Digital Securities

Securities Protocol Frictionless Markets and the impact of regulation!

With cryptocurrency markets exploding over the past few years, it’s not surprising to see regulators worldwide putting many crypto projects under a microscope as they look to enforce compliance bound by financial law.

For example, the Securities and Exchange Commission – the United States financial regulator – has been cracking down on cryptocurrency projects over the past couple of years. Over that time, they started litigation against large crypto companies such as Ripple and Kik, alleging they are operating as unlicensed securities token offerings – a big no-no under the regulatory framework in the US. The SEC took things further by recently forcing Paxos Trust to stop issuing its stablecoin, BUSD, alleging that the company is operating an unlicensed securities offering.

With regulators such as the SEC clamping down on crypto projects with their full power, figureheads within the industry are beginning to question if the regulators are the ones to be blamed. With people losing life savings in calamities like the FTX collapse, it’s about time the industry started to welcome regulation for the safety of everybody involved.

Unfortunately, regulation is seen as a bad word in the cryptosphere. However, it’s important to understand there are now specific frameworks within the regulation that permit blockchain applications to thrive. Projects like Frictionless Markets are ahead of the pack, being the first mover to create a digital assets securities firm that is legally compliant under the Luxembourg securitization & blockchain laws.

Frictionless Markets chose to set up its operations in the Grand Duchy of Luxembourg as it provides the company an avenue to operate legally within the boundaries of a robust regulatory framework, protecting both the company and the users of the protocol.

But the important question is, why Luxembourg? And how are they allowed to operate?

Frictionless Markets is an institutional-grade private debt marketplace providing investors and issuers with an institutional class venue for trade in private debt through securities. Two important laws passed in Luxembourg created a framework for two distinct pieces of legislation allowing Frictionless Markets to operate legally. Before these laws, DEFCYA couldn’t legally issue securities in the private debt markets. However, since these laws were passed, Frictionless Markets is now a fully compliant securities protocol.

The legislation involves two individual Blockchain Laws, of which the first was passed in March 2019. These blockchain laws introduced a series of important initiatives that allow the circulation of securities in the blockchain space through a central account keeper. According to the framework, organizations can now use public or private blockchains to record securities or securitize transactions. Most importantly, the central account keeper is allowed to operate a wallet in the form of a DLT/blockchain address to record the settlement of securities.

The second piece of legislation completely opened the doors wide open for Frictionless Markets to operate. It allows for the securitization of a pool of risks consisting of debt securities, such as debt in the private credit markets, especially if the financial instrument issued is not offered to the public. So, for Frictionless Markets to stay compliant, the securities on the protocol will be only issued to private accredited investors. Although there are other smaller facets to the regulation, these two laws form the bulk of the legislation that allows Frictionless Markets to run a securities-based private credit marketplace.

With that, Frictionless Markets is the first mover in the space, becoming the first permissioned protocol to provide risk-priced under-collateralized lending for institutional issuers and fixed-income for accredited investors. The opportunities presented by the Blockchain Laws provide a favourable regulatory environment for Frictionless Markets to operate under. As a result, the company will be the first to perform digital securitization under Blockchain Laws. The project was registered as Frictionless Markets Securities in November 2022, an actively managed fund vehicle for all legal purposes.

With the Luxembourg Blockchain Laws setting the foundation, Frictionless Markets also has plans to expand further. For example, the Markets in Crypto Assets (MICA) legislation will be enacted within the next 12 months. Frictionless Markets intends to be one of the first technology providers to seek regulatory approval within the EU. They also plan to apply for authorization under the Digital Operational Resilience Act (DORA).

Overall, before Frictionless Markets, executing these kinds of trades involving digital securities was challenging – if not illegal. However, with the regulatory framework created, Frictionless Markets is now making the trade in digital securitizes an everyday possibility.

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