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How It Works

The Nestor Protocol is the technology enabler which translates real-world investments into legal, compliant and transferrable tokenized securities through a Luxembourg structure, operated by Nestor Exchange S.a.r.l. and its securitisation structures.

Nestor Exchange S.a.r.l. and its securitisation fund (NESTOR SECURITISATION FUND) is the legal issuer of digital securities in compliance with MiFID II

There are many tokenization offerings in the market place and the industry is witnessing new entrants each with its respective niche and focus. The Nestor 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 Nestor 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 securitisation, tokenization and distribution.

  1. Securitisation
  2. Tokenization
  3. Distribution

Core Layers of Nestor Protocol

1. Securitisation

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

A securitisation transaction involves establishing a securitisation 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 Nestor Protocol.

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

2. Tokenization

The Nestor Protocol includes:

  1. A suite of smart contracts to represent:
  2. Funds/Notes — Nestor OnChain Assets: The NestorOnChainAssetToken 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 NestorOnChainAssetToken is issued as a digital twin for each specific note in a compartment within the Nestor securitisation fund structure.
  3. Cash — Nestor Deposit Tokens: A NestorFundDepositToken represents a permissioned Investor's FIAT contribution to a specific fund IBAN in a denominated FIAT currency. The NestorFundDepositToken is used as a means of payment and settlement record. The NestorFundDepositToken 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 NestorFundDepositToken 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 NestorFundDepositToken.

  4. Securities — Nestor Digital Security Tokens: This is the permissioned & transferrable digital security which represents the future cash flow from the NestorOnChainAssetToken and is purchased by the Investor using NestorFundDepositTokens. These digital securities are permissioned and transferable between permissioned Investors in a permissioned market. This token is linked to the NestorOnChainAssetToken and denominated in a FIAT currency at a future date for settlement.

  5. Smart contracts to execute the exchange of Nestor tokens in primary and secondary transactions.

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

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

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

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

  10. Subscriptions
  11. Capital Calls
  12. Cash Distributions

  13. Portfolio Compositions

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

3. Distribution

Managers can onboard Investors directly or link into permissioned distribution agents on the Nestor 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 Nestor 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 Nestor Deposit Tokens, which is a non-invasive and seamless conversion between FIAT contributions or settlement and their tokenized representation.

The Nestor 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 Securitisations

Securitisation 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

Nestor Exchange supports the issuance of Notes, Tracker Certificates, and Actively Managed Certificates in multiple currencies. The Nestor team and the Nestor Protocol support the following securitisation & tokenization use cases:

  • Tokenized Private Equity Funds
  • Tokenized 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 securitising 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 Nestor Exchange.

Token Lifecycle

  1. Establishment of the correct Luxembourg securitisation structure.
  2. The Nestor team will create the PPM (private placement memorandum) and the Final Terms for the securitisation undertaking.
  3. The Nestor team creates the compartment, bank accounts of the compartment and the permissioning/provisioning of the necessary wallet infrastructure to execute the tokenization.

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

  5. Tokenization of the undertakings.

  6. The Manager is permissioned on the Nestor Protocol.
  7. Managers can onboard Investors via subscriptions or subscription contracts to the tokenized fund/note in accordance with MiFID II regulation.

  8. The Manager can issue notes, and capital calls, and run cash distributions from the Nestor Manager Interface, via integration with the Nestor Protocol API or directly via the smart contracts.

  9. Distribution of the tokenized securities.

  10. Managers can onboard Investors directly or link into permissioned distribution agents on the Nestor Protocol to distribute their tokenized securities on a global basis.
  11. Capital Calls automatically execute upon Investors' subscriptions to a fund/funds, converting FIAT contributions to Nestor Deposit Tokens and releasing Nestor Digital Securities to record the transaction on-chain.
  12. Cash Distributions automatically distribute income and return of the underlying to the Investors, settling the Nestor Digital Securities with Nestor Deposit Tokens, thereafter handling the FIAT settlement in the securitisation transaction.