1. Finance: settlement coin or stablecoin?
Mica imposes strict constraints on stablecoins, limiting non-compliant issuance in Europe.
Settlement coin? Stablecoin? Understanding the nuances
Settlement coins and stablecoins are distinct but complementary tools in the distributed ledger technology (DLT) ecosystem. Settlement coins are specifically targeted at institutional transactions, while stablecoins have a broader use.
When the finance world adopts DLT, it’s going to have to rethink its settlement processes. Settlement coins are transforming the way funds are transferred between financial institutions. These digital tokens use DLT to offer near-instant settlement, whereas stablecoins focus on stability of value to reduce volatility.
Settlement coins facilitate transactions between financial institutions, while indexed tokens maintain a stable parity with reference assets (fiat). Add Mica regulations and you get a strict framework: electronic money tokens (EMT) with 1:1 reserves, asset-referenced tokens (ART) with issue caps and marketing restrictions for non-European tokens.
Luxembourg’s financial industry could benefit from an EMT-type multi-currency settlement coin initiative to solve the “digital cash” problem and make institutional transactions more fluid.
What this actually means
This token would drastically reduce settlement-delivery times (from T+2 to almost instantaneous), limit counterparty risks and strengthen the competitiveness of Luxembourg’s financial sector in the era of programmable finance.
Initiatives that make this possible
Fnality, a consortium of 15 banks, is developing Utility Settlement Coins and is aiming for multibank interoperability with regulatory validation, while Kinexys (JP Morgan) is focusing on operational efficiency in a controlled environment. As for Banking Circle, it has issued the first stablecoin (EURI) in compliance with Mica.
Warning
Mica regulations prohibit the marketing of many non-compliant tokens on the European market. In addition, some stablecoins conceal risks of significant volatility--the collapse of Terra-Luna illustrates these dangers, despite promises of stability.
2. Tokenisation of financial assets
Democratising access to investment and opening up the field of asset possibilities.
Tokenisation involves converting ownership rights in an asset (financial, real estate, artistic) into divisible digital tokens that can be programmed on DLT. This fractionalisation makes it possible to drastically reduce entry tickets and bring liquidity to assets that are traditionally illiquid by nature.
The process relies on specialist platforms that manage the entire chain: legal structuring, token issuance, regulatory compliance and secondary market animation. These platforms have to navigate between technological innovation and strict regulatory constraints.
Tokenisation is fundamentally transforming the accessibility of investments that are usually reserved for institutional investors. For Luxembourg, this development represents a strategic opportunity to maintain its European leadership in finance. Tokenisation makes it possible to transform alternative investments (private equity, real estate, art) into products accessible to a broader customer base, while maintaining investor protection standards.
What this actually means
Blockchain technology offers a 24/7/365 infrastructure with complete traceability of transactions and programmability of compliance rules (automated KYC/AML, transfer restrictions). Nevertheless, as the technology does not automatically create demand, liquidity remains dependent on investor interest and the depth of the secondary market.
Initiatives that make this possible
Franklin Templeton with its tokenised UCITS fund on Stellar--a world first--and Apex Group since the acquisition of Tokeny (tokenisation platform with integrated compliance).
Warning
The promised liquidity is not guaranteed, and some tokens remain as illiquid as the underlying asset. As regulations change rapidly, they can have an impact on the viability of projects. Due diligence must cover both the tokenised asset and the technology platform and its sustainability.
3. Investor due diligence
Verifying investor identity and compliance remains a time-consuming, costly and redundant process.
Self-sovereign identity (SSI), the new code name for a decentralised digital identity
This makes it possible to prove the authenticity of one’s identity in a harmonised way, certified by the authorities using verifiable identity elements, while maintaining control over the information shared in accordance with the principle of minimum disclosure.
Whitelisting processes, particularly on tokenisation platforms, make it possible to approve an investor so that they can carry out transactions. This complies with anti-money laundering and combating the financing of terrorism (AML/CFT) regulations.
The DLT enables pseudonymous traceability, creating a balance between transparency and confidentiality in the search for suspicious transactions. Transactions carried out and recorded on the registry are transparent, traceable and immutable.
What that actually means
A DLT infrastructure could turn the constraint of know-your-customer (KYC) checks into a competitive advantage via shared compliance pools.
This could be achieved by facilitating collaborative due diligence between financial institutions, based on cryptographically verified information that can be consulted according to access rights precisely defined by smart contracts. Each investor would then be able to prove their qualified status or the legitimate origin of their funds without having to take the same steps with each fund manager. This innovative mechanism would simultaneously enhance security, the user experience and the speed of the investment process, while scrupulously complying with the regulatory framework.
Initiatives that make this possible
Scorechain analyses cryptocurrency flows to detect suspicious transactions. For its part, Polygon ID offers a verifiable identity infrastructure that is compatible with European regulations.
Warning
GPDR compatibility remains a major challenge in the face of blockchain’s immutability, which comes into tension with the right to be forgotten. Emerging solutions include off-chain storage of personal data. European regulations on digital identity (eIDAS 2.0) and the Mica framework are gradually providing clarification, but grey areas remain on data responsibility between the various players in the DLT ecosystem.
4. Automatic order execution via smart contracts
In a financial world where speed is becoming crucial, smart contracts represent a fundamental break with the traditional system of intermediaries.
Smart contracts? More like smart protocols
These autonomous protocols automatically execute transactions according to predefined and verifiable parameters, reducing human intervention in standardised processes. This targeted automation reduces operational costs and speeds up execution while maintaining the traceability of operations between stakeholders. And it can be executed at any time.
Applied to structured products, funds or tokenised assets, this technology enables management rules (automatic distributions, rebalancing, trigger thresholds) to be programmed directly into the protocol code. However, smart contracts do not completely replace intermediaries--rather, they direct their role towards supervision and exception management.
What this actually means
Smart contracts work effectively for standardised, repetitive processes: automatic coupon payments, dividend distributions based on predefined criteria or portfolio rebalancing. However, they remain limited to the parameters programmed at the outset. Any situation not anticipated still requires human intervention or a contract update.
Initiatives that make this possible
JP Morgan is automating settlements with Kinexys Digital Payments and Goldman Sachs is developing automated trading solutions via smart contracts.
Warning
Smart contracts are not infallible, and bugs in the code can cause major losses (as in the case of the DAO protocol). Regulations remain unclear on liability in the event of automated malfunctioning. Immutability, often presented as an advantage, becomes a disadvantage when a correction is required.
5. Green finance
DLT offers unprecedented traceability on the allocation, use and impact of sustainable funds throughout their lifecycle.
DLT technology as an ally in impact projects, particularly re: ESG data.
Blockchain technology enables ESG investment data to be time-stamped and made immutable: financial flows to green projects, environmental performance indicators and impact reports. This digital traceability strengthens the credibility of sustainable funds by verifiably documenting the journey of capital.
For Luxembourg, the European leader in sustainable funds with more than €1.4trn in ESG assets, this technology can consolidate its position by offering higher standards of transparency. DLT facilitates compliance with SFDR regulations and the European taxonomy by automating certain aspects of regulatory reporting.
What this actually means
Platforms are emerging to track green bonds from issuance to final use of funds, with real-time dashboards on carbon impact avoided or projects financed. Investors can track precisely where their money is going and what environmental outcomes are being generated, reducing the information asymmetry typical of sustainable finance.
Initiatives that make this possible
Evercity is developing a blockchain infrastructure for green bonds (focus emerging markets), Particula certifies energy data via IoT and DLT, while Hedera offers eco-efficient DLT thanks to its Hashgraph consensus.
Warning
The technology only guarantees the reliability of the data recorded according to the “garbage in, garbage out” principle: ESG data that is biased at source becomes immutably incorrect on the blockchain. The quality of input data, impact measurement methodology and independent verification of field data remain crucial and rely on external sources.
Where blockchain could also be used
Health/CNS: forgery-proof prescriptions, traceability of sick leave, combating fraud, better use of health data
Clinical trials: reliable patient identification, certified prescriptions for reimbursement
Automobiles: vehicle lifecycle register (repairs, accidents, recalls), accessible history for the second-hand market
Tax: automation of declarations via a secure exchange of data between nodes (banks, employers, administrations)
Finance: creation of a settlement corner for instant settlement of tokenised assets, reduction in counterparty risks
Consumer safety: full traceability (origin, transport, social standards), targeted product recalls
Airline sector: automatic compensation via smart contracts
Real estate: forgery-proof property history, links with town planning documents
Digital identity: decentralised control by the user, simplified and secure authentication
This article, originally published in French, was written for the alternative investment supplement to the July 2025 issue of Paperjam magazine published on 13 June. The magazine content is produced exclusively for the magazine. It is published on the site to contribute to the complete Paperjam archive. Click on this link to subscribe to the magazine.
Is your company a member of Paperjam Club? You can request a subscription in your name. Let us know via club@paperjam.lu.
