When banking secrecy came to an end in Luxembourg on January 1, 2015, critics sneered. The EU nation, a prominent financial capital on the continent, would lose its luster for global wealth. Not a few feared that Luxembourg had spelled out its imminent doom.
Just the contrary has come to pass. In response to the evolving standards of global banking, Luxembourg has taken up the vanguard in its pace to adopt new EU regulations that promote banking transparency, and headlines of the financial industry now tell of a very different story: that of world-first experiments in fintech that promise to shape our future. The economy was never affected as critics predicted, and instead persisted to grow with forecasts putting Luxembourg at a 4.22% expansion in 2018, twice the average of the OECD, a bloc of the world’s richest countries.
The size of Rhode Island with half the population, Luxembourg is small, but has been able to use this as an advantage by organizing itself like a well-capitalized and politically influential village, given its seat as one of the three capitals of the EU. It has not hurt, either, that the Grand Duchy, an old type of monarchy, naturally sits at the heart of Europe, both geographically and linguistically.
“Everybody in Luxembourg speaks at least three languages: French, English and German,” says Paul Mousel, partner at Arendt & Medernach, the country’s largest independent law firm. “Political stability prevails, and there is also a very short degree of separation with authorities, making the government very easy to access.”
US corporations have long known this, and continue to set up EU bases in Luxembourg, with a new wave in financial investment coming in reaction to Brexit. “All the big US multinationals are one way or another in Luxembourg – Google, Amazon, Paypal, Starbucks, McDonald’s,” Mousel says. “And now more and more US banks are arriving.”
Too small to compete head-on with massive financial centers, Luxembourg has evolved into a hyper-specialist, crafting niche after niche in finance (namely with investment funds, wealth management, and insurance), and advancing them through the application of new technology. “Inside our financial sector, a lot of innovation is taking place in climate finance, green bonds and fintech, which are all new and promising fields,” observes Philippe Meyer, managing partner of KPMG Luxembourg.
One of the pioneering firsts in finance that Luxembourg has launched promises to revolutionize the fund industry through the utilization of blockchain, the famed digital, decentralized and public ledger technology first used in Bitcoin. “Through FundsDLT (Distributed Ledger Technology), which is a collaboration between Fundsquare, a subsidiary of the Luxembourg Stock Exchange; InTech, a subsidiary of PostLuxembourg; and ourselves, the world’s first-ever blockchain-enabled transaction in the investment fund industry was processed last July in Luxembourg,” says Meyer.
The application of blockchain could be especially transformative, given that the global fund industry still relies on antiquated forms of communication technology, including fax machines. “FundsDLT has the aim of dramatically increasing operational efficiency in order processing and assisting asset managers,” continues Meyer. “This is a development that will continue to underscore Luxembourg as a specialist and stands as proof that innovation is something we have always had in our DNA here.”