A European blockchain-based funds marketplace that is delivering on its promises
- Future of Finance
- Mar 15, 2024
- 36 min read
Updated: Jul 10
A Future of Finance Interview with Christophe Lepitre, CEO at IZNES and Valérie Gilles, CCO at IZNES
IZNES is a marketplace that enables issuers of funds (asset managers) and institutional investors in funds (such as insurance companies and fund distributors) to sell and buy and service funds in tokenised form on a Cloud-based private, permissioned blockchain. To avoid the build-it-and-they-will-come fallacy, IZNES has solidified its relationships with leading insurance and asset management companies by offering them equity stakes in the business. The strategy has obviously worked, because IZNES has already attracted 18 institutional investors and 36 asset management companies and has €18 billion of funds registered on its marketplace, and its platform is supporting both assert-backed and native fund tokens. Because its target audience is institutional, and institutions prefer to deal with regulated entities, IZNES has secured regulatory licences from two French regulators and used these to passport its services into other major European fund jurisdictions, including the two main fund servicing centres of Ireland and Luxembourg. The firm has also concentrated on providing services that alleviate obvious pain points in the funds industry such as entitlement allocation and distribution and especially the onerous on-boarding and regular customer due diligence checks needed to meet Know Your Client (KYC), Anti Money Laundering (AML), Countering the financing of Terrorism (CFT) and sanctions screening obligations. The longer-term plans include the development of a secondary market in funds, initially to support the less-than-liquid infrastructure funds now being encouraged by regulators. Dominic Hobson, co-founder of Future of Finance, spoke to Christoph Lepitre, chief executive officer (CEO), and Valerie Gilles, chief commercial officer (CCO), at IZNES.
Key Insights
IZNES, a seven-year-old blockchain-based funds marketplace for institutions only, headquartered in Paris, whose brand name is designed to express the idea of “easy business,” is founded on the conviction that tokenisation can improve the fund distribution process for both asset managers (as issuers) and investors.
Having launched and hosted its first transactions on blockchain using the SETL blockchain system IZNES transitioned in August 2022 to the Hyperledger Fabric platform, which enabled the company to develop its own simple and secure technology, including a tokenisation engine, that can be sold to third parties.
IZNES operates a private Cloud-based blockchain network in which it controls all the nodes on behalf of users, because it is more secure, users do not want to operate nodes and public blockchains lack the speed and scale to support a high value, high volume industry and IZNES does not expect this to change.
The IZNES partnership model in which insurers (such as Generali) as investors and asset managers (such as CANDRIAM and Rothschild Asset Management) as issuers become shareholders, facilitating the engagement of both sides of the funds industry, has so far attracted 18 investors and 36 asset managers.
IZNES supports both asset-backed fund tokens (in which the fund continues to exist in analogue as well as digital form) and native fund tokens (in which the fund exists in digital form on a blockchain only) although the native funds are more like managed accounts dedicated to particular categories of investor.
Asset-backed funds do create some cost savings for investors buying funds but, by perpetuating the role of service providers such as fund accountants, transfer agents and custodians, create fewer economies for issuers, though this is expected to change as native funds become the norm over time.
The concern that maintaining funds in both on-chain and off-chain formats would create problems in reconciling separate registers of holders have proved to be misplaced, because traditional registrars (either central securities depositories (CSDs) or transfer agents) accomplish this without difficulty.
The absence of cash on-chain, in the form of payment tokens or (ideally) central bank digital currency (CBDC), means that the cash leg of transactions agreed via the IZNES marketplace continues to rely on the traditional banking system, but IZNES is participating in on-chain settlement experiments with central banks.
With settlement deadlines in the securities industry shortening to T+1, IZNES believes its technology means it is well-placed to support an industry-wide solution to a longstanding investor complaint by bringing the subscription settlement and Net Asset Value (NAV) pricing processes into closer alignment.
The additional services provided by IZNES to asset managers as issuers include cash flow forecasts, fund data sharing, trailer fee calculations, allocations of entitlements and customer due diligence (in which investors share with asset managers the information needed to complete Know Your Client (KYC) checks).
Facilitating access to alternative asset classes (private equity, real estate, infrastructure) through tokenised funds is a priority for IZNES, because these asset classes presently lack automated infrastructure and rely heavily on manual, paper-based processing of investments.
IZNES reports that neither issuers nor investors are wary of blockchain technology anymore, both have ceased to associate it with cryptocurrency and both expect it to underpin the transformation of the industry, but time and money are not always readily available, and decision cycles are long, especially in large organisations.
Intermediaries, such as fund accountants, transfer agents, order routing networks and payments, depositary and custodian banks, are less concerned about being disintermediated and more focused on how IZNES can help them cut costs and develop new services such as customer records and cash flow management.
As an investment company IZNES is regulated by the Autorité des marchés financiers (AMF), which supervises the operating model of the marketplace, but mainly by the Autorité de Contrôle Prudentiel et de Résolution (APCR), which is part of the Banque de France.
IZNES operates not as a “crypto-asset” infrastructure under the Plan d’action pour la croissance et la transformation des entreprises (PACTE) law of 2018 but under the Dispositif d’Enregistrement Electronique Partagé (DEEP) section of the same law, which entitles it to process orders and safekeep assets on a blockchain.
Although most issuers using IZNES are French, the marketplace is not a domestic French fund market provider only and has secured European Union “passport” licences to operate in Austria, Belgium, Germany, Ireland and Luxembourg, and aims to increase the proportion of non-French asset managers using its services.
Although IZNES does not currently operate a secondary market, it is exploring the possibility, partly because it sees it as a logical development, and partly because it sees an immediate opportunity to provide liquidity to infrastructure funds issued under European Long-Term Investment Funds Regulation (ELTIF).
Transcript
00:14 Dominic Hobson: Hello, I’m Dominic Hobson, co-founder of Future of Finance. My guests today are Christoph Lepitre, chief executive officer (CEO), and Valerie Gilles, chief commercial officer (CCO), at IZNES, the blockchain based funds marketplace, whose goals are to cut costs and risks and increase transparency in the interactions between asset managers and asset owners. Christophe, Valerie, thanks very much for joining us.
00:41 Valérie Gilles: Thank you very much, Dominic.
00:43 Christophe Lepitre: Thank you. Hello.
00:47 Dominic Hobson: You’ve both had successful careers before joining IZNES. Can you tell us a little bit about what exactly in your career paths led you personally to your involvement today with IZNES? Perhaps you first, Christophe.
01:04 Christophe Lepitre: Yeah, fine. Thank you. Thank you, Dominic. I worked for a long time for asset management companies, and at that time, most of our clients were insurance companies. And back to 2016. And thanks to Jean Pierre Grimaud, who was at that time CEO of OFI Asset Management and who is still CEO of OFI Invest, we started to have a look to the blockchain technology and trying to find out if it could be useful for the asset management industry. So we came to the conclusion that it could be very interesting for fund distribution. So what we did is that we launched the project with not only one asset management company, but five others. So six different asset management companies to design, to build and to finance the solution as it is now.
02:23 Dominic Hobson: Valerie, I know you were at CACEIS for a while. What brought you to IZNES? What was the attraction?
02:31 Valérie Gilles: Well, in fact, it was a combination of several things, I would say. But yes, as I mentioned, I worked many years for CACEIS, this well-known leading asset servicer, in different responsibilities, both on the commercial side, network management side, et cetera. And yeah, there was a time when I wanted to experience something new, join a new adventure, new type of company, new challenge. And this is where I … Well, I’d already had heard about IZNES before joining, but this was also, I would say, combination where Christophe was looking for a chief commercial officer, and this is where I stepped in. So, planet alignments, I would say.
03:20 Dominic Hobson: Now, this might seem a trivial question, but what does the name mean? Does the name IZNES mean anything? Does it stand for something?
03:28 Christophe Lepitre: Yes, actually, it means easy business. Sorry, it’s not very elaborate, I’m afraid.
03:36 Dominic Hobson: No, it’s very vectoral that; it’s very to the point that it sounds like easy business, doesn’t it?
03:42 Valérie Gilles: We can even now hear, no IZNES, no business.
03:47 Dominic Hobson: But, Christophe, as you were saying, you mentioned the date 2016. Now IZNES dates back to that period – 2017, specifically, I think. What’s happened since then?
04:01 Christophe Lepitre: Well, many things, actually, because the first test was carried out in 2017. So it’s quite a long time ago. And then what we did is we organised workshops with many other asset management companies, not only the actual shareholders, but many of them, roughly 20 of them, because the aim was to define the project with everyone’s expertise and ensure that the solution would suit as many people as possible, actually. So it was a very interesting period when we asked people to collaborate and they did so. Very interesting. Then, of course, some time was needed to develop the first solution, the MVP [Minimum Viable Product]. And the first transactions took place in March 2019. That was on money market funds. But at that time, IZNES was not authorised as an investment company, which was done later; it was done in June 2020. So what we did is once we received this agreement of an investment company, we passported it to Luxembourg, to Ireland, and we grew the business till 2021, when Generali and APICIL, one of them being a large European insurance company, and the other one a social protection group, became shareholders of IZNES. It was a very interesting period because we started to shift the marketplace towards the needs of the insurance, life insurance companies, a little bit, not taking into account only asset management company needs, but also the investor needs. Was very interesting. And then back to 2021, CANDRIAM became a shareholder of IZNES as well. Was a very interesting move, because CANDRIAM, as you know, is not a French asset management company, but more a European one, having operations in Ireland, in Belgium and in Luxembourg.
07:19 Valérie Gilles: And one of the specific features, I would say, of IZNES is our industrial partnership model, through the structure of our shareholders, as Christophe just described. And that industrial partnership model, together with the growing maturity of the market with regards to blockchain technology, allowed IZNES to accelerate its development since end-2021. So we are now engaged in a momentum whereby the asset owners attract the asset managers on the marketplace and vice versa. Another important milestone to mention is in August 2022, when IZNES made a very important move, migrating on to a new blockchain technology to switch on Hyperledger Fabric. And this allowed us to develop new products, of course, and work not only as a marketplace operator, but also be able to be a tech provider. With regards to the evolution of our shareholder structure, in April 2023, we had another major asset manager joining IZNES, both as a client and as a shareholder, that is Rothschild Amco [Asset Management Company]. So were also very happy and proud of that other step forward. Now, between end-2022 and end-2023, the trend is still expanding and growing. The assets registered on the blockchain and the number of operations got almost multiplied by three. We doubled the number of referenced asset management companies during this past year and a lot more to come in 2024. Promise.
09:21 Dominic Hobson: And in terms of investors, can you give a sense of how many of them have been engaged?
09:27 Christophe Lepitre: Yes. So far, at the end of last year, we had 18 investors, 36 asset management companies and €18 billion of assets under register. That’s what we are going to publish, actually.
09:51 Dominic Hobson: Right. And Valerie, you mentioned this partnership model. These major asset managers are becoming shareholders and presumably bringing their business to the firm. Am I right to understand that’s the flavour of the business that you’re doing now in terms of the issuers as opposed to those 18 – or I think it was 18, the figure you used, Christophe, of investors engaged. So give us a flavour of the types of issuers and investors that are using IZNES today.
10:22 Valérie Gilles: IZNES today is used by investors such as insurance companies, corporates for the daily treasury investments and asset managers themselves, right, whether they invest in their own funds, or whether they are more on an open architecture type model. And on the issuer side, all types of asset managers, all sizes of asset management companies, and also whatever type of fund domicile they have. So whether you are from UCITS [Undertakings for the Collective Investment in Transferable Securities] to real assets to real estate, sorry, private assets, whether we’re talking about French, Luxembourgish, Irish, et cetera, and of course, private assets, it’s a growing part of the business for IZNES right now. In October 2023, IZNES won the AM Tech Day award for the best innovative solution for private assets.
11:28 Dominic Hobson: Can we talk a bit now just about how IZNES works from a technical point of view? And my first question is this. Am I right to understand that IZNES at the moment is hosting tokenised versions of existing funds? In other words, those funds continue to exist in their conventional, traditional form. So there’s a tokenised version of an existing fund available. You’re not hosting purely blockchain native funds, i.e., these funds only exist on the blockchain ledger.
11:59 Valérie Gilles: No, we are, in fact, we are really supporting both type of funds. So, tokenised version of existing French shares that you mentioned, Dominic, that perfectly co-exist, by the way, with the traditional historical channel, IZNES being like on-chain co-TA [Transfer Agent], we would say, especially on the French market, for example, but also supporting fully tokenised funds, which are mainly dedicated funds, let’s say. In any case, what is important to have in mind is that the asset managers don’t have to create a specific fund or a specific ISIN [International Securities Identification Number] for the fund to be tokenised.
12:44 Dominic Hobson: And just to be clear on what you mean by dedicated funds – these are like managed accounts, are they? Or dedicated to one investor?
12:53 Valérie Gilles: Yeah, dedicated to certain categories of investor – can be as well managed accounts.
13:00 Dominic Hobson: So you’re supporting funds in both traditional and tokenised forms, native and non-native. Now, those non-native funds, does that not mean that the entire paraphernalia of service providers that support traditional funds – I’m talking here transfer agents, custodian banks, fund accountants, payments banks – do they not remain in place? And if they do remain in place, does that not make it more difficult to fulfil one of your objectives, which is to try and implement cost savings for asset managers and investors?
13:34 Valérie Gilles: For the time being, of course. Not of course but for the time being, cost savings are mainly at the benefit of the investors. But we need to keep in mind that we are really at the beginning of all the potential that the solution can offer. And if you focus from that perspective on the operational efficiency and transparency brought by the solution, in the end it appears much cheaper for the issuer to collect through a peer-to-peer solution rather than through an over-intermediated process, especially when it comes to cross-border distribution. So of course, some of the actors remain in place, but really, the straight through model has a lot of future in front of it.
14:27 Dominic Hobson: Okay, we’ll come back and talk about the benefits to the issuers in a minute, because that’s an important topic here. Christophe, if these funds are available in this traditional and tokenised form, does that not create a problem on the registration side? Do you not have to reconcile the on-chain register with the off-chain register? And if you do, is that a difficult thing or is that an easy thing?
14:52 Christophe Lepitre: No, it’s not complicated. Actually, as you know, you’ve got two models in Europe. The model with the CSD [Central Securities Depository], French and German market, and the TA [Transfer Agent] model. So if you take the model with a CSD, actually an asset management company can have several centralising agents. So, in this case, obviously, someone has to consolidate the global register of holders. But, actually, the traditional asset servicing companies do that very well. They’ve done that with us for many years now, three or four years. So there is no problem around consolidating the global register. Even we’ve got, in some cases, management companies do it themselves. And as far as IZNES is concerned, we are very flexible. So we adapt the workflow case-by-case. So if asset management companies want to consolidate the register themselves, we can do that. If they want CACEIS or BNP or Société Générale to do that, no problem.
16:20 Dominic Hobson: Okay, so the register is not a technical obstacle at all. But when you talk to asset managers, do you detect among them there’s a strong appetite to issue funds in native tokenised form, or are they indifferent as to whether it’s native or non-native? Do they see big cost savings and advantages in issuing funds in tokenised form only?
16:44 Christophe Lepitre: Not only. Actually, no. So far what we see is that asset management companies consider IZNES as an additional distribution channel, but non-exclusive, actually.
17:03 Dominic Hobson: Okay, can we talk a little bit about how the trades are settling on IZNES? I mean, I’m asking here really how the cash side works. Is tokenised cash available on the IZNES platform alongside these tokenised shares of funds? Or is the cash side, the settlement side, or the cash leg of settlement, still being handled off-chain in the banking system? How does settlement work?
17:26 Christophe Lepitre: Right. No, unfortunately it’s not yet available. The cash is not yet available on-chain. So the cash today the trade is settled using cash. When it’s received by the fund or paid to the investor, then the trade is settled because IZNES is a member of the SWIFT network. So we make that part, I would say very traditionally, but actually we took part of an experiment of CBDC [Central Bank Digital Currency] some time ago. That was three years ago with the Banque de France. So we had the opportunity of implementing a solution of settlement on-chain, and we are going to participate to the next round of such an experiment with the Eurosystem. So it’s BCE, the European Central Bank (ECB), who is testing now this opportunity to settle tokenised assets with tokenised central bank money. So we are going to participate in this experiment in September or in October this year. So we are not in a position of settling the cash on-chain, but we are very much preparing ourselves to do so.
19:25 Dominic Hobson: Right. Work is in hand to get cash on-chain. You’ve got live projects to work out how to make that service available. Valerie, how are tokenised fund shares being serviced? I’m thinking here of things like electing and paying dividends to fundholders.
19:44 Valérie Gilles: Well, they are actually fully serviced from corporate action to income collection and all the lifecycle, I would say, of the funds, maybe in a more flexible way as the asset manager has the ability to manage their corporate actions directly through IZNES, for example, and maybe in a more straightforward way, as IZNES is also a tool to share data from the asset owner side – KYC [Know Your Client] that they can share with all the asset managers they are working with. And from the issuers’ side, they can share any static, dynamic or regulatory information with their investors.
20:33 Dominic Hobson: Now, could we talk a bit about what issuers, asset managers in particular, get out of working with IZNES? People talk about IZNES as a distribution platform. They talk about it as a marketplace. But it seems to me, looking at what you do, that the powerful proposition you have for asset managers as issuers is that this is an additional distribution channel for their funds. And is there – perhaps you can talk about that a bit – but I’m wondering in particular what sort of investors they reach through IZNES that they couldn’t otherwise reach? Is it not just an additional distribution channel but actually a channel to additional investors?
21:16 Valérie Gilles: Well, probably both. But the question is rather how do they reach him, rather than what they could not reach without IZNESs? So we are really large institutions. This is what we need to keep in mind, so the investors can invest and manage in a more direct way, in a more efficient way, in a more transparent way, also for issuers, and at reduced costs. So it’s really a question of how rather than what.
21:58 Dominic Hobson: Okay, Christophe, IZNES is built on blockchain technology. The thing about blockchain that everyone understands is that all the parties to it can share the same database. And the major benefit of that is, and this applies to issuers in particular, is you can reduce the number of reconciliation processes because you get rid of that sequential process. Everyone’s looking at the same data set. Now, I assume that’s true of the issuers and investors that are using IZNES? Am I right to think that?
22:34 Christophe Lepitre: Right, you are right. Yeah, this is absolutely true. Actually, it has been identified as a major benefit by our clients, because as issuers and investors share the same database, reconciliations are native. So this saves a great deal of time, for example, when calculating the trailer fees. As you know, it’s difficult and complicated now, but actually, in addition to that, as maybe Valerie mentioned before, investors have access to static and dynamic funds data directly provided by the asset management companies and at no extra cost. So the model is quite interesting. So facilitating the exchange of data between issuers and investors.
23:46 Dominic Hobson: Now, you’ve used the term dynamic data, and we’ve used these terms, marketplace, distribution platform and so on. But at bottom, what’s going on here is people are subscribing to funds and people are redeeming from funds, and that obviously has cash implications. You’ve got to pay to buy the fund, and you want your money back when you sell the fund, if you like, is the service that IZNES is providing include improving the cash management for the issuers? In other words, are they able to predict better how much money they’re going to need to fund redemptions and how much money they’ve got coming in from subscriptions, and therefore they have a less need to borrow money from banks. Is it good for cash management what IZNES is offering?
24:29 Christophe Lepitre: Yes, it is, because actually, as an investor or as an asset management company, you get access to your order book. And in this order book, investors can place orders on the next net asset value [NAV] point or any future date. And they do it actually. So that means that on their side, managers can consult this order book at any time and see the future flows, actually. So saying that you understand that it’s easier for them to manage their liabilities and to anticipate significant outflows or inflows in their funds.
25:30 Dominic Hobson: Valerie, when asset managers are tokenising funds, they can presumably do that themselves, or they can use some third-party tokenisation engine. I’m wondering, is operating what I call a tokenisation engine a business that IZNES is in, or wants to be in, or sees as adding value to its customers? How are issuers doing it now? And do you think you should be helping them do that?
25:58 Valérie Gilles: Yes, of course we do think we should be helping them doing that. And this is what we already do, in fact, because as mentioned previously when I was talking about our shift on to a new blockchain technology, we are both operating as a marketplace operator and as a tech provider. So the time has already come when we can offer a tokenisation engine. And we equipped our first asset management company last summer, where IZNES plugs its tokenisation engine, let’s say behind the web app made available by the asset management company to either its client indirect or financial adviser. And this is what we call the B2C [Business to Consumer] model, in fact, and this is being rolled out in addition to the B2B [Business to Business] marketplace model.
26:58 Dominic Hobson: So they don’t have to use your service, but they can, it’s available for that B2C option.
27:03: Valérie Gilles: Absolutely.
27:04 Dominic Hobson: Let’s talk a bit about the benefits for … We have talked a lot about the benefits for issuers. What about the benefits for investors? And this is something we see all over Europe, this complaint from investors and their distributors, their advisers, whether it’s banks or IFAs [Independent Financial Advisers], private banks and so on, is the very early cut-off times for placing trades. Is one of the efficiencies you offer – Christophe, it’s probably a question for you – is one of the benefits you offer that investors can trade for longer during the day, maybe even pay and get paid earlier?
27:41 Christophe Lepitre: Yeah, but definitely not longer, but sooner, actually, because as you know, transfer agents or asset servicers, they do generally apply a comfort time limit for taking orders that could be 30 minutes or one hour or sometimes much more when it comes to distributions of Luxembourg funds to very far [away] countries. But with IZNES it’s not the case anymore because an investor may subscribe at any time until the prospectus limit. So this is a benefit which is very much appreciated with the corporate clients. But not only. Some life insurance companies do appreciate very much the possibility to put orders at the last limit.
28:49 Dominic Hobson: And what about this other long running issue is that you pay your money today. The fund you’re buying isn’t actually priced till tomorrow. So you don’t know how many shares in the fund you’re going to get because it’s not till the following day they actually calculate the net asset value (NAV). Is a movement towards real time pricing of those fund subscriptions something that you’re looking to deliver at IZNES?
29:16 Christophe Lepitre: Well, with IZNES it’s very easy to shorten the settlement delivery cycle for bonds or any other financial instruments. So far we are around T+2 [Trade Date Plus Two Days], T+3 [Trade Date Plus Three Days] or, for money market funds, it can be shorter than that. But at any time we can make a very quick, on-the-same-day delivery and settlements cycle. But for that, of course, the whole industry needs to adapt.
30:02 Dominic Hobson: Yeah. You can’t change it on your own, can you?
30:05 Christophe Lepitre: No, we can facilitate actually, because for example, it’s a very good question actually, when you think about the T+1 [Trade Date Plus One Day] regime concerning the US and Canadian funds on the asset side. So the question is, can you reduce the length of the settlement cycle for that type of funds easily? Maybe not for traditional asset servicers in the ecosystem, but with IZNES it’s very easy actually.
30:49 Dominic Hobson: Okay, so you think that because the underlying can settle a bit earlier on T+1 [[Trade Date Plus One Day], the underlying assets, actually you can move the NAV [Net Asset Value] calculation forward as well. That would be an advantage, I guess. I think that’s what you are saying.
31:00 Christophe Lepitre: If the administrator of the fund is able to do that, it would be very easy on our side.
31:08 Dominic Hobson: Yeah, the fund accountants have to do the work of course, yeah. Valerie, one thing I noticed is that you’re offering investors the chance to place orders for future execution. You’re offering a kind of futures market here as well. That struck me as counterintuitive. Why is that service attractive to them?
31:27 Valérie Gilles: Well, yeah, it’s a real order book that is offered to investors and it allows them to fine tune the forecast of their investments and then reinforce their financial optimisation. It’s of great interest, as Christophe was mentioning also previously.
31:47 Dominic Hobson: Now investors, of course, are generally buying their funds in continental Europe through a bank. In other markets, they’re using IFAs [Independent Financial Advisers]. These we call fund distributors. At the moment, if I understand it, your network is really just the issuers, the asset managers, and the asset owners, if you like. The intermediaries, these fund distributors, are not part of the network. Does it make sense for you to work with distributors as well as with asset managers and asset owners?
32:16 Valérie Gilles: Yes, absolutely. It fully makes sense because either user, I would say, of the B2B [Business to Business] marketplace solution or the tech provider solution on a more B2B2C [Business to Business to Consumer] model with probably a more dedicated field of investment. So both make sense and both can easily coexist.
32:43 Dominic Hobson: You mentioned earlier, Valerie, that you’ve made a lot of progress on the privately managed assets side, done some very interesting work there. And clearly investors, particularly the institutional type, now have a very large and growing appetite for those alternative asset classes. I’m thinking here not just of privately managed equity, privately managed debt/credit, but also of things like real estate. Tell us a bit more about how you’re helping them to access those asset classes.
33:13 Valérie Gilles: IZNES helps them by offering the same STP [Straight Through Processing] process for private assets, let’s say, in a general manner private equity, infrastructure, real estate funds as for UCITS. It’s exactly the same way. So it waives any paper process, any manual process, and therefore reduces all the operational risks linked to that type of operational process. Of course, waiving also the poor added value for the teams to just print a subscription order, have it signed whatsoever, send it by mail. So all this together increases really operational efficiency and added value within the teams.
34:00 Dominic Hobson: So you’re really offering an infrastructure where one doesn’t exist at present for that class of asset, right?
34:06 Valérie Gilles: Yeah.
34:09 Dominic Hobson: Let’s talk a bit about the technology now. As I said at the outset, and this is a blockchain-based platform, and despite all the improvements that have been made with blockchain technology over the last decade or so, and there are improvements almost every day, the speed and scale of classic blockchain remains a problem. Here you are operating in a pretty high volume, high value market. How are you working with blockchain to achieve the speed and scale to support the fund volumes of transactions, fund value of transactions, when using a blockchain technology? How have you overcome those constraints of speed and scale?
34:54 Christophe Lepitre: Well, it’s a very interesting question. At IZNES, we made the choice of a private permissioned blockchain because it’s cheaper and faster to operate than public ones. So this choice was made a long time ago, even if we changed the underlying technology. We’ll talk about that later probably. But even at the beginning, the choice was made towards a private and permissioned blockchain.
35:40 Dominic Hobson: You also mentioned earlier, Christophe, that you’d switched to from … You started with the SETL technology back in 2017. You switched in 2022 to Hyperledger. What was the reasoning behind that decision? What were the benefits of making that switch?
35:59 Christophe Lepitre: There were several benefits. The first one was to design and to develop our own blockchain layer. The second one was to adopt a more common underlying blockchain technology, and Hyperledger Fabric was nice for that. The third benefit was to cease to pay SETL for their blockchain layer, a private one. But in both cases, we had more or less the same technological choice. So, a limited number of nodes, a very simple consensus mechanism, and those choices actually offer an excellent performance and a very good level of security. And on top of that, a very low carbon footprint. So for those reasons, we are very much attached to the choices we made in terms of new blockchain technology that we implemented last year or the year before, actually.
37:27 Dominic Hobson: Can I ask how your asset managers and asset owners interact with your technology? I think you mentioned, if memory serves, you’ve got these 18 investors, you’ve got 30-odd asset managers. Do they control their own nodes on this Hyperledger network, or do you control those nodes on their behalf?
37:48 Christophe Lepitre: IZNES controls all nodes on their behalf. I remember that we offered them to get an access to a node if they wished to do so. It’s a possibility now. It’s still a possibility, but it has not been on so far.
38:15 Dominic Hobson: Because they don’t want to … It would involve some investment in new technology for them, and it’s much easier for them to get you to do it on their behalf, I guess. Is that the logic?
38:25 Christophe Lepitre: I think they are happy with the present technology situation and they don’t want to take the risk of operating one node, probably for security reasons, because today our nodes are very much protected behind the different security systems because the nodes are with AWS [Amazon Web Services] and it allows us to achieve a very good level of security, actually, which maybe wouldn’t be the case if one node was operated by somebody else.
39:19 Dominic Hobson: You mentioned AWS, but you’re working with Azure as well, I think I’m right to say.
39:24 Christophe Lepitre: Right, as a back-up, yes.
39:26 Dominic Hobson: Okay, so Azure is just a back-up. So the interesting thing is that you’re in the Cloud. What are the benefits of that for the issuers and the investors?
39:38 Christophe Lepitre: Scaling and security.
39:44 Dominic Hobson: And if you upgrade, they don’t have to worry about that either. It just happens automatically. The service just changes and they enjoy it, right? Okay. All right. Valerie, we talked about IZNES as a technology vendor earlier in relation to the tokenisation engine service. Tell me a bit more about being a technology vendor. Does this mean you’re kind of selling your technology to third parties as well? By which I mean fund distributors, fund platforms?
40:17 Valérie Gilles: Yes, absolutely. Any third-party that would need that kind of technology to support their businesses and their operational efficiency? As mentioned previously, we started with asset managers and we are currently rolling that out to other type of stakeholders, specifically thinking of TAs [Transfer Agents], for example.
40:47 Dominic Hobson: Now let’s look a bit at how difficult it is to reinvent an industry. You’ve clearly made solid progress. You’ve got assets, you’ve got clients from both sides, both the subscription and the redemption side. But, and this is for you, Valerie, you must spend time talking to, most of your time, talking to potential clients. What are the problems that you run into? What are the excuses they offer you for not wanting to get involved immediately? Is it a question of budget? Is it a question of time, other priorities? Is it that it would be too difficult technologically to change our business processes? Do they still complain that blockchain technology is all about cryptocurrencies and that’s a disreputable business? What are the obstacles you run into when you’re talking to potential clients?
41:42 Valérie Gilles: Well, I’ve really observed a shift, I would say, since I joined IZNES, where firstly maybe it was some still remaining confusion between what you mentioned just now, between crypto and DLT [Distributed Ledger Technology] technology, et cetera, and that really, I believe is behind us right now. And this is one of the guides [inaudible] that was published saying asset managers, for example, do not question themselves anymore about the fact that they will use or implement blockchain technology at one time, but just when and for what. So this is where we stand now. So I would no longer talk about obstacles anymore and the potential reluctance towards the technology is no longer there, clearly. So the main excuse is probably, as always, a challenge of time, availability. The decision cycles within our industry are very long. Of course, they can be shortened when we address, for example, tier three asset managers. I mean, depending on the size of the organisation, it may be quicker or longer, but, still patience and perseverance has always been the case for any major technological innovation to ramp up. So this is where we are.
43:23 Dominic Hobson: Yeah. And having enough funding to support your patience as well.
43:28 Valérie Gilles: Absolutely.
43:29 Dominic Hobson: We talked a bit about issuers. Obviously, they want to reach investors, but what are the obstacles for investors getting involved with IZNES? They clearly want lots of funds on the platform. So there’s a chicken and egg problem here, isn’t it? You need funds to get lots of investors and the issuers need lots of investors to get lots of funds. It’s a conundrum you must face all the time, but from an investor perspective, what are they looking for and what do they not find?
44:02 Valérie Gilles: It’s clearly, as you mentioned, chicken and egg stuff. But this is not an obstacle. I mean, when they join, they also attract and want to attract, of course, the asset managers to reference their ISINs [International Securities Identification Numbers] on the platform for all the benefits we mentioned previously. So it’s really pretty much the same as the issuers – time, decision-making processes. And really on both sides, I now see the conviction of the usefulness of the solution. So it’s just a question of time.
44:44 Dominic Hobson: Can I raise the dreaded “d” word at this point? By which I mean disintermediation. Now IZNES is connecting fund issuers, asset managers, and fund investors, asset owners directly. In your interactions with fund intermediaries – and I’m talking not just of fund accountants, transfer agents like your former firm CACEIS, like Société Générale. As Christophe mentioned, CSDs [Central Securities Depositories] are involved in the registration process. Euroclear France is in this business, then you’ve got these fund order routing platforms like Vestima, like FundSettle, like Calastone. Do those fund intermediaries -let’s collectively call them fund intermediaries – do they worry that IZNES is going to disintermediate them, either now or at some point in the future?
45:36 Valérie Gilles: I think all the stakeholders now see the interest and the fact that we are no longer in a type of proof-of-concept stuff, but really the application of the technology on everyday business and the fact that it’s growing, et cetera. So I believe IZNES is seen rather as an opportunity to make the market moves toward better innovation, greater operational efficiency. And these stakeholders question themselves about how could they use that into their own process, organisation, to enhance the service they offer to their. client. So really an opportunity to upgrade the processes, to modernise the industry, both from the historical players, as a chance to be part of the change in the end.
46:37 Dominic Hobson: Now, Christophe, Valerie’s mentioned how business makes it possible for these intermediaries to do what they’re doing already at lower cost, more efficiently. But are there actually new, whole new service opportunities which this technology can create for them as well- businesses they’re not in today, but could be in future if they got fully engaged with IZNES?
47:00 Christophe Lepitre: Actually, what we were mentioning before concerning the liabilities management. So the knowledge of future cash flows is very important for the asset manager. Usually, asset services can use this information if we provide this information to them to build value-added solutions, for example, impact analysis of some outflows or some inflows on the asset and liquidity management, but with a better knowledge of the holders, you can work on that. You can do some historical analysis on that, depending on the type of investors and on what you see on the market. So you’ve got a large number of possibilities of new services once you get a very good, accurate information on your holdings.
48:25 Valérie Gilles: And I think on top of that, it’s also all the added value services a fund intermediary could set up and develop, having the perfect knowledge of the holder structure of the fund. I mean, when you know who distributes what to whom, how much, which investors, when, et cetera, you have all the necessary data to really fine-tune your client approach and commercial strategy, which is currently lacking today in the funds industry globally.
49:03 Dominic Hobson: Okay, so the data which the IZNES model throws off creates gains, concrete, measurable gains, in areas like liquidity management, but it also enables you to improve your sales process because you have a more accurate picture of who’s buying what at particular times.
49:20 Valérie Gilles: Yeah, exactly. The habits of your clients. In fact, just as it’s the case in mass distribution, for example.
49:31 Dominic Hobson: Now you’re dealing, obviously, with regulated issuers and regulated investors, and they like to deal with regulated services as well. Now, I noticed that IZNES is regulated not just by the AMF [Autorité des marchés financiers], which I would have expected, but by the ACPR [Autorité de Contrôle Prudentiel et de Résolution], which is part of the Banque de France. What explains that? Why do you need two regulators? I mean, it’s for good clients, but why do you need both?
49:58 Valérie Gilles: Because we want all of it. In fact, it’s not really two regulators. We have one regulator, which is the ACPR, and the AMF acts as a supervisor.
50:11 Dominic Hobson: I see.
50:12 Valérie Gilles: Yeah.
50:13 Dominic Hobson: Okay. And what are the responsibilities of those two- of the ACPR and AMF? How do they regulate you? What are they looking for? What do you have to report to them? What do you have to do to comply?
50:27 Christophe Lepitre: Many things.
50:30 Dominic Hobson: I was surprised that Valerie said, “We want to be regulated by everybody!”
50:35: Christophe Lepitre: No.
50:36: Dominic Hobson: Sounds like a lot of work.
50:37 Christophe Lepitre: I disagree with that, actually. No, ACPR is, I would say, the natural regulator, as IZNES, being an investment company, we are definitely regulated by the Banque de France. AMF is part of the game because they give their advice on the so-called plan d’activite, so the way you operate, because actually, most of the French investment companies are part of asset management groups, and usually they provide services to the group. So that’s why we talk to both of them, actually.
51:21 Dominic Hobson: Okay.
51:22 Christophe Lepitre: But on a regular basis, I would say it’s definitely 100 per cent ACPR.
51:29 Dominic Hobson: Now, France was very early into the field of crypto asset regulation with the PACTE [Plan d’action pour la croissance et la transformation des entreprises] Law of 2019, and IZNES was set up as a crypto asset infrastructure under that law. What did the PACTE Law allow you to do or allow IZNES to do after you were registered under it that you weren’t able to do before?
51:52 Christophe Lepitre: No, sorry about that. But IZNES is not a crypto asset infrastructure at all. IZNES operates under the so called DEEP [Dispositif d’Enregistrement Electronique Partagé] regime. But you’re right to say that it was put in place in the PACTE Law in 2018, actually. And the DEEP regime is the Dispositif d’Enregistrement Electronique Partagé. That’s DLT, actually, that’s the French acronym for DLT. And what’s interesting with this piece of regulation is that it allows IZNES to, at the same time, receive investors’ orders, but also to hold their positions in the blockchain in place of their historical custodian, and, finally, to keep the fund register. So we do three services at the same time. We provide those services to investors and asset management companies, and we are able to do that because of this piece of regulation, the DEEP regulation.
53:16 Dominic Hobson: Okay. So it’s actually a very important piece of regulation from your point of view, because it allows you to do what you do. Had it not existed, you wouldn’t have been able to do it. I get it. Right. Okay. I’m glad I asked that and cleared it up. It’s clearly crucial. Now, something which every institution operating in this field has to do these days, of course, is conduct these KYC [Know Your Client], AML [Anti Money Laundering], CFT [Countering the Financing of Terrorism], sanctions screening checks under the global regime set up by the Financial Action Task Force (FATF), I think it is. So how’s that process working in the case of IZNES? After all, you’ve got issuers interacting directly with investors here. How do you cover that risk for them? Valerie, you’re nodding. It’s a question for you, then.
54:05 Valérie Gilles: Yeah, indeed. Well, we were talking previously about the fact that IZNES is also a tool to share data, information, of whatever type. This is clearly part of that. The issuers benefit from a one stop shop approach, having a direct access to a fresh and accurate investor KYC information, documentation and analysis, not just only the documentation piece. So IZNES performs the KYC on behalf of the assurers. All the due diligence, including the [inaudible] accuracy checks. Some of the processes are being delegated to DKYC, which is a Deloitte solution – thinking about sanction screening, for example. And all this combined collection of information and analysis is made available directly to the asset managers. So this is really a gain of time also for the issuers. And on the investor side, also a gain of time and efficiency, as they don’t have to disseminate by email bits and pieces of information to all the issuers they’re working with. They share it once through IZNES and to all the asset managers that are connected.
55:27 Dominic Hobson: And that outsourcing involves Deloitte, you said?
55:32 Valérie Gilles: Yes, absolutely.
55:37 Dominic Hobson: As you look across the regulatory landscape, do you see obstacles to the growth of your business or is … I mean, the PACTE Law has obviously been very helpful getting you going, but are there obstacles that it erects as well? Is regulation a problem? And do you see any? You can just say no if you want.
55:59 Christophe Lepitre: No, no. I mean, it’s changing all the time, actually. For example, in the UK, I understood that you received a green light to do funds tokenisation last November. So on the asset management side, so if the question is, can you tokenise funds in Europe? The answer would be yes. It’s possible tokenise funds in Europe, almost everywhere. On the investor side, it depends, because if you take the example of a very regulated company like pension funds or life insurance companies, you may have in certain countries still in the domestic regulation, still obstacles to actually hold tokenised financial instruments in your wallet. But we see as well some movements in that field. I don’t have a full picture of what’s going on in Europe, but in two or three countries, we see what’s going on now, and I can say it’s going in the right direction.
57:35 Dominic Hobson: Well, since you’re talking about other jurisdictions, perhaps we could wrap our discussion up by just looking to the future growth of what you’re doing. And as you say, you’re already supporting funds in jurisdictions outside France. So you mentioned Luxembourg, you mentioned Ireland. And what’s that doing to your existing customer base – the issuers you’re attracting in those locations as well? Or are you still attracting exclusively French issuers at this point?
58:18 Valérie Gilles: No, we are not attracting exclusively French issuers, hopefully, though, at the time being, most of the issuers available on IZNES are domestic, but the portion of non-domestic is growing significantly and this will obviously continue this year and onwards for various reasons. Of course, the adoption of the solution that is currently ongoing, the chicken and egg mechanism we were mentioning previously, and also the fact that IZNES extended its passport to Austria, Belgium and Germany just last year. So we are really in that trend.
59:07 Dominic Hobson: And on the investor side, you’re looking to attract non-domestic investors as well?
59:12 Valérie Gilles: Same. We already have non-domestic investors using IZNES, and this is also the type of investors that will continue to grow on the marketplace. And the potential is really huge, especially when we have in mind, I would say, the basket of funds that are available within the European market.
59:36 Dominic Hobson: Now, Christophe, when we talked about technology, about Hyperledger and all that, you said that you’d overcome the scale problems with, and speed problems with, blockchain, by opting for a private permissioned solution. Can you imagine a future in which IZNES goes public? You become a public blockchain, you’ve got your users controlling their own nodes. Again, at the moment, you’re controlling the nodes for them. Do you envisage a future where the business is much more open and much more in the hands of its users? Or is that so far in the future that it’s not worth talking about at this point? Can you imagine being public and your users controlling their nodes?
01:00:21 Christophe Lepitre: No, not in the near future, for the same reasons, because so far, public blockchains, as you know, are slow and expensive. And maybe I could add that in the state of the present regulation, it wouldn’t be very easy.
01:00:46 Dominic Hobson: And Valerie, can we go back to the very interesting point you raised about the distinction between being a marketplace and a platform? Do you envisage the fund markets evolving away from the principal-based model it has at the moment? You buy your shares from the issuer, you sell them back to the issuer. Actually, a genuine secondary market could replace that in which investors buy and sell shares among themselves and so don’t need to go back to the issuer. Is that a future which you think IZNES could find itself supporting? Otherwise, you’re running a secondary market for fund shares?
01:01:26 Valérie Gilles: Absolutely. This is my favourite topic.
01:01:31 Dominic Hobson: It’s my second to last question.
01:01:34 Valérie Gilles: And so, yes, we are working on it. We believe really, DLT [Distributed Ledger Technology] is very relevant technology for operating a secondary market, especially when we’re talking about private assets.
01:01:52 Dominic Hobson: Christophe, you were nodding there as well. Did you want to add anything to that?
01:01:56 Christophe Lepitre: Yes, actually, I confirm what Valerie said. We’ve been working on it for some time, because, as you did, we came to the conclusion that the need was real in the industry and specifically with the development of ELTIF 2.0 [the European Long-Term Investment Funds Regulation 2.0], where you can have that kind of secondary market.
01:02:29 Dominic Hobson: Now, I promise this is my last question. You mentioned, Valerie, again in relation to the tokenisation engine that you were developing, a B2C component in your business. But most of what you’re doing is an institutional business. It’s B2B [Business to Business]. As you look forward to the ways in which IZNES might evolve, does that range of possibilities include supporting purely retail business, retail investors, retail buyers and sellers, or do you envisage remaining institutional for the time being?
01:03:09 Valérie Gilles: For the time being, remaining institutional. But we support already retail buyers and sellers through the model we discussed previously, like the B2B2C [Business to Business to Consumer], supporting the B2B [Business to Business] part. But the potential, as mentioned, is so huge. Our roadmap is so rich. The future opens any field and any possibility, but not in a very near future, for sure.
01:03:41 Dominic Hobson: I asked you that question because as I look back 20-odd years to when the first, what we now call fund platforms came along, they were going to be fund supermarkets, and retail people were going to buy funds like they bought groceries. In fact, they evolved into being service providers, really, to the existing distributors, I suppose, and became, in effect, another layer of intermediation. So it’s interesting that you think that actually this new technology which you’re pioneering here might well evolve in the direction which we thought it should have gone, some of us thought it should have gone, maybe 25 years ago.
01:04:21 Valérie Gilles: Absolutely.
01:04:22 Dominic Hobson: You’ve both been very kind, very patient, and spent lots of time with the members of Future of Finance. I’d like to thank you both very much for sharing everything you’ve learned and you’ve done with us. So thank you very much, Christophe Lepitre and Valerie Gilles. It’s been a very interesting conversation. Thank you
.
01:04:41 Christophe Lepitre: Thank you. Thank you, Dominic, indeed.
01:04:43 Valérie Gilles: Thank you very much, Dominic. Thank you.
