Smart Financial Instruments
What is the project about?
Copenhagen Fintech has supported a series of very ambitious R&D projects with Professor Fritz Henglein at the Department of Computer Science at the University of Copenhagen (DIKU) as PI to test and evaluate Smart Financial Instruments (SFIs) within the context of evolving and recently passed EU financial regulation, including the Distributed Ledger Technology (DLT) Pilot Regime (passed June 2nd, 2022, and in effect as of March 23rd, 2023). With the adoption of the DLT Pilot Regime (DLTR), the EU has signaled its commitment to boosting Europe's competitiveness and innovation in the financial sector.
Deon Digital, in an open partnership with Agreena ApS, BEC Financial Technologies and Capital Market Partners has developed a new regulated component-oriented platform, the SFI System, based on Fritz Henglein’s and his collaborators’ pioneering research. The platform comes with Contract Specification Language (CSL), a secure domain-specific language for expressing the full logic of obligations and permissions of financial contracts including standard securities and novel financial instruments such as
- Fixed- and floating-rate bonds
- Novel crypto assets
- Carbon credit certificates
- KPI-linked green bonds
- Bonds with payouts in carbon credits
The SFI System supports a variety of automated trading protocols, from classical bid-offer matching to advanced secure auctions. Issuers and investors have direct access and control over their holdings, but can additionally give powers of attorney to professional intermediaries to act on their behalf. Trades are cleared instantaneously and settled in bank money (fiat currencies) within seconds, without counterparty or settlement failure risk. All messages are digitally signed by legally identified actors, are checked and validated against the applicable CSL-specification, stored securely and immutably in a digital ledger that is distributed across a configurable number of nodes on a network. The SFI System is highly scalable and energy efficient since it is permissioned (in accordance with KYC, AML and other laws) and neither requires nor implements global message order consensus.
The results of these projects and collaboration have been so promising that the platform was accepted into and has successfully concluded a regulatory sandbox project under supervision of the Danish Financial Supervisory Authority (FSA) FTLab. In particular, the SFI System is expected to receive clarification of regulatory treatment as a DLT-based trading and settlement system under DLTR, allowing Deon Digital or a designated operator of the technology to apply for a regulatory license to operate a combined central security depository and exchange (trading system). If approved the SFI System is on track to becoming one of the first, if not the first fully regulated DLT-based financial market platform within the EU.
The final project, led by Assoc. Prof. Alexandra Andhov (Faculty of Law, UCPH) in collaboration with DIKU, Agreena, BEC Technologies, Deon Digital and Ztlment, has investigated regulatory limitations on financial instruments to ensure modern green bonds for funding trust worthy and effective carbon capture projects, specifically carbon farming, can be issued and traded on the SFI System. Agreena specializes in trustworthy carbon credit issuance for carbon credit trading and for funding carbon farming, which is a major EU initiative towards reducing GHG emissions.
Host Institution(s):
University of Copenhagen
Principal Investigator:
Fritz Henglein, Professor, Department of Computer Science (DIKU)
Partners:
Deon Digital Denmark A/S, Agreena ApS, BEC Financial Technologies A/S, Capital Market Partners A/S, ZTLment ApS
Grant:
800.000 DKK in total (4 projects)
Materials:
- Presentation: smart-contracts-presentation.pdf
- Presentation Deon Digital: Deon Digitals Smart Financial Instrument – Deon Digital
- Presentation: 220420 SFI Agreena.pdf
- Danish Financial Supervisory Authority (FSA) sandbox FTLab project announcement
- Trading Green Bonds Using Distributed Ledger Technology https://aisel.aisnet.org/ecis2023_rp/340/
Want to know more? (Related published material)
Contract backed digital cash (arXiv:2211.14442) - November 19th 2022:
Book by several authors including Fritz Henglein. Includes contributions made in independent chapters by participants of the Working Group on Digital Cash at Copenhagen FinTech in 2018 and 2019, which have not been published before - LINK
Danish Financial Supervisory Authority (FSA): Sandbox FTLab project announcement: LINK
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