In the world of mergers and acquisitions (M&A), transactions involve complex agreements and the transfer of significant assets between parties. Although the potential uses of the distributed ledger technology (DLT) in M&A deals have been widely discussed, there are broader applications to explore. DLT’s unalterable shared ledger, which can automatically record and verify transactions, has the capability to fundamentally transform the methods through which investors assess, negotiate, and carry out transactions, by automatically recording and validating them. The possibilities for smart contracts and various types of tokens are enormous.
Enabling Widespread Access to Investment Opportunities
Opening up capital opportunities to a wider audience through tokenisation means enabling more individuals and entities to invest and own parts of an asset, rather than the whole, by fractionalizing ownership. This process is supported by DLT technology, which allows for the digital transfer of physical assets and the creation of various types of tokens which are digital representations, created via smart contracts, through which an individual possesses or is documented as possessing a unit or another form of entitlement within a register or digital framework based on the DLT.
Due to the fact that tokenisation allows for a fractional ownership model, it enables individuals with limited capital to participate in investments in a diverse range of assets (via the purchase of tokens in smaller denominations) that were traditionally accessible only to high-net-worth individuals or institutions. In addition, since tokens can be traded and accessed globally through digital platforms and decentralized exchanges, this accessibility provides individuals from various geographic locations with equal opportunities to invest.
Tokenisation, therefore, proves particularly valuable in sectors characterized by restricted liquidity and significant investor obstacles.
Enhancing Confidence in Transactions with Smart Contracts
By leveraging blockchain technology, smart contracts enable the representation of business or contractual logic, either in whole or in part, through programmable code. This innovative approach involves recording the agreed-upon transaction conditions between the involved parties as a protocol within the DLT. Subsequently, if these predetermined conditions are satisfied, the desired legal consequences are automatically triggered via a technical process. For instance, this could theoretically entail the transfer of the purchase price or the release of an earn-out amount upon the realisation of conditions precedents. Importantly, this entire process operates independently of the parties or any external intermediaries, ensuring that no party can exert any influence on the transaction.
By reducing counterparty risks, smart contracts, therefore, allow dealmakers to enter into agreements with greater confidence, even if they have no prior relationship or trust between them. This situation could potentially lower the variability of returns and outcomes, resulting in higher valuations for income-producing assets.
Expanding the Reach of Emerging Technologies
Via the adoption of the Blockchain I[1], Blockchain II[2] and Blockchain III[3] Acts, Luxembourg has demonstrated its determination to position itself as the leading EU centre for Distributed Ledger Technology. However, advancing the adoption of DLT technology in the context of transactions requires the involvement, coordination and collaboration of all market players. It is through this collective endeavour that Luxembourg can establish a robust ecosystem, fully unleashing the potential of DLT and positioning itself as the preferred jurisdiction for tokenisation and DLT-related transactions, giving Luxembourg a significant competitive edge on the global financial market.
[1] Luxembourg Act of 1 March 2019 amending the Act of 1 August 2001 on the circulation of securities as amended.
[2] Luxembourg Act of 22 January 2021 amending (1) the Act of 5 April 1993 on the financial sector, as amended and (2) the Act of 6 April 2013 on dematerialized securities.
[3] Luxembourg Act of 15 March 2023 (1) amending a) the Act of 5 April 1993 on the financial sector, as amended; b) the Act of 5 August 2005 on financial collateral arrangements, as amended; c) the Act of 30 May 2018 on markets in financial instruments, as amended; and (2) implementing Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology, and amending Regulations (EU) No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU.
