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> > > New doctrine – Smart Pledges: creation, perfection and performance of information duties, by Melvin Tjon Akon

New doctrine – Smart Pledges: creation, perfection and performance of information duties, by Melvin Tjon Akon

9 mai 2018 Droit financier

Resume: Business processes are increasingly digital and automated. In the global secured finance market, banks and industry associations are experimenting with smart contracts to automate the granting of security over movable property. After a discussion of smart contracts, the author concludes that pledge agreements in the form of smart contracts, i.e. “smart pledges”, can be validly created and perfected in compliance with the Luxembourg law of 5 August 2005 on financial collateral arrangements. Furthermore, smart pledges can be used to automate information undertakings of pledgors, in particular if those undertakings are specific.

Introduction

 Business processes are increasingly digital and automated. For example, several companies are working on ‘business ecosystems’ on blockchains, linking multiple actors in a value chain1)Examples are FundsDLT (https://fundsdlt.net/) and the commodity trade finance solution built by IBM, Natixis and Trafigura using Linux Hyperledger (https://www-03.ibm.com/press/us/en/pressrelease/51951.wss).. Another example is the use of loan management systems by banks (and contract life cycle management systems more generally), to monitor debtor compliance and manage collateral2)See for example SAP (Systems, Applications and Products for data processing) Loans Management (FS CML), https://help.sap.com/. Regulators stimulate the use of these systems, e.g. European Central Bank, ‘Guidance to banks on non-performing loans’, March 2017, p. 26 (https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf).. A third example is the rise of virtual assistants and other software agents in the retail space, from financial services to personal management3)Examples of digital personal assistants include Amazon’s Alexa, Microsoft’s Cortana, Apple’s Siri and Google’s Assistant. Another example of a popular software agent is a digital financial adviser or ‘robo-advisor’. See as well: ‘Robo-Advisors: investor protection  to code or not  to code? ’, Melvin Tjon Akon, Legimag nr 19, October 2017, Legitech..

This trend has found its way to the global secured finance markets. Some illustrations of this trend include:

  • Ethereum, the largest blockchain after Bitcoin,4)Source: https://coinmarketcap.com. has introduced ETHLend, a “marketplace allowing lenders and borrowers from all over the world to create peer-to-peer lending agreements” secured by pledges on Ethereum-based ERC-20 compatible digital tokens using “smart contracts5)ETHLend Whitepaper (25 February 2018), source: https://github.com/ETHLend/Documentation/blob/master/ETHLendWhitePaper.md, accessed on 17 March 2018..
  • the International Swaps and Derivatives Association (ISDA) has introduced a consistent event and product model for financial products (ISDA CDM), which incorporates features for the pledging of financial securities using blockchain technology6)ISDA, ISDA Common Domain Model Version 1.0 Design Definition Document, October 2017, p. 22..
  • more and more companies are starting to develop smart contracts for a variety of purposes in the financial markets7)Some examples: R3 Corda, Cicero Accord (on Hyperledger Fabric) and EtherParty..

The Grand Duchy of Luxembourg (“Luxembourg”) is often involved as a jurisdiction in global secured finance market transactions. Typically, the security arrangements in respect of certain assets held by Luxembourg companies are governed by Luxembourg law and the financing agreement is governed by foreign law, such as English law. The trend towards digitization and automation raises the question as to whether or not Luxembourg law is sufficiently flexible to allow for the valid creation and perfection of financial collateral arrangements in the form of smart contracts. After a discussion of smart contracts (section 2), this article will assess whether it is possible (1) to create and perfect pledge agreements in the form of smart contracts, in conformity with the law of 5 August 2005 – as amended – on financial collateral arrangements, and (2) to automate the performance of information duties (section 3)

[…]

Source: Melvin Tjon Akon

 

The entire article is available for our subscribers on Legicorp

Références   [ + ]

1. Examples are FundsDLT (https://fundsdlt.net/) and the commodity trade finance solution built by IBM, Natixis and Trafigura using Linux Hyperledger (https://www-03.ibm.com/press/us/en/pressrelease/51951.wss).
2. See for example SAP (Systems, Applications and Products for data processing) Loans Management (FS CML), https://help.sap.com/. Regulators stimulate the use of these systems, e.g. European Central Bank, ‘Guidance to banks on non-performing loans’, March 2017, p. 26 (https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf).
3. Examples of digital personal assistants include Amazon’s Alexa, Microsoft’s Cortana, Apple’s Siri and Google’s Assistant. Another example of a popular software agent is a digital financial adviser or ‘robo-advisor’. See as well: ‘Robo-Advisors: investor protection  to code or not  to code? ’, Melvin Tjon Akon, Legimag nr 19, October 2017, Legitech.
4. Source: https://coinmarketcap.com.
5. ETHLend Whitepaper (25 February 2018), source: https://github.com/ETHLend/Documentation/blob/master/ETHLendWhitePaper.md, accessed on 17 March 2018.
6. ISDA, ISDA Common Domain Model Version 1.0 Design Definition Document, October 2017, p. 22.
7. Some examples: R3 Corda, Cicero Accord (on Hyperledger Fabric) and EtherParty.

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