How it works

The Frictionless protocol is the technology enabler which translates real-world investments into legal, compliant and transferrable tokenized securities through a Luxembourg structure, operated by Frictionless Markets S.à r.l and its securitization structures.

There are many tokenization offerings in the market place and the industry is witnessing new entrants each with its respective niche and focus. The Frictionless protocol focus is specifically on the private markets and specifically on providing the legally compliant market infrastructure to enable Managers and GPs to tokenize their funds and offerings, whilst offering Investors a frictionless, low minimum, and transparent access point to the private markets on a global basis.

Core Layers

As a market infrastructure, the Frictionless protocol provides the three core layers to enable Investors to invest in the best private markets offerings on a global basis. These sections cover the basics of securitization, tokenization and distribution.

1. Securitization

2. Tokenization

3. Distribution

1. Securitization

The Frictionless Markets team supports a wide variety of securitizations in Luxembourg. The securitizations can be "true sale" or "synthetic" securitizations and are issued from bankruptcy remote and orphan entity-protected structures.

A securitization transaction involves establishing a securitization entity in Luxembourg to assume the risk associated with future cash flows tied to receivables, assets, or activities conducted by third parties known as the Underlying Assets. Simultaneously, the entity issues securities, typically in the form of notes, whose yield and value are connected to the performance of the Underlying Assets. These securities are then offered to professional investors on the financial markets in a tokenized format using the Frictionless protocol.

The Frictionless Markets team establishes and operates the securitization structures, providing the fund administration, fund structuring, cash operations and fund reporting services under Luxembourg securitization law.

2. Tokenization

The Frictionless protocol includes:

1. A suite of smart contracts to represent:

   1. Funds/Notes - Frictionless OnChain Assets: The FrictionlessOnChainAssetToken represents a listed fund with the informational and legal rights to the underlying. This includes all the informational rights on the underlying and its associated maturity. A FrictionlessOnChainAssetToken is issued as a digital twin for each specific note in a compartment within the Frictionless Markets fund structure.

   2. Cash - Frictionless Deposit Tokens: A FrictionlessFundDepositToken represents a permissioned Investors FIAT contribution to a specific fund IBAN in a denominated FIAT currency. The FrictionlessFundDepositToken is used as a means of payment and settlement record. The FrictionlessFundDepositToken can only be transferred between permissioned Investors and Managers in the fund as a record of FIAT transfers within the Fund. A daily attestation of the fund IBAN serves to prove the 1:1 backing with FIAT. Market participants holding a FrictionlessFundDepositToken have the legal claim to the FIAT value held in the fund IBAN account under the final terms of the financial instrument issued by the note tracking the FrictionlessFundDepositToken.

   3. Securities - Frictionless Digital Security Tokens: This is the permissioned & transferrable digital security which represents the future cash flow from the FrictionlessOnChainAssetToken and is purchased by the Investor using FrictionlessFundDepositToken's. These digital securities are permissioned and transferable between permissioned Investors in a permissioned market. This token is linked to the FrictionlessOnChainAssetToken and denominated in a FIAT currency at a future date for settlement.

2. Smart contracts to execute the exchange of Frictionless tokens in primary and secondary transactions

3. Smart contracts to swap ERC20 tokens (stablecoins) to/from Frictionless Deposit Tokens, enabling Managers to risk off stablecoin contributions to their respective funds/

4. Smart contracts to swap Frictionless Deposit Tokens of different FIAT denominations using spot and forward rates, enabling Investors to invest and settle in multiple currencies.

5. Smart contracts to manage the permissioning of market participants in accordance with regulation.

6. APIs and a Tokenization Engine to orchestrate and automate complex Manager workflows such as:

   1. Subscriptions

   2. Capital Calls

   3. Cash Distributions

   4. Portfolio Compositions

7. Wallet Infrastructure enabling the custody of tokenized funds/notes, the collection of fees, custody of ERC20 stablecoins for the PROTOCOL_TREASURY and the wallet infrastructure required to sign and execute transactions on the blockchain.

The Frictionless Markets team operates the protocol, granting access to Managers to tokenize their funds and automate their fund administration services from the Frictionless Markets Manager Interface, API or smart contracts.

3. Distribution

Managers can onboard Investors directly or link into permissioned distribution agents on the Frictionless protocol to distribute their tokenized securities on a global basis., these include:

1. Private Placement Agents

2. Global Wealth Advisors

3. Private Banks

4. Digital Security Exchanges

The distribution layer of the Frictionless protocol enables Investors to onboard into tokenized funds using their OnChainId, direct KYC/AML subscription or via reliance letter.

Investors invest via subscriptions or subscription contracts to the tokenized fund/note in accordance with MiFID II regulation.

The investment and settlement of tokenized securities are carried out using Frictionless Deposit Tokens, which is a non-invasive and seamless conversion between FIAT contributions or settlement and their tokenized representation.

The Frictionless Markets team operates the protocol, granting access to Distribution Agents and their Investor base to a wide variety of tokenized funds from the world's best GPs and Managers.

Distribution Agents can manage:

• Subscriptions to Funds for their Investor base.

• Capital Calls and reporting for their Investor base.

• Cash Distributions and reporting for their Investor base.

• Portfolio Compositions for their Investor base.

Supported Securitizations

Securitization encompasses a wide range of asset types, including:

1. Receivables such as loans

2. Liquid assets like bonds or securities

3. Illiquid assets including private equity and real estate

4. Derivative instruments

5. Intellectual property generating royalty streams

6. Cash flow associated with risk or contractual agreements

7. Shares in other entities, PE, Credit, Infrastructure funds, or deals

Frictionless Markets supports the issuance of Notes, Tracker Certificates, and Actively Managed Certificates in multiple currencies. In general, the Frictionless Markets team and the Frictionless protocol support the following securitization & tokenization use cases:

• Tokenized Private Equity Funds.

• Tokenixed Private Credit and Infrastructure Funds.

• Tokenized Real Estate Funds, REITs, and Property Club Deals.

• Tokenized Commodities & Certificated Commodity Funds.

• Tokenized Art, Collectibles, Music Rights, IP Rights, Image Rights & their future cash flows.

• Tokenized Liquid Government Debt in the form of ETFs, Repos, and Treasuries.

• Tokenized Crypto Funds, Crypto ETFs.

• Tokenized Hedge Funds.

Lifecycle of a Transaction

The act of correctly securitizing an undertaking, legally and in compliance with the laws of Luxembourg, and thereafter tokenizing into legally compliant tokenized (digital) securities for distribution to permissioned Investors is a complex end-to-end transaction. This section covers the high-level details of the lifecycle of a transaction which holds true for any type of tokenized offering undertaken by Frictionless Markets.

1. Establishment of the correct Luxembourg securitization structure.

   1. The Frictionless Markets team will create the PPM (private placement memorandum) and the Final Terms for the securitization undertaking.

   2. The Frictionless Markets team creates the compartment, bank accounts of the compartment and the permissioning/provisioning of the necessary wallet infrastructure to execute the tokenization.

   3. All relevant statutory reporting and regulatory obligations for the structure are handled by the Frictionless Markets team, including AML6, SARs, CRS, FATCA, FATF, ManCo Reporting, etc.

2. Tokenization of the undertakings.

   1. The Manager is permissioned on the Frictionless protocol.

   2. Managers can onboard Investors via subscriptions or subscription contracts to the tokenized fund/note in accordance with MiFID II regulation.

   3. The Manager can issue notes, and capital calls*, and run cash distributions** from the Frictionless Markets UI, via integration with the Frictionless Markets API or directly via the smart contracts.

3. Distribution of the tokenized securities.

   1. Managers can onboard Investors directly or link into permissioned distribution agents on the Frictionless protocol to distribute their tokenized securities on a global basis.

   2. Capital Calls* automatically execute upon Investors' subscriptions to a fund/funds, converting FIAT contributions to Frictionless Deposit Tokens and releasing Frictionless Digital Securities to record the transaction on-chain.

   3. Cash Distributions ** automatically distribute income and return of the underlying to the Investors, settling the Frictionless Digital Securities with Frictionless Deposit Tokens, thereafter handling the FIAT settlement in the securitization transaction.