Where Finance Finds Its Future

Traditional stock exchanges are confronted by a classic Innovator’s Dilemma. They have the installed client base and the revenues to match. But if their digital challengers lack clients, they also benefit from nugatory costs and a new technology powerful enough to extend their reach into whole new classes of investors, issuers and assets. Faced by a potentially long transition to a totally new model in the capital markets, established exchanges know they must work out how and when to embrace change, and in particular when it makes sense to inter-operate with the Blockhain-based platforms built by their competitors. Some are building digital exchanges of their own. Others are eyeing what might be available for purchase. Almost all have concluded that new technology can transform their post-trade costs, and it may well be that it is in the back office rather than the front where the true convergence of the old world and the new will begin. Dominic Hobson, co-founder of Future of Finance, asked Angie Walker, Global Head of Capital Markets Business Development at R3, how Corda is helping established as well as start-up exchanges to exploit the opportunities created by the digitisation of assets. Hosted on Acast. See acast.com/privacy for more information.

In November 2021, the SIX Group issued a CHF 150 million bond onto its own exchange and into its own central securities depository (CSD). Nothing remarkable about that, you might think. Except that the securities became the first digital bond to be freely issued into a regulated environment. More remarkable still is that a majority of investors, offered a choice of the bonds in tokenised or traditional form, opted for the tokenised variety. Creating that choice required considerable operational ingenuity. The digital bonds are listed and traded on the digital asset exchange of SIX Group (SDX) and issued into the digital CSD of SDX, while the traditional bonds are listed and traded on the traditional SIX Swiss Exchange and centrally held by the traditional CSD (SIX SIS). The challenges – in terms of maintaining a register of investors, paying entitlements, enabling investors to switch between the two forms of the bond and maintaining a liquid market – are not hard to guess. Dominic Hobson, co-founder of Future of Finance, asked Stefan Bosshard, product head, fixed income at SIX Digital Exchange, about these and other complexities. Hosted on Acast. See acast.com/privacy for more information.

Fusang is Asia’s first fully licensed and regulated digital financial ecosystem for security tokens and assets. Licensed in two jurisdictions (Hong Kong and Labuan, Malaysia), Fusang operates a fully licensed and regulated digital ecosystem which includes Fusang Exchange, a regulated stock exchange for security tokens. Fusang’s driving force is its vision of making it as easy to invest into a company as it is to buy its products online. Most tokenisation ventures start with technology, their spokesmen and women revel in its cost efficiency and process automation, and with Fusang’s ability to issue, trade, settle, and vaulting services, all housed in one end to end solution, that may indeed be true. It’s therefore not surprising that the aim of its founders is to connect even the smallest retail investors with the biggest issuers, giving the former access to asset classes previously reserved to the institutional realm. If democratising investment through tokenisation sounds familiar, the enthusiasm of Fusang for using regulation to protect investors is much less predictable, Fusang exudes dependability as well as entrepreneurial energy evidenced by its drive to marry a culture of compliance and innovation.  Dominic Hobson, co-founder of Future of Finance, asked Henry Chong, Founder and CEO of Fusang, about his vision of the future of investing and how the company plans to make it happen. Hosted on Acast. See acast.com/privacy for more information.

Post-trade was an early target of the blockchain revolution. Yet progress has proved to be arduous, with legacy technologies, regulatory uncertainty and the protectionism of incumbents making it hard for even successful proofs of concept and pilots to grow into scalable innovations. Signs are now more encouraging, with blockchain-based investments poised to disrupt the securities and money markets from the front office to the back over the next few years. The Corda technology created by R3, which has concentrated since its foundation in 2014 on providing private, scalable distributed ledger technology (DLT) platforms to regulated financial institutions active in regulated financial industries, is behind many of the most promising projects in the capital markets. Corda supports a medley of established firms and start-ups using DLT to reinvent the issuance, trading, settlement, custody and servicing of equity and debt securities and money market instruments. Dominic Hobson, co-founder of Future of Finance, spoke to Goncalo Lima, capital markets eco-system lead at R3, about what post-trade infrastructure is now evolving into.  Hosted on Acast. See acast.com/privacy for more information.

The ingredients of a successful security token exchange are now clear. It must be regulated, focused on asset classes that will benefit from greater liquidity and secondary market trading, and be backed by strong, committed and widely recognised shareholders that are willing to engage actively in helping the exchange to succeed. ADDX, the security token exchange regulated by the Monetary Authority of Singapore (MAS), meets these criteria in full. Armed from 2020 with no less than three regulatory licences spanning securities, funds and a trading platform, and capitalised by a combination of the SGX, Temasek and major financial institutions from Japan, Korea and Thailand, ADDX is concentrating initially on the less than liquid privately managed assets whose liquidity tokenisation is best-placed to transform quickly. Security token exchanges need issuers and investors, and last year saw ADDX gather both. A string of issues backed by its shareholders garnered support from exactly the class of wealthier retail investors looking to diversify into asset classes previously reserved for institutions. A novel distribution agreement was also put in place in Japan. Dominic Hobson, co-founder of Future of Finance, spoke to Oi-Yee Choo, chief commercial officer at ADDX, about where ADDX has come from and where it plans to go next. Hosted on Acast. See acast.com/privacy for more information.

Central securities depositories (CSDs) have always led an unglamorous existence. They are overshadowed by trading and investment activities, even when the post-trade revenues they generate are more reliable or more profitable or even just larger. The rise of the digital asset has not improved their lot. They are threatened with disintermediation by securities tokens issued, traded and safekept on blockchain networks that promise to replace the issuance and registration and settlement services of the incumbent CSDs with a single process on a digital ledger. Central banks pondering the introduction of central bank digital currencies (CBDCs), mostly on to blockchain-based networks as well, seem to have forgotten that every securities transaction settled by a CSD entails a payment as well as a delivery. Other regulators seem to remember nothing except that sellers must earmark what they have sold until it can be delivered against payment, even where the risk is nugatory, or eliminated altogether by a central counterparty clearing house (CCP) or stock loan service. It is near-impossible for CSDs to embrace the burgeoning data economy by developing new products based on data because the data belongs to their users, who often double as their owners. Those CSDs that are able to make the case for change find budgets for investment are far from generous. So are CSDs caught in an impossible dilemma or can they adapt successfully to the age of the digital asset? Dominic Hobson, co-founder of Future of Finance, spoke to Chris Richardson, CEO of Percival Software, one of the leading suppliers of technology to central securities depositories (CSDs), about how his clients are conceiving and preparing for the future. Hosted on Acast. See acast.com/privacy for more information.

This year marks the twentieth anniversary of the PayPal IPO. At the time, the failure of the conventional payments industry to respond to the epic potential of e-commerce on the Internet surprised even the more thoughtful bankers. Two decades later, that institutional inertia looks negligent rather than surprising. The loss of payments revenues by banks to technology companies represents a loss of shareholder value that far exceeds what the owners of banks lost in the financial crisis of 2007-08. With e-commerce continuing to grow, especially across borders, the frenzy created by the indifference of the banks continues. It is estimated that there are around 10,000 payment service providers (PSPs) of various sorts – acquirers, processors, facilitators, aggregators, gateways and digital wallet providers – now contending for pieces of the payments industry around the world. Yet the so-called revolution in payments amounts to no more than twin measures of the negligence of the banks: an increase in customer convenience that the banks should have provided plus a massive transfer of value from the owners of banks to the owners of technology companies. Every one of those 10,000 PSPs relies either on existing payments infrastructures or existing payments banks to provide a service. They are parasitic rather than transformational. A truly transformational innovation would dispense with the need for bank accounts altogether. It would also jettison the continuing reliance on the existing payments market infrastructures such as card networks, automated clearing houses and central bank-operated Real Time Gross Settlement systems (RTGSs) – what payments aficionados call “rails.” Lastly, a true innovation would undermine the current monopolies enjoyed by central banks over the issue of central bank money and banks over the issue of commercial bank money. Just such an innovation is now becoming visible in the crypto-currency and Decentralised Finance (DeFi) markets, which rely on software plus the Internet plus cryptography to enable anyone to issue digital money and anyone to use it to pay and get paid directly using digital wallets. These innovations have the potential to bypass the PSPs. They also have the potential to break the central bank and bank duopoly in the creation of money, allowing multiple forms of money to be issued and used to settle claims. New forms of money could fuse payments and monies into a single process in which money is indistinguishable from payment. Indeed, both payments and monies could be reduced to mere components of a single transactional process in which goods and services are bought and sold through exchanges of data that include the exchange of value. The value created by innovations of this kind will stem not from price or service but from the fact that the transactions they facilitate create data. If that data is owned not by the innovators but by their customers, it will have the power to overthrow more than the banks and the PSPs. It is certainly powerful enough to dislodge banks from their current roles in money creation through manufacturing credit, and in the selection of creditworthy borrowers. It may even be forceful enough to shift the balance of power in capitalism altogether, by making buyers more powerful than sellers. Hosted on Acast. See acast.com/privacy for more information.

A protocol which combines high speed and scalability with the highest standards of security and privacy is what is required to make blockchain both mainstream and universal. The designers of the Meta MUI Blockchain set out to meet these demanding requirements. Inspired by the vision of a high-volume transaction network that is seamless across the Internet and mobile telephone networks, and in which security and privacy are protected by tying digital assets to digital identities, their goal was to create a blockchain fit for the age of the Internet of Things (IoT) and the Metaverse. The earliest use-cases include Central Bank Digital Currencies (CBDCs), which require capacity, security and privacy, but the technology is extensible to security tokens and Non-Fungible Tokens (NFTs). Seokgu (Phantom) Yun is Founder and CEO of the Sovereign Wallet Network and Project Lead of the Meta MUI Blockchain. He spoke to Future of Finance co-founder Dominic Hobson.  Hosted on Acast. See acast.com/privacy for more information.

Enthusiasts for security tokenisation must sometimes feel like Old Testament prophets waiting for the new dispensation to begin. Yet the fact that they are waiting at all is a mystery. Theory and practice (albeit modest, so far) both suggest that issuers ought to be queuing up to issue security tokens. Tokenisation would cut their cost of raising capital significantly, by widening the investor base, cutting issuance fees and trimming listing and investor servicing charges. Yet even the most optimistic forecasts do not expect debt and equity security token offerings (STOs) to clear much above, say, US$4.0 trillion by the end of the decade. Which suggests tokenisation will not make much of dent in global equity and bond markets capitalised even today at US$225 trillion. The optimists have many reasons to be cautious about the rate of growth. It is hard to convince issuers to take the risk, especially when many extant STOs have failed to reach their fund-raising target, and securities laws and regulations are out of joint with the new technique. The start-ups aimed at making the primary markets more efficient seem to lack ambition. The sheer plethora and variety of security tokenisation platforms is daunting, and they are virtually all constrained by limited licences and unkind memories of the reputational issues at some crypto-currency exchanges. Though several established stock exchanges have embraced tokenisation, most are worried about cannibalising their existing revenues. So the marquee STO has yet to happen, and the security token markets look set for slow and unspectacular growth. That said, cumulative STOs will offer substantial scope for trading activity – perhaps 20 times as much as the value of accumulated outstandings, or more than US$150 trillion a year by, say, 2030. High-frequency traders, FX traders and hedge funds are already active in the crypto-currency and Decentralised Finance (DeFi) markets and should not struggle to adapt to trading security tokens as well, legacy systems apart. They and other trading houses ought to value round-the-clock trading, new asset classes in tradeable forms and the ability to arbitrage between tokenisation platforms as well as between tokenisation platforms and traditional marketplaces. As liquidity increases, price information will fuel the production of derivative instruments that increase liquidity still further. An active secondary market would do much to boost the primary markets too, not least as a source of price information for new issues. This happy outcome hinges on inter-operability, which in turn depends on the development of standards that make API-intermediated data exchanges between tokenisation platforms and between tokenisation platforms and traditional marketplaces friction-free. And, in the long run, even traders will baulk at the destiny outlined for them already by developments in the DeFi markets: their replacement by algorithmically operated liquidity pools that dispense with fee and spread-earning intermediaries such as brokers and market makers altogether. At this Future of Finance webinar, a panel of experts will consider what is going right and what is going wrong in security token issuance and trading, and share ideas about what can be done to bring a new and better capital market system closer. Hosted on Acast. See acast.com/privacy for more information.

The convergence of traditional and blockchain-based financial markets is now a given. But it still takes people and businesses to make it happen. The proportion of FinTechs seeking regulatory licences is one measure of who is doing what. Now a regulated Swiss security token start-up, STOverse, has hit upon an idea that the Peter Thiel of Zero to One would recognise instantly as an unsuspected secret hidden in plain sight: DeFi can be a source of capital and liquidity for securities tokens. In terms of Total Value Locked (TVL), DeFi has grown ten-fold since the beginning of 2020, clearing US$100 billion in November 2021. Staking is now an US$18 billion market, providing investors in security tokens with an obvious source of yield. By building a security token issuance and trading market based on liquidity pools operated by smart contracts that balance supply and demand algorithmically, STOverse aims to build a bridge to DeFi market-making exchanges, starting with SushiSwap. Its target audience is SME issuers and investors and DeFi investors familiar with liquidity pools. If it works as intended, STOverse could help the security token markets move from latent to actual growth. Dominic Hobson, co-founder of Future of Finance, spoke to Francesco Biviano, founder of STOverse, and Florian Ducommon, a partner at Bonnard Lawson, a law firm specialising in Fintech and Blockchain in Switzerland. Hosted on Acast. See acast.com/privacy for more information.