The clue is not in the name: AsiaNext is thinking globally not regionally
- Future of Finance
- Feb 7, 2024
- 30 min read
Updated: Jan 30
A Future of Finance interview with Neil Thomas, Chief Commercial Officer of AsiaNext.
AsiaNext, a 24/7, Singapore-based institutional-only digital asset trading platform, opened for business in January 2024. Owned by the Swiss stock exchange (SIX) and SBI Holdings of Japan, AsiaNext emphasises its sound governance and regulatory compliance, which its owners and management believe are the keys to attracting institutional money. The new exchange has already secured two operating licences from the Monetary Authority of Singapore (MAS) and has applied for a third. But easily the most striking ambition of the new exchange is its commitment to a global strategy, in which AsiaNext will form a triad with the Swiss Digital Exchange (SDX, owned by SIX) in Zurich and Osaka Digital Exchange in Japan (where SBI is a major shareholder). To make a reality of this ambition, much depends on the behaviour of others. Technologists must create the tools to facilitate the transfer of digital assets between platforms (interoperability) and central banks must provide the trusted, on-chain fiat currency (CBDCs) to pay for them. But AsiaNext is moulded in the image of its parents and its management does not hesitate to speak of ten-year time horizons as well as the returns that are waiting to be collected on the investment in radical change. Dominic Hobson, co-founder of Future of Finance, spoke to Neil Thomas, Chief Commercial Officer of AsiaNext, about the origins, character and destiny of the first self-consciously global digital asset trading venue.
Key Insights
AsiaNext is a Singapore-based digital asset secondary market only trading exchange jointly owned by SDX, the digital asset exchange of the Swiss stock exchange (SIX), and SBI Digital Holdings, the omnivorous Japanese digital assets investment company whose interests span cryptocurrency as well as digital asset issuance, trading and custody.
A strategic ambition of the owners of AsiaNext is to incorporate the new exchange into a set of inter-operating digital asset platforms covering Europe (via SDX), Japan (via the Osaka Digital Exchange, where SBI is a shareholder) and Asia ex-Japan (via AsiaNext), to provide a genuinely cross-border exchange that appeals to issuers and investors alike.
Unlike some of the other digital asset exchanges based in Singapore, AsiaNext has chosen not only to be global but also to be a generalist, with plans to support trading in security and fund tokens, tokenised real-world assets and cryptocurrencies, though its first product, launched in January 2024, is cryptocurrency derivatives, because its regulatory position meant it could start trading them immediately.
AsiaNext has secured Recognised Markets Operator (RMO) and Capital Market Services (CMS) licences from the Monetary Authority of Singapore (MAS) that empower it to trade cryptocurrency derivatives and security, real-world asset and fund tokens and has applied for a Digital Payment Token licence to trade cryptocurrencies spot.
To help generate activity in its market, AsiaNext has formed partnerships with cryptocurrency liquidity providers such as B2C2 and Wintermute, and with the cryptocurrency prime broker Hidden Road, all of which can be expected to bring some of the activity of existing clients to the new exchange.
The services provided to users by AsiaNext include 24/7 central limit order book trading against AsiaNext as a central counterparty clearing house – the use of conventional technologies and infrastructure reflects the need to offer the trading speeds and clearing benefits demanded by institutional trading houses – and settlement and custody on a Hyperledger Besu-based blockchain network.
The clearing function of AsiaNext accepts fiat currency (US dollars) as margin, which is processed through the conventional banking system, but the exchange is adding the USDC US dollar Stablecoin managed by Circle to accommodate counterparties that need to make margin payments when the banks are closed, and exploring the acceptability of money market funds as collateral.
AsiaNext sees flexibility in connectivity as a major attraction, so users can access the platform via existing FIX connections, binary Application Programme Interfaces (APIs), industry standard APIs (REST), private links in the Cloud and via a conventional Point of Presence interface (where the exchange is working with telecommunications provider Colt) .
AsiaNext believes Central Bank Digital Currencies (CBDCs) will help its business to grow, especially across national borders, and monitors the CBDC projects and work of the Swiss National Bank, the Monetary Authority of Singapore (MAS) and the Bank of Japan closely, but believes the tokenised deposits being developed by the leading banks will have a more immediate impact.
Interoperability between digital asset exchanges depends, says AsiaNext, on the acceptance by institutions of public or open blockchains (rather than private, permissioned ones) and the emergence of a trusted and secure global Layer One blockchain protocol that can act as a standard, global programmable platform for all kinds of digital assets.
AsiaNext expects the transition from traditional markets to tokenised markets, and from asset-backed to digitally native tokens, to be a long one but contends that scale hinges on the support of the major institutions rather than the headline-grabbing innovators and pioneers and it is prudent to plan for established market participants to make the journey into a tokenised future step by step by offering them flexible options, a high degree of security against their assets being misappropriated and seamless interoperability between exchanges.
AsiaNext believes that although buy-side firms are more enthusiastic about the cost-reducing possibilities of tokenisation, sell-side firms are alive to the potential efficiencies as well, and the ability of tokenisation to broaden and cheapen access to capital for both issuers and investors will in the end overcome fear of the risks associated with adopting a new model of issuance and trading.
Transcript
00:14 Dominic Hobson: Hello, I’m Dominic Hobson, Co-founder of Future of Finance. My guest today is Neil Thomas, chief commercial officer of AsiaNext, a digital asset exchange owned by SBI Digital Holdings from Japan and SIX Group, the Swiss stock exchange. The ambition of the Singapore-based digital asset exchange is to provide an institutional grade platform for the listing, trading, clearing, settlement and custody of tokenised assets. Neil, thanks very much for joining us.
00:46 Neil Thomas: Pleasure to be here. Thank you for taking the time to speak to us.
00:49 Dominic Hobson: Could we begin with a quick review of the history of AsiaNext? What’s the story?
01:00 Neil Thomas: Yeah, certainly. So AsiaNext was originated back in just before COVID-19 pandemic, actually. Originally, they had the SIX Digital Exchange, which was formed out of Zurich by the Swiss exchange. At the time, I was the head of APAC for the Swiss exchange, and we saw that there was a real demand for, a growing demand in Asia for digital assets. And we looked to see how we, from a SIX perspective, could grow that audience out of Asia. And interestingly, myself and the CRO of the SIX Group met with SBI right before COVID in March 2020, and we had a conversation about how could we do something in Asia. Obviously, then COVID kicked in, there was a bit of a delay, but the conversation kept going through online channels and at the back-end of 2021, we formed a joint venture with SIX Group and SBI Digital Asset Holdings to form AsiaNext, which was to be a digital asset venue, trading a broad range of digital assets. And then really, 2022 was about the – at which time I was on the board – was about really establishing the first hires, the team, and 2023 really was about the build-up of the technology and onboarding our members that would help trade these assets. So I sit here today, 2024. We’re now live for part of that under derivatives. But really, the joint venture is two organisations who really were keen on spearheading the development of digital assets, not just in Asia, but globally. So that’s how it came about.
02:54 Dominic Hobson: Well, you’ve talked about both SIX and SBI, and they obviously bring different things to the venture. But when you put those two forces together, what else do you get? Are we looking here at potentially a cross border digital asset exchange in the medium to long term, or are there different things which each party brings to the party?
03:16 Neil Thomas: It’s a good question. I think both. So I think with the two organisations, they kind of have different value, different sort of, bring different types of value to the partnership. So SIX s very much innovating in the digital security space and has been a pioneer in Switzerland. SIX is really founded on good principles of good governance, risk and compliance. They’re very well respected as the financial markets infrastructure of Switzerland and now of the Spanish market as well. SBI, on the other hand, are big players in the Japan market, but they’re also really innovative and they are very much investors into the digital asset space. So they have quite a broad range of assets. So combining the reputational infrastructure that the Swiss have alongside this innovative and investor-style approach of SBI, you kind of bring together two different skill sets which really lend to driving what AsiaNext is developing. As you rightly say, also, from a global perspective, AsiaNext is founded in Singapore. You have SIX in Switzerland and [SBI in] Japan. Also there’s ODX, Osaka Digital Exchange, and we have a long term view to connect these three venues for digital securities in order to be able to transfer value internationally. So that is part of the plan going forward.
04:46 Dominic Hobson: If we zoom back from the global to the local, what is interesting about Singapore is it has been extraordinarily productive in producing digital asset exchanges. There’s quite a few in Singapore. I just wonder how AsiaNext would see itself as fitting into the spectrum of digital asset exchanges, if you like, in Singapore, both from a local point of view and maybe from a global point of view. How would you characterise your market position?
05:14 Neil Thomas: Yeah, you’re right to point out there are some digital asset exchanges who are also innovating in this space, and we understand their model very well. I think we’re quite broad in our approach. We’re not just in doing one thing, some of the players there are very much focused on private markets or looking at things like the tokenisation of real-world assets. We’re broad. So we also look at crypto[currency] as an asset class, crypto derivatives, crypto spot, alongside security token offerings as well, and real-world assets. So we actually operate under AsiaNext three exchanges: a derivatives exchange, crypto[currency] spot exchange, and we have a Recognised Markets Operator (RMO) and a CMS [Capital Market Services] licence for the STO [Securities Token Offering] or securities exchange as well. So I guess we’re quite broad. Though we are rooted in Asia and Singapore, we’re global as well. So we’re not just covering the local market. We’re very much trying to approach global adoption in digital securities. So, yeah, we understand what they’re doing. We do a bit of that, but we also do a lot more.
06:27 Dominic Hobson: You mentioned your CMS or capital market services licence, and if I’m correct, you also have a regulated market operator licence, both of them obtained from the Monetary Authority of Singapore (MAS). Now, what do they enable you to do in terms of asset classes? You’ve mentioned cryptocurrency, spot and derivatives. But does this licence extend to security tokens, equities, bonds and so on. And what sort of services do they cover as well? What can you do? Can you do all those things I mentioned at the outset – issuance, trading, settlement, custody and so on?
06:59 Neil Thomas: Yeah, thanks. So what we can’t do with the RMO/CMS licences is trade crypto spot. That’s very much not a part of that. Under the Payment Services Act, the DPT [Digital Payment Token] licence that is available from Monetary Authority of Singapore serves crypto spot trading. And we’ve applied for that licence. We’re just going through the stages now with Monetary Authority of Singapore and we hope to secure that licence in a few months’ time. So that allows us. Crypto derivatives is we’re an institutional-only venue, so that is permitted but not licensed in Singapore. So the RMO/CMS licence really allows us to trade digital securities and collective investment schemes. So CIS [Collective Investment Scheme] based products such as funds, ETFs [Exchange Traded Funds] and real-world assets. So we can use that for tokenisation of real-world assets or fixed assets in tokenised form as well as tokenised funds, fixed income, etc., That all happens on that venue. But, that said, we will look to leverage that venue for access to the other exchanges as well. So the interesting piece now is the recent announcement of the Bitcoin ETF launched by many major asset managers. That would sit on our RMO licensed platform – as an example.
08:29 Dominic Hobson: Okay, so if I understood what you’ve just said correctly, you’re starting with crypto derivatives, which is itself rather unusual. You’d normally expect an exchange to start with spot and then go to derivatives, but that reflects the licences you’ve obtained and are looking to obtain in the future. What are the pros and cons of starting with derivatives?
08:50 Neil Thomas: I think, firstly, derivatives is probably the most complex thing you can start with. Trying to establish an exchange with derivatives, obviously you’ve got to look at the broad range of derivatives. So we will cover four assets. So we will do calendar futures, perpetuals as well as options. So we’re currently live with calendar futures and perpetuals. The initial reason for that is basically looking at what do you need a licence to do and what can you start without a licence and what do you need to wait for a licence. So we took a lot of advice from lawyers as well as we were speaking to MAS directly. So we felt this is a good way to start the exchange because it allowed us to get operating quicker. And in the meantime, we applied for all of our licences and as I said earlier, some of those have now landed with AsiaNext. But the good thing is we did the difficult thing first. So getting that live has been our journey for 2022, 2023. But we’ve now achieved that which then has benefits as and when we roll out crypto spot. And as I say, the securities, we can use some of those, the benefit of that, to support our derivatives venue as well.
10:12 Dominic Hobson: Right. So derivatives have been an eminently practical decision, but you’ve gained some valuable experience from doing something rather difficult first. I don’t think you did say this, but I think I’m right to say that your initial RMO licence is to operate a secondary market only. Good. You’re nodding. I’ve got that right. What are the advantages and disadvantages of that? I mean, people would often look to start with the primary market to get some issues, but maybe there’s a big upside to running a secondary market first.
10:40 Neil Thomas: Well, I think we wanted to be really good at being an exchange. So operating from the point of listing onwards allows us to focus on our core value proposition, which is being a secondary market for the listing of these types of assets. There’s a lot of participants in that space. I don’t know the numbers, but there’s in excess of 500 CMS licence holders in the primary space in Singapore. Now, we didn’t want to add to that within the SBI Group particularly, since they have a lot of value in that space already. So SBI Digital Markets are in the primary issuance space and there’s many people who want to list these types of products on a venue like ours. So we just felt it’s better to start from the point of listing and focus on delivering value from there on. And that’s really what we’ve done. And I think that’s proved with the amount of interest we’ve had from various different people who are looking to list on our venue. So all different types of assets, so tokenised diamonds, right through to funds, right through to fixed income, etc. And we as a venue would be very much tied up trying to orchestrate all those different types of listings on the origination stuff ourselves.
11:54 Dominic Hobson: There’s a long-term plan to develop a primary market capability, is there?
12:00 Neil Thomas: I don’t think so right now. Not at the moment. I think really we want to focus on creating a secondary market for these products. I mean, there’s a lot of people who are busy in that space doing the issuance origination. So for ourselves we really are really core focused on being a really good venue for secondary market.
12:25 Dominic Hobson: A secondary market will succeed if it generates liquidity, price formation and so on. And I see you’re working with these market makers, B2C2 and Hidden Road, whose role will be to supply that liquidity. This is something which is often forgotten. These markets don’t always happen spontaneously. But can you explain to us a little bit about what those two partners will do and how you’re going to work with them?
12:52 Neil Thomas: B2C2 is a market maker on AsiaNext and we have other market makers outside of that, such as Wintermute, and actually a few others which remain … They want to be confidential to the market, so we have to respect that. So I apologise, I can’t share. But we have several market makers who have agreed to make markets on that. Hidden Road are providing kind of … represent more the taker community. So they are there. As a prime broker they are there and they are a big supporter of AsiaNext. They’re really there to bring different types. We’re institutional only, so they share the same philosophy of good governance, risk and compliance. So they bring different types of organisations onto our venue. We onboard Hidden Road, we have a strategic relationship with them. So they really help us drive liquidity on the platform and make sure that there’s a good venue available to them for trading. They’re mainly crypto at this stage, actually, with them, particularly derivatives at this time.
13:59 Dominic Hobson: Despite the fact you’re running a secondary market only, you’ve got a pretty comprehensive list of things you’re looking to do. You’ve obviously got to list these assets. You’ve got to make these trading arrangements. We talked about B2C2 and Hidden Road and others. You’ve got to clear them, settle them, even safekeep them. You’re going to provide a custody service as well. Could we sort of go through those services in turn and get an idea of exactly what you’re going to be doing? Now, listing, I assume is pretty simple. It’s just secondary listing of assets which happen to be listed elsewhere as well. Is that right?
14:33 Neil Thomas: Well, we can list assets which aren’t listed elsewhere. I guess it depends on the rate. So if you look at it from a derivatives perspective, what we’ve done there is really how can we innovate against those current market participants? So we’re a 24/7 venue. So we then offer benefit to the market by allowing them to trade over the weekend, which in turn limits your period of risk as an exchange. So the margin period of risk on AsiaNext is only one hour, which means that you don’t have to post as much margin, which allows you to be more capital efficient. So for that, we’ve really looked to innovate in that respect. With respect to then the other venues, I guess we offer technology which is very secure. We’ve kind of dropped the governance, risk and compliance mandate from the Swiss stock exchange on top of AsiaNext. So we really look at how do we protect the industry in the long-term? So really making sure that we have the basis and values that you would see on the Swiss stock exchange available on a digital venue like AsiaNext So when it comes to settlement, we take the benefits of what blockchain can bring, so we can settle T+0, but also when it comes to the security of the assets. So we’re a CCP [Central Counterparty Clearing House) as well, but we also then allow for all the assets to clear and be secured on AsiaNext. So we use technologies which people are well used to in this space, like Fireblocks etc., making sure that we have really good security on the venue. We run a SOC [Security Operations Centre], etc. So all those kind of elements come together to protect the asset. So we really do focus on the lifecycle of an asset basically from the point of issuance. I hope that answers your question.
16:30 Dominic Hobson: Yeah, I’ve got a few little, a few follow-ups there. But just so I’m clear on that trading point you mentioned, this is a blockchain-based platform. So that ability to trade through the weekend and presumably round the clock with that one-hour gap which you referred to. So is what’s going on here, just in technical terms, are the users of the exchange actually transferring value between nodes on a blockchain they operate themselves or are you operating nodes on their behalf? How does it work technically- that round-the-clock trading?
17:04 Neil Thomas: Yes, we’re a central exchange, right? So we’re not the decentralised venue. So everything comes through. We operate in a central limit order book. So all counterparties face AsiaNext. What we do is we use the blockchain for settlement and custody of the assets. So we use technology such as Hyperledger Besu on the blockchain in order to store the assets. But we’re not distributed, so everybody comes through AsiaNext. You face us as the central counterparty.
17:36 Dominic Hobson: You mentioned clearing as well the margin call management. Point (a), is that on the blockchain or is it on some different system? Secondly, what assets are you accepting as margin? Is it cash or are you accepting cryptocurrencies as well?
17:53 Neil Thomas: We don’t margin on-chain just for speed. The matching engine is not on-chain either because we take HFT [High Frequency Traders] latency is important to us. For collateral, we largely look at US dollar, so we’re a fiat-backed venue right now, but we are broadening that at the moment. So we’re adopting USDC [a Stablecoin managed by Circle and pegged to the United States dollar]. We have great banking relationships. But digital fiat, I think, is coming, but it’s still got a little way to go. So the adoption of USDC is really important to us right now. So we’re really working on bringing USDC onto the venue in order to allow people to transfer if they need to top-up margin accounts at the weekend or after banking hours. USDC is fantastic at doing that. There’s also a lot of adoption now in the space of money market funds. Capital at rest for institutional investors is not great. So how can we help support them in that respect? And you see the issuance of these money market funds coming through now, mainly Treasury-backed, but they do offer things like interest at up to 5 per cent on average, maybe some of them a little bit lower, 4 per cent. Now, this, I think, is where the market is going, because you can then post that as collateral against your margin position, but you can still benefit from earning interest against the money resting in your margin account. So, as a form of collateral, I think it’s a really evolving story. It’s a very dynamic space, actually, right now, and we will look at that. And obviously, when our spot venue is live, you can use the physical coin as well to margin a position. But we’re not there yet. But we are definitely there with Stablecoin. But we keep an eye on that space because I feel it’s an innovation that the crypto markets can also bring. All this is listed on our RMO venue as well.
19:58 Dominic Hobson: Yeah, sometimes it is hard to tell the difference between Stablecoins and money market funds. But, talking of Stablecoins, you mentioned USDC. Is that how cash is getting on-chain in your model? Is that what you’re using to complete the cash leg of settlement?
20:14 Neil Thomas: Well, we can operate purely in US dollar, actually. This is kind of the primary use. But obviously with the dollar, it’s still limited to banking hours, right? So we prefer the US dollar right now. We think it’s the most riskless form of collateral there is. But, that said, we have to realise that there are restrictions trying to operate 24/7, so we have to be open to other types of collateral. So this is where the USDC [fits in]. I mean, our bar is high for adopting Stablecoins, but the USDC, I think, is one of those Stablecoins which the general industry is very comfortable with. There’s announcement recently, one of our shareholders, also a major investor into USDC, for the Japan market. So it’s an area that we’re comfortable with.
21:06 Dominic Hobson: Just to be clear on that point, you’ve explained that your preference at this point is to settle in US dollars off-chain. But are you saying that, if counterparties were happy to settle in USDC on-chain, you would support that?
21:20 Neil Thomas: Yes, we will going forward. Absolutely.
21:25 Dominic Hobson: We touched briefly earlier on atomic settlement, and this has been a long -running saga in the securities token space in particular, in which people on the one hand say, `Oh, atomic settlement is a good idea in theory, but it has enormous costs. In practise, you have to pre-fund your account, you lose all the benefits of netting.’ On the other hand, you do get this elimination of the counterparty risk. Have you reached a view on where the balance of advantage lies between atomic and non-atomic settlement in your own thinking?
21:56 Neil Thomas: Yeah, it’s a good question, Dominic. I’m not the best person to answer this, but we are comfortable with atomic settlement. Pre-funding is not really what institutional want to do because it ties up too much capital. So we are working on finding the best balance going forward for that. So we are not asking full pre-funding at the moment. I guess it’s one of those things that I’ll come back to you on, to be honest, because we’re kind of working through that at the moment.
22:38 Dominic Hobson: Everybody is working through that question. It’s an unresolved one as yet. And just before I close the question of services, could I ask you just to explain to the listeners clearly how the blockchain technology you’re using works in practice. You’ve explained that it’s being used for post-trade services only. What is the meeting point between that and the trading side? And as you look forward to particularly asset-backed tokens becoming available – tokenising, I don’t know, real assets or even securities listed elsewhere – are those going to somehow be tokenised to a sort of post-trade blockchain? The settlement function will be separated. I’m rambling here, but perhaps explain to me how the pre-trade and post-trade functions will work together harmoniously on a blockchain.
23:36 Neil Thomas: So I think blockchain technology, obviously I’m a huge supporter of it. When it comes to trading, speed is important. So latency is very important. So we don’t trade, do the matching, on-chain. So we do that off-chain because it allows us for speed. And that’s really around crypto derivatives, right? So none of that sits on-chain, actually. For security tokens – and we will tokenise securities on-chain using Hyperledger Besu – awe will make these digital native, listed on the blockchain. We will use, as I said, the Fireblocks technology in order to support those assets going forward in custody. I guess we use blockchain where it’s really of a benefit to the process. It’s not the panacea for all the ills of the financial markets industry. So we really look carefully at what we can deliver with blockchain. So one of the things that are important to us is security, the future-proofing of blockchain and interoperability. So they’re the things we look at. As I said earlier, we have these relationships with SDX in Switzerland and Osaka Digital Exchange in Japan. So we want to make sure we can interoperate with a long-term goal of being able to list in one venue on-chain and be able to then transfer that asset into other jurisdictions so they can be traded in other markets. So we really are on [the blockchain] for the post-trade, but particularly in the security tokens offering. We will tokenise and then make that asset digitally native on-chain. And then obviously it will stay native on the chain.
25:28 Dominic Hobson: I’ll come back to that native question and to the interoperability point that you mentioned there. Before I do, would it make a lot of difference to your operating model if digital cash, digital money was available on-chain now? And by that I don’t mean Stablecoins, I mean CBDCs [Central Bank Digital Currencies], I mean tokenised deposits. Maybe I mean Stablecoins as well. But is this a constraint for you in terms of how you can actually operate – that this reliable, trustworthy digital money is not available on-chain? And of course we talk about interoperability, but it’d be helpful to have this stuff able to move across border as well. By stuff I mean digital money. So you could …
26:13 Neil Thomas: No, that would be fantastic. SDX are now actually [inaudible] operating wholesale CBDC against the assets on that venue. So they have a lot of digital bond issuances, some private equity as well. So the big benefit of CBDC is that the risk is really down to the national bank. So even if it’s CBDC, sorry, if it’s a tokenised currency on your venue, you still have the risk, bankruptcy risk of that venue to take into consideration. The big benefits of CBDC is that you really minimise the risk. So we’re big fans of CBDC. It’s very early. The Swiss are kind of the pioneers in that. What SDX has done with the Swiss National Bank (SNB) is really groundbreaking. They’ve just done the pilot there for that. We would love to be able to do that in Singapore with CBDC on the Singapore dollar. I mean I don’t even want to go there for US dollar. But it’s just not there yet. So then you’ve got to look at Singapore market, what is available to you 24/7. And this is where you look at … It’s all about managing risk really. What is available. And some of the banks now, the big banks, I’m talking Tier Ones, are working on projects to issue digital US dollar which can operate then 24/7. This is a really exciting development. I think it’s kind of the interim step, maybe as an alternative to Stablecoin. These projects are out there, well-known. And we’re speaking to those banks in order to adopt that as and when it’s ready. It’s really a question of … they want to operate in a very safe space like regulated venues such as AsiaNext etc. So CBDC I guess is the Holy Grail. Switzerland are closest right now in my world. We work and speak closely to MAS to understand where they are in their CBDC journey and likewise in Japan. But I think it’s just you’ve got to have a long-term view in this space and we do have a ten-year view. I mean, my shareholders say you’ve got to look at this over the next ten years to really see global adoption in this space. And wholesale CBDC is a much easier lift than like a retail CBDC, which is very political. So we are confident of the use-case, but it’s really out of our hands. It’s really got to be driven by the monetary authority or the national banks in order to get that. In our sister exchange, SDX, we have [already] seen the benefits that brings.
29:19 Dominic Hobson: We’re going to talk about interoperability in a minute, but before we do, should we just talk a bit about connectivity? You have this relationship with Colt. Perhaps you could explain how that works for you. But more importantly, how are your users going to actually access the AsiaNext services? Can they use the traditional routes? How are those routes made secure and so on? How do you reassure them that this is a safe place to go and that what business they do there will be kept secure?
29:48 Neil Thomas: So we operate with a foot in both camps. So we’re trying to work with good quality crypto- native participants in the institutional space as well as traditional finance who want to look at an allocation or adoption of digital securities and crypto. So to do that, you’ve got to be quite versatile in how you allow people to connect into you. It’s a heavy lift, but what we do is we allow different types of connectivity so we can operate with the traditional world of FIX [Financial Information eXchange]. So FIX connectivity is available on AsiaNext and you can take your market data by things like UDP [User Datagram Protocol] multicast, which traditional players will know very well. We also then look at things like binary APIs [Application Programme Interfaces], private links in the Cloud, and alongside that the Point of Presence with Colt, as you rightly say, which allows you to look at the .. If you really want Point of Presence in a data centre, lower latency environment, that’s available. But also on the other side, the crypto natives, they use REST [Representational State Transfer Application Programming Interface]. So we can connect in those different ways. So it’s allowing … From our current members, I don’t think there’s anybody who does it the same. We have all these different ways that people look to connect and I think that’s really what we bring is that versatility that allows people to say, `Okay, this is how I have historically done it and this is how I want to use AsiaNext.’ So we have a multitude of access points.
31:19 Dominic Hobson: So it’s very flexible. You can use FIX, you can use APIs, you can use Colt, whatever.
31:23 Neil Thomas: Yes.
31:24 Dominic Hobson: And it’d be obviously very useful to have that in terms of interoperability between exchanges as well. And I’m wondering, everybody recognises that solving the interoperability problem, getting rid of those constraints, would be massively helpful to digital asset exchanges everywhere. But the blockages to it are so varied. You’ve got all these different blockchain protocols, you’ve got people operating these legacy systems. Again, we just talked about connectivity. People want to use their legacy systems. You don’t have any standards or don’t have any universally accepted standards in the field. And then, of course, you’ve got all these regulatory differences between the various jurisdictions as well. You’ve said that you’re taking a long-term view, a ten-year view here. Do you think it’s going to take that long to get rid of these various barriers to interoperability? Have you reached a view on how urgent the work is?
32:22 Neil Thomas: That’s a big question. Yeah. I wish I had a full answer for you. I think speaking to people who are coming into this space now from the major buy-side, institutional space, I think private blockchain is limited. Obviously, you can interoperate between them, but I think Ravi Menon [Managing Director of the MAS until January 2024] from the MAS was talking about global Layer One and these permissioned public chains. I think public blockchain is definitely going to have to be the future, that we can have a chain which is open to everybody, which you can connect to in a safe, secure way. So how do you create that environment? Right now, I think there’s iterative steps that the industry needs to go through, which is like, where are we today with these private permissioned blockchains? How can we interoperate between them? So you’ve got all this different technology evolving, which allows standards like ERC 20 etc., which allows interoperability. Long-term, I do agree with Ravi Menon on the kind of the global Layer One will be the foundational [layer] for big adoption in the industry. I think that will be the prerequisite for it. We have to operate at the moment in that space where we’re not there yet. So how do we help drive the adoption? I think it’s really understanding what we can do today. How can you add versatility? How can you work with that framework? But, most importantly, how can you make sure what you do is trusted and people feel secure operating on your network? Because without the long-term trust, you can’t afford another 2022 in this space, particularly in the crypto space, because it will erode too much trust. So we’re really thereabouts. We understand the technology is still very new. We’re on that journey. I do think it’s going to be ten years, actually, until we’re really there, but we’re working towards driving that adoption. It’s going to be a few steps.
34:34 Dominic Hobson: I promised to come back to the question of native versus non-native. In this context, I was very interested by a remark which one of your board members, the CEO of SBI Digital Asset Holdings, Fernando Luis Vasquez, said. He said, `We’re trying to encourage people to leapfrog from legacy technology and go directly to something that’s more native digital.’ I’m happy to declare my view here, which is that the efficiency gains from tokenisation ultimately do depend upon going native digital. But at the moment, most security token issues, and indeed most fund token issues, are going down this asset-backed route. I’m not asking you to disagree with your board member, but again, maybe the relevant question here is, do you agree with him? I’m sure you do. But how long do you think it’s going to take to get there and what are the obstacles? Why are people starting with this asset-backed model, where the efficiency gains are so limited that the business case is hard to make for doing more?
35:36 Neil Thomas: Yeah, I think it’s really about, as you rightly say, people have investment in technology. People who sit in major financial institutions have to see this technology through its lifecycle. You can’t strip out and completely adopt a brand-new technology overnight. So how do you then get to that? There is no easy answer to this, but how do you get to the place where people can start adapting to the new form which when you’re fully digital, native, there are huge benefits. I think the efficiency is there, but it’s a journey. And what Fernando was saying I do agree with is that you have to be realistic about the investment that financial institutions have made in legacy technology. So how can you slowly migrate them over to the new world? I think it will be step by step. Some may be able to leapfrog and get fully digital native straight away, but you need the market to come. To bring liquidity to this, you need a quorum, and that’s going to take a little bit of time.
36:45 Dominic Hobson: Where these two crucial ideas come together, by which I mean interoperability and native rather than non-native, in my mind, came together very well in a paper the BIS [Bank for International Settlements] published, in which they described the future of digital asset markets as this series of interoperating networks. They described it would function in practice as if it was a single global, programmable platform. In other words, you’d be issuing these tokens in a standardised way, they’re being exchanged in a standardised way as well. Is that a vision which you would support? And again, how far away is it? This step-by-step process you’ve described could go on for decades, let alone years.
37:29 Neil Thomas: Well, I guess ultimately it’s about how can you … I don’t know. The way that I look at it is how do we make sure that we can deliver value? If people want to bring new types of assets to market, can the blockchains which exist operate efficiently and effectively? So can I transfer value from one chain to another with minimal risk of hacking or exposure? Can it then appear cross-border? You’ve obviously got the regulatory constructs on top of that you need to consider. And I think through things like Project Guardian, this is being reviewed as well. So in my experience, the real world use-cases … Which again, these are major household, financial industry household, names which are adopting this, they are operating on those terms because no one has decided which is the global Layer One that the whole world will adopt right now. So the realistic approach is to interoperate between chains which are existing and make sure that they can operate efficiently and safely. That’s how we’re working today.
Question: Does AsiaNext find the buy-side more enthusiastic about radical change than the sell-side?
38:44 Dominic Hobson: In the conversations we have at Future of Finance, we tend to find the buy-side, by which I mean asset managers, wealth managers, and even end-investors, asset owners, they tend to view tokenisation much more positively than the sell-side – the banks, the brokers, the financial market, infrastructures. In a way that’s not surprising because the buy-side has most to gain and the sell-side has most to lose, if you like. But does that match your experience as well? Do you find the buy-side more enthusiastic about what you’re trying to do than the sell-side?
39:15 Neil Thomas: I think the buy-side, yeah, I would agree that the buy-side is very enthusiastic in this space and the big names are really coming to the fore. This is global news, right? But I would say that the sell-side is not anti this at all and is actually adopting this and that they may not do it publicly right now, but there’s a load of initiatives going on, big announcements which have been made by [inaudible] in the custody space, but also on the sell-side space where they’re really looking to do this. These announcements are really coming through. I think if 2024 will be the year when we go from … It’s really [inaudible] that will drive adoption, I think by the end of this year there will be a marked change in the adoption of this which will see us go from this kind of nascent phase into kind of the start of the growth phase. And that will be driven by the buy-side, by asset managers, but also by the sell-side, by the banks. They talk to each other as well. These relationships don’t exist in a vacuum. So these companies don’t exist in a vacuum. They speak to each other all the time and we’re privy to that, being an exchange.
40:30 Dominic Hobson: At the risk of asking you the same question again, markets are, in the old cliche, driven by fear and greed. And the fear here lies in the fear of being disintermediated, the fear of the cost of having to decommission all these legacy systems which you’ve invested so much money in building and then maintaining. But the greed, of course, is the efficiency savings, the cost savings and of course the massive new business opportunities, particularly in tokenising all these asset classes, which would benefit from being made more accessible and more liquid. When you say that 2024 is the year you think we’ll move from the nascent phase to the growth phase, does that mean you think we’ve now, in terms of the balance between fear and greed, we’re shifting towards greed now? And if so, does that greediness vary between issuers and investors and intermediaries? Or do you think everyone’s basically pushing in the same direction?
41:32 Neil Thomas: I wouldn’t use the term greed. I think if you’re running any financial institution, efficiency is going to be critical. And is there a cost benefit, cost saving to be made, then banks will look at that, particularly in the post-trade arena. I think also is that about how do I create opportunity in new assets? If you look at the Bitcoin ETF, this is a US$2 billion inflow now into the BlackRock product alone, which I think is a record for any ETF issuance. But I think really it’s about coming, moving forward in a way that … How can I reduce my cost in the back office? How can I create more opportunities in the front office. Funding? We see a lot of people who are looking to raise capital through tokenisation – working with other prime businesses, but looking to list. So it creates more access for more people to the market, which in turn is good for everybody. So I do see it as a broad benefit. I mean, you could use the word greed, but I think really it’s about just access to capital and the benefits that tokenisation can bring to a broad range of participants in the financial service industry.
42:57 Dominic Hobson: Cutting the costs and seizing the opportunities is a good point on which to draw our conversation to a close. So Neil Thomas, thanks very much for taking the time to share your knowledge and your experience with the members of Future of Finance.
44:46 Neil Thomas: Dominic, thank you very much for your time. It’s been a pleasure speaking to you. Thank you very much.
