “We have to underline that the document does not purport to provide all the technical explanations on the functioning of a DLT, as extensive literature is already available, but to ensure that both risks and advantages are adequately and appropriately taken into consideration by the financial sector.” To that extent, the document first recalls the key common characteristics and different types of DLTs and then presents the main actors and roles identified in a DLT project along with use-case examples. Finally, the main part emphasises some of the main risks related to the DLT, both in terms of governance and technical risks, by proposing key questions and recommendations for professionals to consider when performing their risk analysis and due diligence processes.

The document can be downloaded on the CSSF’s website: DLT_WP.pdf (cssf.lu)

1 Reference is made to the Law of 1 March 2019 amending the Law of 1 August 2001 on the circulation of securities and the Law of 22 January 2021 amending the Law of 5 April 1993 on the financial sector and the Law of 6 April 2013 on dematerialised securities (also often referred to as the ‘Blockchain laws’ 1 and 2).

2 The EC digital finance package includes three proposals for regulations on markets in crypto-assets, on digital operational resilience for the financial sector and on a pilot regime for market infrastructures based on DLT.

The Commission de Surveillance du Secteur Financier

The Commission de Surveillance du Secteur Financier (CSSF) is a public institution which supervises the professionals and products of the Luxembourg financial sector. It supervises, regulates, authorises, informs, and, where appropriate, carries out on-site inspections and issues sanctions. Moreover, it is in charge of promoting transparency, simplicity and fairness in the markets of financial products and services and is responsible for the enforcement of laws relating to financial consumer protection and the fight against money laundering and terrorist financing.

The CSSF carries out its prudential supervision and supervision of the markets in order to contribute to the solidity and stability of the financial sector exclusively in the public interest.

The CSSF is under the authority of the Ministry of Finance but has financial autonomy and autonomy of action as required by the highest international organisations. It has a total workforce of nearly 1,000 highly qualified agents.

 

Press contact: Paul Wilwertz, t. +352 26 25 1 3157, email: paul.wilwertz@cssf.lu