Why DEFYCA’s Selection Offers A First Mover Advantage

The Laws of Luxembourg / DLT / Blockchain technology

The DEFYCA team looked at many legal jurisdictions in which to partner their business activities, settling to adopt the jurisdiction of the Grand Duchy of Luxembourg as headquarters for all business activities and companies. The main reason behind this decision was the favourable regulatory environment and the proactive nature of the Luxembourg government in adapting their legislation as a visionary way for DLT/Blockchain technology. 

This innovation encouraged by the Luxembourg government has resulted in the Luxembourg securitization market becoming the leading market for securitizations in Europe. The Luxembourg Ministry for Digitisation has created a syndicate of government bodies to support the research and development of Blockchain technologies. (1)

Legal Basis

There has been in the Luxembourg regulatory space a confluence of 2 distinct pieces of legislation which have enabled the type of securitization undertakings contemplated by DEFYCA to become a reality. The relevant laws are as follows;

The Blockchain laws, Blockchain 1&2 laws (collectively the Blockchain laws) enacted on the 1st of March 2019 and the 21st of January 2021 respectively, complete a series of initiatives in the DLT (Distributed Ledger Technology) or blockchain area on the circulation of securities such as allowing the use of DLT technology to settle fungible securities on a blockchain. This clarifies and gives legal certainty to the fact that a central account keeper or settlement organisation may use a DLT device or technology to make and keep records of accounts held with the settlement organisation. 

”This account may be maintained on the registrations of securities may be carried out through secured electronic registration mechanisms, including distributed electronic ledgers or databases.” (2) 

It is therefore now possible to use private or public blockchains for the such recording of securities or securitising transactions. The central account keeper can now operate a wallet in the form of a DLT/ blockchain address to record the settlement of the dematerialised securities as tokens. The 2021 Blockchain Act allows the direct issuance of dematerialised securities in tokenized form.

As an update the Luxembourg authorities with the inputs of the CSSF (the Luxembourg Financial Regulator) have lately, in 2022 proposed an additional Law, Blockchain 3 (No 8055) which allows for:

• 1. An amended definition of financial instruments 
• 2. The holding of financial collaterals on a blockchain
• 3. The introduction of the DLT Pilot Regime into the Luxembourg legal framework. 

The second piece of legislation is also important and is the recent amendment to the Securitization laws of Luxembourg. These regulations are in force since the 8th of March 2022 and are a very recent addition to the Luxembourg legal code. In particular, the law of the 25th of February 2022 states: 

“a securitization undertaking may securitize a pool of risks consisting of debt securities, debt financial instruments or claims which is actively managed by the securitization undertaking itself or by a third party, only if the financial instruments issued in order to finance the acquisition of this pool of risks are not offered to the public.” (3)

The key point here is the offer to the public. In order for the DEFYCA platform to be compliant the securities issued on the platform will be only issued to private accredited investors and in compliance with European legislation and regulations known as MiFID 2. There are other key elements to this recent amendment to the securitization law. They are as follows,

1. This new law puts an end to the legal uncertainty in Luxembourg in relation to a securitisation SPV.( Special Purpose Vehicle ). Such an SPV can now be financed by way of issuance of financial instruments in the broadest possible meaning and is no longer limited to “securities “. 

2. There is now the possibility for active management of the assets acquired by the SPV which was previously prohibited by the earlier legislation, by allowing the active management of the acquired assets in the form of loans (CLOs) or debt securities (CDOs) the Luxembourg regulator allows SPVs closer to the investment funds without however introducing additional regulation thereby substantially achieving higher flexibility with these type of issuances. (4) 

3. The new law also allows the financing of Luxembourg securitization funds by loans thereby creating additional liquidity in the system. 

4. A securitization fund can now grant security for the benefit of any third party, for instance, a bank where the borrower is the mother company (that will use the proceeds of the loan to invest in the fund). 

The new law also clarifies the rules of subordination and priority of rights applicable in a securitisation vehicle. The new law also imposes a legal obligation on securitization funds which are registered with the Luxembourg Trade Companies Register. DEFYCA has now registered as a Fund (Frictionless Markets) with the Register. 

Overview

In the final analysis, the opportunity presented by the confluence of the two laws presented DEFYCA with a unique opportunity to take advantage of the favourable regulatory environment of Luxembourg. We intend to be the first company to perform digital securitisation under the Blockchain laws of Luxembourg.

DEFYCA has formed its actively managed fund vehicle Frictionless Markets Securities which has been registered with the Luxembourg Register on the 14th of November 2022. For all legal purposes, this fund is now operational and open for business.

DEFYCA is set to position itself to be a significant technological force in the digital securities space, not only in Luxembourg but throughout the European Union and globally. 

Given that, within the next 12 months, the MiCA (Markets in Crypto Assets ) legislation shall be in force, DEFYCA will be one of the first technology providers to seek regulatory approval and validation of our project within the EU. In addition, DORA ( Digital Operational Resilience Act ) will be also in force and again DEFYCA will also apply to come under the DORA regulatory framework. An update on the progression of the MICA /DORA will follow shortly. 

References

1. Luxembourg aims to be a European pioneer in the Blockchain World 7th July 2021

Blockchain & Cryptocurrency Laws and Regulations | Luxembourg | GLI.webarchive

2. Lux. recognises the use of DLT for issuance of dematerialised securities 22nd January 2021 

Luxembourg law recognises the use of dlt for the issuance of …

3. Clifford Chance on the Securitisation Law 22nd March 2004 (amended).

AMENDMENTS TO THE LUXEMBOURG SECURITISATION LAW

4. Lux CMA on the CLOs and CDOs, webinar November 2022 

LuxCMA: Luxembourg Capital Markets Association

Brendan Flanagan

General Counsel 

DEFYCA 

February 27th 2023