In January 2022, the Luxembourg Stock Exchange (LuxSE) admitted the very first financial instruments registered on a public Distributed Ledger Technology (DLT) on its Securities Official List (LuxSE SOL). These security tokens were issued by Societe Generale, and this pioneering step was made possible thanks to a fruitful collaboration between LuxSE, Societe Generale Luxembourg and Societe Generale – FORGE, the tokenisation platform of the group. To learn more about the context of this cooperation and what the admission on LuxSE means for future developments in the space of DLT securities, we interviewed David Durouchoux, Deputy CEO of Societe Generale – FORGE, and Laurent Marochini, Head of Innovation at SGSS Luxembourg.
The first security tokens ever admitted on LuxSE SOL were issued by SG – why is this a significant milestone?
It is indeed very important to get our tokens admitted on LuxSE, especially in the wider context of the EU Pilot Regime. This provides public documentation to potential investors, from a trusted source. This is also a way to prepare for the opening of a liquid market when the Pilot Regime will enter into force. Through this trustful cooperation, we have shown to the market that security tokens are considered credible by a key market infrastructure provider in Europe and this is an important milestone toward the wider adoption of security tokens.
How important is the role of DLT in the digitalisation of EU financial markets?
Tokenisation of debt securities on blockchain can bring a huge benefit to issuers and investors. Firstly, this will allow to automate a certain number of tasks thanks to the smart contract and will streamline the issuance process. Secondly, it will shorten drastically the settlement time from T+2 to T+0. And finally, this allows massive platformisation of security offers where issuers and investors can come to raise money and exchange tokenised assets, whatever they are. In a nutshell, more efficiency, more speed and better distribution to investors. All the benefits coupled with a clear legal framework will contribute to making the EU Financial markets more competitive in terms of infrastructure but also in terms of investment. So, it’s a virtuous circle that is necessary for capital markets.
What role can exchanges play in making DLT issuance mainstream?
In a traditional world, exchanges are placed in the centre of the market by allowing the buyers and sellers to transfer financial assets. In a digital world, when the EU pilot regime will enter into force, the role of digital exchanges will be the same: allowing the new financial assets to be traded. To do so, exchanges must update their rule book to define clear rules.Exchanges will probably develop towards additional assets and services based on blockchain: repo solutions (like DeFi in the cryptocurrency space), cross assets trading, etc …We have demonstrated that we can settle a security everywhere as fast as a cryptocurrency. Now that a true digital security infrastructure is there, the question is: how will this be leveraged by exchanges and market actors towards better liquidity? We don’t know yet, but we believe that all the technical bricks almost exist.The more active a role exchanges will play in the DLT issuance and the rules, the more active they will be in the secondary market. At the end, the ecosystem will be the winner as liquidity is the cornerstone of the project.
What are your thoughts on the EU Pilot Regime, which is expected to enter into force this year or next year?
We indeed expect the EU Pilot Regime to enter into force by the beginning of 2023. This will clarify the role and responsibilities of the different actors along the value chain, and anchor the European legal framework. This step is of course necessary, and the prerequisite to reassure potential issuers and investors. This will be the opportunity to create more liquidity in the secondary market and enable each stakeholder of the value chain to find their strategy path.
What other developments do you expect to see in the DLT space over the next decade?
We consider that the whole ecosystem, including clients, regulators and IBs, has reached an important maturity level with the issuance by the EIB in May 2021 – this is to the benefit of all blockchain actors. We have seen in a year the development of use cases like NFTs, Decentralised Finance, Metaverse. So, in a decade, it will be quite difficult to predict. By the way, we anticipate in a medium term, by 2025, the launch of Central Bank Digital Currencies (CBDC) in Europe and US that will probably lead to the final adoption, especially in the wholesale activity. New players will enter the market, and the digital custody can be the necessary cornerstone for institutional investors. In this context, new business models will probably appear, and some traditional actors of the financial industry will have to reinvent themselves.
What do you consider to be the main drivers and barriers to DLT issuances today?
The barrier of yesterday is not the one of tomorrow, especially if we consider that the regulatory environment will be up to date by next year. For us, regulation is now a driver. The driver number one is “the leadership by example” and this is what we do at Societe Generale – FORGE by performing real transactions in DLT, embarking key clients in our processes. We need to show the market that the benefits of tokenisation are concrete, and not only show it from a technology perspective. The adoption of DLT issuance will have as a pre-requisite the liquidity. To ensure the liquidity, we need to have the entire ecosystem in place. Alone we go faster, together we go further. The education of the market is again necessary to reach the next level of maturity.