eNote legal framework
Enabling Standardised & Enforceable Debt. As DLT-based Securities.
Disclaimer: The comments below are for general information purposes only. Please make sure you have sufficient legal advice before issuing an eNote or investing in an eNote.
Legal basis: How is the eNote structured?
FQX AG, the company behind the Obligate platform, is a specialist in structuring electronic negotiable instruments based on various legal bases such as Delaware law (promissory notes based on Delaware UETA), Singapore law (promissory notes based on Singapore ETA), and Swiss law (ledger-based and uncertificated securities). The term "eNote" trademarked by FQX AG serves as an umbrella term for different legal & financial debt instruments.
For eNotes on the Obligate platform, the instruments are structured as tokenized bonds in the form of ledger-based securities under Swiss law (art. 973d et seq. Swiss Code of Obligations). The legal basis used has come into force in February 2021 and is part of the Swiss DLT Act (Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology). The new provisions entail one of the world's most advanced legal frameworks for tokenized securities, covering topics such as the valid issuance of all types of instruments, requirements regarding transfers, pledges & usufructus, potential liability, as well as the treatment in potential insolvency procedures (segregation of the instruments).
Issuance: how is the eNote created and what does it entail?
A ledger-based security is formed through an agreement between the parties (Registration Agreement), based on which the respective rights are registered in a securities ledger under art. 973d para. 2 CO and may only be asserted and transferred to others via this ledger. It is therefore a kind of a "negotiable instrument" sui generis.
Any type of transferable claim and membership right can be structured as ledger-based security, specifically bonds, but also structured instruments as well as equity.
Securities Ledger (DLT) in specific: where are eNotes stored?
The applicable legal provisions define certain requirements regarding the Securities Ledger used, which have to be met in order to create legally valid instruments. Obligate uses Polygon as Securities Ledgers for its eNote issuances (in general, most public permissionless blockchains would qualify). Those DLTs in combination with the issuance and settlement smart contracts provided by Obligate.com fulfill the following requirements acc. to art. 973d para. 2 Swiss CO:
- They use technological processes to give the creditors, but not the obligor, direct power of disposal over their rights;
- Their integrity is secured through adequate technical and organizational measures, such as joint management by several independent participants, to protect it from unauthorized modification;
- The content of the rights, the functioning of the ledger and the registration agreement are recorded in the ledger or in linked accompanying data;
- Creditors can view relevant information and ledger entries, and check the integrity of the ledger contents relating to themselves without intervention by a third party.
Legal effects of the eNote: who is entitled?
The eNote works as a bearer instrument (the obligor under a ledger-based security is entitled and obliged to render performance only to the creditor indicated in the securities ledger and subject to appropriate modification of the ledger). In simple words: the person holding the eNote and registered on-chain will get paid (see however KYC requirements mentioned below).
By rendering the performance due at maturity to the Holder indicated in the securities ledger, the issuer is released from the obligation even if the indicated Holder is not the actual creditor unless the Holder is guilty of malice or gross negligence.
When acquiring a ledger-based security in a securities ledger from the Holder indicated therein, the acquirer is protected even if the seller was not entitled to dispose of the ledger-based security unless the Acquirer acted in bad faith or with gross negligence (bona fide acquisition).
The Issuer may raise against a claim deriving from a ledger-based security only those objections which:
- are aimed at contesting the validity of the registration or derive from the securities ledger itself or its accompanying data;
- he or she is personally entitled to raise against the current Holder of the ledger-based security; or are based on the direct relations between the Issuer and a former Holder of the ledger-based security if the current Holder intentionally acted to the detriment of the Issuer when acquiring the ledger-based security.
In addition, the payment of the face value will be technically held back by the settlement program until the successful identification of the last Holder is executed by Obligate and/or identification partners.
Potential hard forks: which eNotes are valid?
In case of a hard fork of the Securities Ledger, the procedure is as follows:
- if the eNote is denominated in a mint issued by a central entity (i.e. Circle for USDC), the eNote shall be paid on the chain defined by the mint-issuer as authoritative chain;
- if the eNote is denominated in token not issued by a central entity (i.e. in MATIC or ETH), the eNote shall be paid on both forked chains if i) the tokens on both chains have a certain market value, and ii) if the coin-split can be done with reasonable efforts.
All users of the infrastructure and transaction parties will enter into and be bound exclusively by arbitration agreements, subjecting all eNotes-related disputes to arbitration in Switzerland. Accordingly, if a dispute is not settled amicably between the parties in question, then a party may seek a decision by an arbitration panel in Switzerland. The arbitration panel will, in turn, decide the case and render an arbitral award that is enforceable under the New York Convention on the Recognition and Enforceability of Arbitral Awards (NYC). This arbitral award can be presented to the relevant foreign local court. This court will have to grant enforcement of the award without a further review of its merits according to the NYC. The NYC has been signed by more than 168 countries and has an outstanding reputation for adherence to it by its member states and their courts.
Arbitration avails the parties to business expertise, confidentiality, speed and very quick finality in dispute resolution. Swiss arbitration laws and rules are deemed one of the “gold standards” in international arbitration and consequently form the dispute resolution framework of choice for companies.
eNote instruments qualify as securities in most jurisdictions. To simplify the regulatory requirements, Obligate only allows professional clients and qualified investors to use its platform.
In order to use the Obligate platform, parties must successfully identify and register. As part of the onboarding process, parties go through a full KYB & KYC process. In addition, certain countries and nationals are excluded from using Obligate.com and/or eNotes.
Once the onboarding and registration process on the Obligate platform has been completed, the parties receive login data as well as personal electronic signatures. Otherwise, Obligate is based on a "bring your own wallet" approach and supports institutional-grade wallets such as Fireblocks or Metamask Institutional. Obligate never has any direct or indirect form of control over eNote instruments and/or related on-chain payments. In order to claim payment of an eNote face value at maturity, an eNote holder must be a verified (= KYC'ed) user. Non-verified parties first have to successfully conduct the KYC process before being entitled for receiving payment. Parties not successfully passing the KYC Process do not have any claims against the issuer. This ensures that issuers only pay to known parties.
FQX AG, based in Zurich, Switzerland, is a regulated financial intermediary and a member of a FINMA-supervised AML SRO.
FQX (Germany) GmbH, based in Berlin, Germany, acts under the liability umbrella of CM-Equity AG, a German BaFin-regulated securities firm. This allows providing investment brokerage and placement activities which might be, from a regulatory perspective in certain jurisdictions, indirectly included in the Obligate platform functionality. FQX itself, however, is never party of any transactions nor does it hold any clients assets. Third party clients are served on a reverse solicitation approach only.