The Luxembourg House of Financial Technology (LHoFT), an organization focused on driving innovation for financial services in Luxembourg by connecting the local and global Fintech industry participants, recently shared an update from Luc Falempin, the CEO at Tokeny Solutions, a company that aims to drive liquidity for private markets.
The Future of Capital Markets
"Luxembourg has been an extremely fertile ground for us to develop our services. The legislation around tokenisation is very forward thinking and the Fintech community here is super innovative." – @LucFalempin
— Luxembourg House of Financial Technology (@The_LHoFT) December 16, 2020
“Luxembourg has been an extremely fertile ground for us to develop our services. The legislation around tokenization is very [progressive] and the Fintech community here is super innovative.”
With the rise and adoption of Fintech, capital markets are experiencing a truly transformative phase. New opportunities can be found in many industries, both in terms of boosting efficiency of existing markets and bringing additional liquidity into new or emerging markets and various asset classes.
Luxembourg’s established expertise in this industry makes it home to promising new innovations that aim to transform Europe’s capital markets of tomorrow.
Blockchain or distributed ledger technology (DLT) will have a significant impact when it comes to defining or creating new operating models or enhancing traditional business models for capital markets. Blockchain or DLT will also bring the benefits of market liquidity to many new asset classes through the process of tokenization.
As stated in a blog post by Luxembourg for Finance (LFF), the Agency for the Development of the Financial Centre (a public-private partnership between the Luxembourg Government and the Luxembourg Financial Industry Federation that aims to develop the nation’s financial services sector):
“Luxembourg has been innovative in terms of providing legal clarity on the use of blockchain and DLT technologies. Luxembourg passed a new law in 2019, permitting the use of [DLT] for the registration of securities. The new law provides greater transparency and legal certainty on the use of [DLT or blockchain] … by deeming it equivalent to other secured electronic recording mechanisms for the transmission of securities.”
This year, Luxembourg began to further develop this foundation in order to expand the legal framework for using the latest technologies such as DLT for issuing securities, and the Grand Duchy also established guidelines for the registration and supervision of Virtual Asset Service Providers (VASPs) for the purposes of AML and CFT supervision.
Luxembourg based Fintech firm, HQLAx, along with a leading European exchange group, have created a DLT-powered solution for handling collateral swaps in the securities lending market.
As confirmed in the announcement:
“The objective is to help market participants redistribute collateral liquidity more efficiently – by improving the interoperability for different pools of securities and tackling the problem of fragmentation in the market.”
In December of last year, the blockchain-based solution was introduced with the first live transactions carried out by Commerzbank, Credit Suisse and UBS.
Another use case being worked on is FundsDLT, a blockchain-enabled platform for “reengineering of the fund distribution value chain, from front to back, covering the entire fund lifecycle.” The DLT-based solution has been designed to allow fund managers, distributors, asset servicers, and the entire supply chain to lower operational costs by eliminating redundant activities, “while providing the opportunity to achieve necessary transparency on end investors and creating the foundation for digital fund distribution.”
This year, the initiative acquired Series A funding from Luxembourg’s market infrastructure providers and local asset managers.
As noted in the announcement:
“Tokenization is another emerging use case for DLT…[It helps with] the introduction of liquidity into secondary market trading in assets that were previously impossible to trade or highly illiquid. In such cases, coins on a given blockchain network are used as tokens representing an underlying ‘real’ asset. Potential underlying assets for such tokenization … include traditional …. securities or other financial instruments, … real estate, fine art, … forestry assets.”
Companies like Tokeny are now offering solutions that allow businesses to leverage tokenization technology, which leads to faster onboarding, cost-effective management and quick transferability of private market securities.
A Europe-wide approach to tokenization is being developed. The Markets in Crypto Assets bill, which was introduced in September 2020 by the European Commission, is expected to further enhance the industry.