The Swiss token exchange creating a market for small company shares
- Future of Finance
- Dec 21, 2023
- 35 min read
Updated: Jan 30
A Future of Finance interview with Nicola Plain, CEO of Aktionariat.
Success in tokenising equity is unusual. Most issues of tokens are asset-backed versions of existing bonds or fund shares. So the fact that Zurich-based token platform Aktionariat has succeeded in attracting a variety of small company issuers is a considerable achievement. The goal of the firm is to help start-ups and SMEs, initially in Switzerland but eventually around the world, raise equity capital from third parties at low cost. Its strategy is to reduce dramatically the costs of issuance and post-issuance operations such as settlement and registration. Aktionariat has also formed a string of partnerships with specialist service providers and with SDX, the digital arm of the Swiss stock exchange, which helps the company secure access to the clients of the Swiss private banks. An ingenious liquidity model, based on the principal-based trading of shares in mutual funds, meant that by the end of 2022 Aktionariat was already host to 29 issuers, had as many companies again preparing to issue, and had identified dozens more on a target list that ultimately spans the entirety of the enormous Swiss private company market. Dominic Hobson, co-founder of Future of Finance, spoke to Nicola Plain, CEO of Aktionariat, about where the company came from, what it has achieved so far and what it plans to accomplish in the future.
Key Insights
When it comes to investing in start-ups or SMEs, it makes more sense for retail investors to purchase shares in local or national companies than to invest in their foreign equivalents, because local knowledge ensures superior information flows and better judgment.
Switzerland is an ideal jurisdiction to encourage equity investing in smaller companies because the economy supports 500,000 companies, of which less than one in a hundred (just 230) is publicly listed and available for investment on the stock exchange.
In Switzerland, the Federal Act on the Adaptation of Federal Law to Developments in Distributed Electronic Ledger Technology (known colloquially as “the DLT law”) has provided a flexible legal foundation for the issuance of tokenised equity.
Blockchain technology is a means and not an end – it is the ability to raise capital, not the convenience and efficiencies afforded by blockchain technology, that determines whether a company wishes to issue shares on to the Aktionariat platform.
Issuers value the convenience of being able to issue shares at low cost without securing subscribers because it enables them to tailor fund raisings to immediate investment needs and lowers their overall cost of equity capital.
The issuance costs are lower because the number of intermediaries associated with an issue is much lower than in a traditional IPO, with even the mandatory legal and customer due diligence services supplied by specialist third parties partnered with Aktionariat.
Aktionariat offers issuers access to c.1,500 experienced investors, opportunities to pitch to investors at bi-annual events, help from specialists (Founder Studio) to raise the minimum CHF 100,000 required to set up a stock corporation and data rooms to attract institutional money.
On the cash side, Aktionariat has formed partnerships with Bity (so investors can exchange fiat currency for cryptocurrency to invest) and Monerium (so investors can turn cryptocurrency received from sales of tokens back into fiat currency).
The Aktionariat relationship with Swiss digital exchange SDX delivers trust, access to potential investors and issuers among the clients of the Swiss private banks, and the beginnings of an integrated network of tokenised capital market networks and infrastructures.
Investors in equities available on Aktionariat can hold the tokens in any wallet compatible with the WalletConnect protocol, or use the Aktionariat custody app or, provided tests are successful, with any Swiss bank providing a digital asset custody service.
Issuers are exempt from running KYC and AML checks on investors because no financial intermediaries are involved in the issuance, but issuers retain the right to refuse investors entry to their register, and some do use third party services to run checks voluntarily.
Issuers on the Aktionariat platform provide liquidity directly by reserving sufficient cash to be able to buy shares back from sellers, in a principal-based mechanism akin to that provided by asset managers to investors in open-ended mutual funds.
All transactions in tokenised shares on the Aktionariat platform, whether they are purchases or sales, must pass through a user interface (called Brokerbot) to the market smart contract that ensures tokens are always exchanged for cryptocurrency on the platform.
Aktionariat expects a liquid secondary market in tokens to develop over time as liquidity improves and is already introducing an option that will allow sellers to accept prices lower than Brokerbot when issuers are not providing liquidity as principals.
The fact that the Aktionariat platform is an open, permissionless network built on the Ethereum blockchain testifies to the confidence of the founders in the long-term potential of public blockchain networks, and in the greater security and liquidity of the Ethereum protocol.
The growth strategy for Aktionariat outside Switzerland is focused on the United States and the United Kingdom rather than the European Union (EU) because the prospectus requirements of EU law make it more expensive to raise equity capital in the EU.
The main obstacles to the growth of tokenised equity markets around the world are continuing legal uncertainty and a misapprehension on the part of financial institutions and institutional investors that tokens are synonymous with cryptocurrencies.
Transcript
00:14 Dominic Hobson: Hello, I’m Dominic Hobson, Co-founder of Future of Finance. My guest today is Nicola Plain, CEO of Aktionariat, the Zurich-based start-up whose vision is to use blockchain technology to create liquid capital markets for private companies, starting in Switzerland. Nicola, thanks for joining us.
00:32 Nicola Plain: It’s great to be here. Thanks.
00:35 Dominic Hobson: Now, I mentioned a little of where you are. Could you tell us a bit more about your own background and the backgrounds of your co-founders and indeed of the 175 shareholders that you have. What in your personal histories inspired the creation of Aktionariat?
00:55 Nicola Plain: So I have a classic business background. I studied business at the University of St Gallen. I have a master’s in business engineering. The other two founders actually are techies, so they developed the first version of our software themselves. And what inspired us to do what we do, basically, was seeing a problem in private markets with shares that were extremely illiquid. And then, on the other hand, seeing the opportunity that blockchain technology brings and the combination of these two would potentially solve a problem. That was the initial idea and that’s where we started.
01:39 Dominic Hobson: Well, I’ll come back to the blockchain technology a bit later on, but I was very struck by the vision that you’ve stated, which is to enable this long-term value investing, emphasis on long term and value investing, building this culture of local, sustainable, transparent and centralised finance. So that’s a pretty complete contradiction of how speculative global stock markets have worked for 150-odd years. So what sort of issuers and investors are you looking for to share that vision with you?
02:17 Nicola Plain: So for the investors, we think if you’re a retail investor and you’re not doing this professionally, you maybe shouldn’t invest in a company from overseas. So, for example, you shouldn’t invest in a China-based company that you can’t really grasp what they’re doing and if they’re doing it in a good way. So the idea was, for retail investors, why don’t you just invest in these companies that you know, that you’re probably a customer of, or you’re a supplier for these companies, so you know them? You have, let’s not call it insider information, but you have some information about the company and you can really tell if the product or the service makes sense because, as I said, maybe you’re a customer. So these type of investors are those that we target mostly. And that’s where we also say it makes sense to invest more locally and in companies that, you know. On the other side, the companies that we’re targeting are startups as well as SMEs [Small and Medium-sized Enterprises] in Switzerland, and there can be a broad variety of companies that we could potentially target. The most interesting companies, though, are the B2C [Business to Consumer] companies, because they come with a large community that they can leverage and ask if they want to become co-owners.
03:42 Dominic Hobson: And I’ll come back to that point as well, because I think it’s an important one. Can we just talk a little bit about what it’s like being in Switzerland? How important has it been to actually be in Switzerland? You’ve got this very large sector of private companies there. In terms of the economic and commercial environment in Switzerland, how important was that? We’ll talk about the law and the financial system a bit in the next question. But how important is it to be in Switzerland, given the structure of the Swiss economy?
04:11 Nicola Plain: I think it’s not a bad country to start off with, because, as you said, we have a very strong SME sector in Switzerland. So the backbone of the economy are SMEs. They are very robust, very solid. So that’s a very good base to start off with. And then, on the other hand, we have this start-up eco-system, which is also growing, with more and more money flowing into Swiss start-ups. Of course, there are countries in this world where the start-up eco-system is even more vital, but I would say what we have here in Switzerland is not a bad base to start off with. So I would say the economic structures in Switzerland are quite good for such a business as we have. But maybe there are markets that would be even more suitable for that.
05:05 Dominic Hobson: We’re talking about 500,000 privately owned companies in Switzerland. So it’s a large sector in a relatively small country, isn’t it?
05:14 Nicola Plain: True. Less than one per cent of the companies is listed on a stock exchange, not even 1 per cent.
05:20 Dominic Hobson: So it’s a big growth opportunity for you. Now, the law. Switzerland has this blockchain or DLT law in place, but then so does Liechtenstein, so does Luxembourg. So how helpful has that the Swiss version been for you? And did you look at Liechtenstein and Luxembourg as alternatives?
05:38 Nicola Plain: Yes, we looked at these other legislations as well. I have to say that the Swiss legislation is, in my eyes, the most flexible one. So compared to, for example, Luxembourg, where you have to go through a financial intermediary if you want to issue securities in Switzerland, that’s not the case. So a company can issue their own shares directly without the use of any financial intermediary. So that’s one of the factors that makes this law extremely flexible and also very usable for us.
06:12 Dominic Hobson: Can we talk a little bit about the issuers you’re after now? You said you’re interested in start-ups as well as SMEs. You’re particularly interested in B2C companies because they have this built-in, natural shareholder base, if you like. So, if I said to you, what’s your principal target group? Does that question not make sense to you because you kind of know what issuers you want when you see them? Or can you paint a picture of what the structure of the market you’re addressing actually looks like, between SMEs, start-ups, B2C?
06:44 Nicola Plain: So, at the end of the day, we want to have a good mix between start-ups and value investments, so more mature SMEs that already have a proven track record. And I think if you have a balance between the two, then you also offer the possibility to diversify within the companies that we offer. And of course, no matter if it’s an SME or a start-up, the important part is that you have a large community that you can leverage. That’s always a plus. So if we actively go out and target customers, which we barely do because we have a lot of in-bounds that we have to work on, but if we would do that, then we would definitely target B2C companies. And then, as I said, a good mix between young start-ups with a high growth potential and more established SMEs with a smaller growth potential. This is what we are aiming for.
07:43 Dominic Hobson: And the type of issuers that you’ve worked with already and who are interested in working with you, is there any pattern to the type of industries they’re in? You mentioned the B2C thing, but are you attracting, I don’t know, a lot of grocery chains or travel companies? Can you describe, sectorally, where you’re getting the most interest?
08:02 Nicola Plain: That’s a very interesting question that I get asked a lot. Funnily, there is no industry trend yet that we can see, so we really have a very broad spectrum of companies. Sometimes people assume that most of the clients are from the Web 3.0 space because they understand blockchain and they know the potential of the blockchain technology. But as a matter of fact that is not the case. So we have, I think about two or three Web 3.0 companies, but not more. So there’s really no trend yet that I can see within the industries.
08:40 Dominic Hobson: Does that mean that the blockchain technology is of secondary interest to the issuers you’re talking to? They’re actually much more interested in the capital raising than how you do it?
08:48 Nicola Plain: Yes, totally. That should also be the goal. Blockchain technology is only a means to the end and if it doesn’t provide value, then it’s probably the wrong technology. So our goal is to make it as easy as possible so the issuers, as well as the investors, don’t have to worry a lot about what technology they’re working on, because, as you said, at the end of the day, the issuer wants to collect money and the investor wants to make money, and that’s all they care about. And the rest is more of our problem to make it easy and convenient.
09:24 Dominic Hobson: One distinctive feature of your model is that issuers can create shares in advance and hold these in reserve until they need to raise the funds. That obviously makes it easier for them to raise funds as an opportunity to invest comes along. But how does that model work in terms of Swiss company law? Does company law support that proposition, creating these shares and not issuing them? And how does it work in practice? Is this proving very popular with the issuers you’re working with? Do they see the benefits of that?
09:56 Nicola Plain: I think the issuers see the benefits of that, but of course, it’s not a proven model. So also the law is not tailored towards such a case. So the law is tailored towards fixed, traditional financing rounds. And now what we are doing is we’re stretching the boundaries a bit of the existing laws. It takes a little bit of an effort upfront to create these shares and take them into the company. But as you did this, you are much more flexible because you can onboard an investor at any time, and we have a limitation there in Switzerland, so you cannot hold more than 10 per cent of your own shares at a time. So if you want to sell more than 10 per cent you have to do it in different batches. But that’s it. So that’s the only limitation with the upfront effort that you have to do to create the shares. But once done this, it’s extremely flexible and highly convenient for both sides, for the issuer, but also for the investors. And this allows a continuous form of fund-raising. So you’re not in this fixed fundraising round, but you can continuously sell shares as long as you have them. And if you’re running out of shares and you still want to sell more, then you create new shares, take them into the company again and then you keep selling. So with this model, we really enable a continuous way of fundraising, which has a lot of advantages.
11:21 Dominic Hobson: And are you able to prove through that model that issuers have actually reduced their cost of capital by using the model you’ve just described? Is it cheaper for them to do this?
11:31 Nicola Plain: I would say so, yes, I would say they reduced cost of capital. Definitely. You don’t have to go through an intermediary. The costs that we charge are very low. So I would say overall it’s definitely a reduction of cost of capital. Yeah.
11:46 Dominic Hobson: And it enables them to raise equity rather than debt. Forgive me, I’m not that familiar with how the Swiss small company sector, what their capital structure is, but I imagine equity is more expensive for them than debt. And this is presumably a new capital source for them as well, right?
12:04 Nicola Plain: Yes, I mean, of course, equity in general is more expensive than debt. Still, we have some SMEs that preferred to raise more capital by issuing equity instead of getting a loan from a bank. So it seems like also the SMEs see some advantages in having people being shareholders and not only having new money at their disposal. So of course, if you have people that co-own the company, they have a much higher motivation to help the company in any terms. So I think that’s one of the advantages that also the SMEs that are using our tools are seeing. And that’s why they decided to issue equity instead of debt. Of course, I assume, I don’t know, but most of the companies that issued debt with us also have a loan, at least those that are profitable, because for the other ones it’s probably a bit hard to get a loan.
13:07 Dominic Hobson: Okay, can I ask you where the business has actually got to? How many issues have you hosted so far and how deep is the pipeline of prospective issues coming up?
13:18 Nicola Plain: So we have 29 companies live on our platform and we have over 60 signed contracts. So more than half of the issuers is still in the onboarding process with us and the demand is still very high. So we still didn’t have the time to do outbound because we have so many inquiries from potential clients. Next year, we are targeting 200 new issuers. So at the end of the year 2023, we will have, if everything goes well, around 200 and 250 clients.
13:58 Dominic Hobson: You’ll still have 499,000 to go, so plenty of room for growth. In terms of how you have to support these issuers, what sort of services are you having to supply to them? I mean, a normal IPO [Initial Public Offering], of course, you would have investment banks, you’d have marketing agents, you’d have lawyers and so on. So are you getting involved in things like actually helping these companies draft the prospectus, their shareholder agreements? Are you actually minting the tokens for them? Doing the marketing communications, the investor, communications, the customer due diligence? Are you doing the financial crime checks? Are you maintaining the register? How many services are you actually having to supply to make these issues work?
14:36 Nicola Plain: So most of the services that are not technical services we offer through third parties. So, for example, the due diligence cheque is performed by a third-party. Then we have a law firm assisting us, leading the clients through the whole heuristic process of setting up and creating the legal framework for them. And of course, we also have partners that can help with valuations and we also have marketing partners. But as I said, everything that is non-technical, we basically outsource and provide it through third parties. But if you look at the whole package, it’s pretty similar to an IPO, but much cheaper. And usually the prospectus is not needed because there is an exemption in Switzerland as well as in the UK, as I learned, if you stay below £8 million or Swiss francs in Switzerland, a year, then you do not have to provide a prospectus. So usually our clients stay below that threshold and do not have the obligation to come up with a prospectus.
15:47 Dominic Hobson: As you’re explaining, you’re primarily a technology company providing these technical services, which I assume include minting the tokens, as it were. But do your issuers have to make use of these third-party providers that you make available or is this just a convenient choice you offer to them? They could use their own lawyers or their own customer due diligence provider if they wanted?
16:10 Nicola Plain: So the law firm is mandatory. You have to go through the legal process with our law firm because we want to make sure that everything is legally sound. That of course is extremely important and elementary. Also, the due diligence check is mandatory, of course, because we have to provide a certain quality gate to make sure that we do not have scammers using our tools being listed on our platform. So that’s also mandatory. Then on the other hand, we have some financial market experts that can help you with valuation. We have marketing companies that can help you with PR and marketing measures. This is not mandatory, but an optional feature that we offer.
16:52 Dominic Hobson: Now, a little bit about investors. How do you help issuers find investors? You’ve mentioned you have these 1,400 or 1,500 investors. Who are they? And is there a typical profile of an Aktionariat investor?
17:08 Nicola Plain: So currently the investors are mainly people like me. Before we invested in stock listed equity, and now we have the possibility to diversify into private equity. So most of the people are used to doing investments listed on exchanges and now they’re moving over and start investing in private equity. So usually people with a little bit of experience investment, a little bit of spare money, of course, and maybe not in their ‘20s, but rather in their 30s or 40s. So that’s the typical investor at Aktionariat currently.
17:50 Dominic Hobson: So if you’re co investing with some of the companies that are listing on Aktionariat, does that not present you with quite difficult choices? Sometimes. After all, you have almost a conflict of interest there, which you really want these people to be on your thing, but do you face difficult choices, such as `I want to invest in this one, but not that one’?
18:13 Nicola Plain: So, for me personally, seeing all these companies going live, I really have to behave and make sure that I’m not tempted too much to invest in most of these companies. And of course, I don’t invest in all of these. But yeah, it’s a difficult choice to make because, of course, I also need to make sure that my portfolio is diversified, and I do not have only private equity investments in my portfolio. So, yeah, that’s like the daily struggle to make sure to not spend all of your money on private equity.
18:48 Dominic Hobson: Are you to some extent running a capital introduction service as well? Like, are you running investor events to showcase these companies?
18:55 Nicola Plain: Yes, that is correct. So we have different channels, let’s put it that way. When we have new companies, we distribute that message through all of our channels. And as you said, also twice a year we are hosting an investor event where the companies can apply to pitch on stage and to have a booth. And these events are extremely valuable because they also offer an opportunity to get in touch directly in the physical world with potential investors. So, yeah, we always get extremely positive feedback from these events. And I think that’s a nice addition to the channels, to the other channels that we have.
19:33 Dominic Hobson: Can you explain to me what your relationship is with the Founder Studio? I wasn’t quite clear how that relationship worked.
19:40 Nicola Plain: Very good question. So Founder Studio is aiming to provide a TikTok for founders, basically. So since we operate on the DLT [Distributed Ledger Technology] Law and that only covers AGs, [Aktiengesellschaft], so stock operations, we cannot help all of the companies that are not established yet, that are not stock corporations. So there is a part of the market that we cannot cover today. And Founder Studio is aiming to help exactly these type of companies and founders – people that have an idea of another company yet, people that maybe founded a company, but it’s not a stock corporation yet. Because in Switzerland, in order to found a stock corporation, you need CHF 100,000. So the hurdle is quite high. And the idea is that this is a sales channel for us. So all of the clients that we cannot serve yet, they will go through Founder Studio, raise the initial capital in order to establish a stock operation and then they will be handed over to us. So we tokenise the shares, we hand them out to the investors, and then they can start with the continuous fund-raising on our platform. So for us, it’s really like a sales channel. And for Founder Studio, it’s a partner that they can hand their clients over to when they were successful in the initial fund-raising round.
21:04 Dominic Hobson: And for the issuers, Founder Studio is about finding people to help them raise that first CHF 100,000. It’s an investor introduction service for them, is it? Or do they get other services as well?
21:14 Nicola Plain: That is correct. So it’s the easy, straightforward way to present yourself and your idea and your maybe already established company in a very, let’s say, [genset] type of way, TikTok way with videos, selfie videos and such type of content.
21:35 Dominic Hobson: Now you have these relationships with Monerium and Bity as well. Are those in place to help investors get money onto your platform? I mean, crudely speaking, I’m an investor. I’ve got a lot of Swiss francs, but I actually want to get onto this blockchain network and buy these tokens in these companies. Do you help with that or do Monerium and Bity do that for you? Or is it more complex than that?
22:02 Nicola Plain: No, it’s actually exactly that. Actually, it’s more the off-ramping part than the on-ramping part. So you have to see that you can buy these tokenised shares without any crypto. So you can do a normal bank transfer, send your fiat money, and then you will receive the tokenised shares. But the other way around is a bit more complicated. So if you sell the shares, you will receive the crypto franc, which is a Swiss stablecoin. Now, what are you going to do with the crypto franc? Usually people that are not very crypto savvy, they don’t know what to do with the crypto franc. So that’s why we offer an easy way to get out and swap the crypto franc into a Swiss franc or whatever fiat currency you like. And that’s what we are using Bity for. And also Monerium. Bity was integrated more for on-ramping. So if you want to buy some cryptos, you can do that through Bity integration in our app. And Monerium was more for the off-ramping part.
23:02 Dominic Hobson: And talking of on- and off-ramps, is it part of your ambition to attract institutional investors in the medium or long term?
23:11 Nicola Plain: Yes, it actually is. So we are also taking measures to attract them. So the depth of the information that the companies provide is being increased. So we are introducing new standards of information that you have to provide. And then, in addition to that, we’re working with a provider for data rooms. So we want to integrate the data room service so you can give access to institutional investors to your data room and thereby be more attractive, because currently, what mostly holds institutional investors back from investing in these companies is the depth of information. It’s just not high enough.
23:48 Dominic Hobson: Am I right to think that in terms of attracting institutional investors, your relationship with SDX is going to be quite important to that. You’re talking about on- and off-ramps, for example. SDX is the digital arm of the Swiss stock exchange. Am I right to think that is a way of making institutional investors more comfortable with getting involved with your market? Or is it deeper and richer than that?
24:14 Nicola Plain: Yeah, definitely. I mean, on the one hand, of course, it’s a very good signal of trust that we can provide if we can say we work together with SDX. And since SDX is also working together with all of the major banks in Switzerland, they also have access to their clients, which can be institutional investors. So I would say the co-operation with SDX is beneficial on every end, if you want. So it gives us trust, but it also gives us access to an investor group that we didn’t have access to so far. So that’s extremely beneficial on every end, if you want.
24:54 Dominic Hobson: So I can see the advantages for you. What are the advantages for SDX in working with you?
25:00 Nicola Plain: So SDX has the possibility to offer access to these tokenised shares that we issued or our clients are issuing using our tools, so they can open the investment spectrum for their clients by offering shares that are tokenised from Fintechs like Aktionariat. And of course, maybe they see a risk that part of their business is going away from them and moving to Fintech. So they want to be integrated. And I think that makes a lot of sense. In the bird’s eye view, especially, it does not make sense to have, like, fragmented financial systems. So you have the traditional financial system, and then you have the new Fintechs with blockchain technology and so on, and it’s fragmented. I think we all win if we have an integrated system that makes sure that both worlds are integrated into each other. So the DeFi [Decentralised Finance] world, but also the traditional finance world. We all win if we have a strong alliance there and we make sure that can get easily in and out. DeFi or TradFi [Traditional Finance]. And at the end of the day, as I said in the beginning, blockchain technology is only a means to the end. So if blockchain technology works well in one sector, let’s say private markets, [that] doesn’t mean that it also has to work well in other sectors. At the end of the day, we just want to offer investors the whole spectrum of investment opportunities. And if that’s on the blockchain or not, that’s for the investors and the issuers. That’s not crucial. And that’s why I think an integrated financial system with partners like SDX makes a lot of sense.
26:53 Dominic Hobson: The Swiss Stock Exchange obviously has a central securities depository (CSD); it has a digital one as well. There’s no suggestion at this point that the issuers might issue their shares into either the SDX CSD or the conventional CSD owned by the Swiss Stock Exchange. I ask you that question because I do see central securities depositories around the world – United States is an example, so is South Africa – where the CSDs have seen a business opportunity for themselves and getting involved with the issuers active in capital raising for private companies. I was about to say tokenisation. It’s not always tokenisation. Sometimes it’s something more conventional. Is that part of your discussion with the Swiss stock exchange, or is it too premature to be talking about that?
27:47 Nicola Plain: It is part of the discussion, but I don’t think that SDX aims for becoming an issuer [agent] of tokenised shares. They’re more like the gateway to the players of the traditional finance for Fintechs like us. Of course, they have a CSD licence and they will also make use of it. But, yeah, at that point, I can’t say more than that. But it’s part of the discussions. Yes. To make it short.
28:22 Dominic Hobson: I don’t know whether custody is part of that discussion as well, but perhaps you could explain a little bit about what the custody arrangements are that you offer investors they have to bring their own digital wallet. Do you provide a wallet? Do you have third-party providers who could work with them? Where are people going to custody their tokens?
28:39 Nicola Plain: Yeah. So today you can either bring your own wallet – so our tools are compatible with all the wallets that support the WalletConnect protocol. So basically every Ethereum wallet can be used. We also use our own wallets, the Aktionariat app. So it’s an application on Android and iOs. And furthermore, we also offer a hardware solution for the wallet. So you have something more tangible. We are starting a pilot project now, actually. We will announce it beginning of the next year with the first Swiss bank that offers to take your ERC 20 security tokens into custody. So that means instead of connecting your wallet in the buying process, you just choose to give these shares into custody at this bank. And then in the background, everything, all the information needed will be handed over to that bank and you will start the on-boarding process if you’re not a client yet. So pretty soon we will offer a first additional solution where you don’t have to take your shares into self-custody, but you can hand over the responsibility to a bank.
29:50 Dominic Hobson: How do the asset servicing and shareholder rights components of issuing equity work in your system? Obviously, investors want to collect their entitlements. They want to vote their stock, they want to make sure that their ownership in the company isn’t being diluted by issues to third parties. How does all that work from a shareholder point of view – an investor point of view?
30:17 Nicola Plain: It’s not a lot different from the traditional world. So since the DLT law is basically one additional article in the Code of Obligations, the Swiss Code of Obligations, which introduced a new form of shares, everything else remains the same. So all the existing rules for stock operations remain the same. There is just a new type of share that has been introduced, which is the ledger-based security. So everything else remains the same. That’s one of the beauties of the Swiss DLT – it’s super lightweight. It’s basically just an additional form of shares and that’s it. Everything else remains the same. So the old rules still apply, which works out very well, I have to say. So, yeah, nothing changes. You just have your shares on a blockchain and they’re just more easily transferable.
31:09 Dominic Hobson: Okay, one last question on investors. I was very interested to see that there’s no Know Your Client (KYC), Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT), sanction screening checks – obligations laid on issuers to check that investors aren’t money launderers or financial criminals of some other kind. But are you finding that most issuers run checks on investors anyway? And if they do, are you referring them to a third-party to help with that work? I think you mentioned earlier on that you do.
31:40 Nicola Plain: Yes. So we offer a KYC feature that you can have as an issuer. So far, I think 99 per cent of our clients are opting out and not using it because it poses an additional hurdle for an investor to buy your shares because they have to go through an identification process. But we offer such a feature also through a third-party, but it’s fully integrated in our tools, but no one wants to use it. So the law says in Switzerland … So it’s the FINMA, [Swiss Financial Market Supervisory Authority], the financial regulator, that has these AML rules and since the financial regulator is not responsible for these type of markets, also the AML rules do not apply. Why is the financial regulator not responsible for these type of markets? It’s because it’s the issuer itself, creating a market for its own shares without any financial intermediary involved. So that’s the thing, since there is no one commercially trading these shares, FINMA is not responsible, and that’s also why the AML rules do not apply. When it comes to sanction list checks, of course you’re still obliged to do that. Let’s say for example, the sanctions against Russia, you have to comply with that, of course. And then there is always the question, if you want to do this on the smart contract level, so block someone with a certain wallet address from buying, or if you want to do that on the shareholder registry level, because if you write that down in your articles of association, you always have the possibility to deny someone from entering in your shareholder registry, even though the physical, let’s say it’s a paper or it’s a token, it doesn’t matter, but the token or the share has been transferred, you can still deny a shareholder to become part of a shareholder registry and benefit from the investor rights – from the shareholder rights. So there are two types. We offer both solutions. Usually, the KYC is not used by our clients, but then of course the sanction list check on a shareholder registry level is performed.
34:00 Dominic Hobson: Could we talk a bit now about the market structure? You mentioned a minute ago that there’s no intermediaries involved in trading these shares. And if I’ve understood your model correctly, the issuers are providing liquidity themselves. There’s no secondary market. They’re doing it, and they’re doing it on a principal-based model, a bit like the classic open-ended mutual fund structure, in which the companies will buy back the shares of any investors that wish to sell. What are the pros and cons? And I can see how you start there. What are the pros and cons of that model?
34:35 Nicola Plain: Very good question. So the pro is you don’t have to have a lot of trades in order to provide some liquidity for selling the shares. Usually if you work on an order book-based approach, you have to have enough trades because otherwise you don’t have the matching and there are large spreads between bid and ask. And that problem you don’t have if the company provides a certain amount of liquidity, and you can make sure that a certain amount of trading can take place. So, on the downside, of course, the company always has to reserve some liquidity that they can use otherwise or could use otherwise that they have to reserve. And of course, reserving liquidity also comes with a cost. And as the liquidity is gone, so if you have a lot of selling pressure, at some point the liquidity will be gone and then you don’t have an automated way of selling your shares anymore. So what we do here is basically a combination of primary and secondary market, with the issuer providing the liquidity and the smart contract that is taking the role of an automated market maker. Having said that, I don’t know if that would be your next question, but we are also exploring additional options.
35:55 Dominic Hobson: Well, I don’t know whether that’s my next question either, but I’m interested in this Aktionariat Brokerbot, you have. What part does that play in the process you’ve begun to describe there?
36:06 Nicola Plain: Yeah, the Brokerbot is basically the elementary tool that allows the trading here. So the Brokerbot is a user interface of a smart contract. So in the background there is a market smart contract. And the smart contract, to make it simple, just makes sure that, if one party receives the shares, the other party also receives the money, right? So it makes sure that the trade takes place and both parties get what they need to get. And then the Brokerbot basically is always involved. If you want to buy or sell shares, you always go through this smart contract, or the interface of smart contract, what we call the Brokerbot. So no matter if you’re buying or selling, you will always go through this interface with this market smart contract in the background.
36:58 Dominic Hobson: Is there a vision here of eventually this will evolve into a full familiar secondary market trading mechanism, complete with the sort of intermediaries we see in classic stock markets like market makers, like lead brokers, and indeed perhaps even like investment banks coming along to structure issues. Is that where you see yourself in terms of the market structure evolving into something which looks quite like the market we’ve come to know and love, but is based upon this new, more efficient technological model? Or am I just [speculating]?.
37:35 Nicola Plain: Yeah, we are observing very well what is going on, but it really depends on the development of the market. Usually, these markets never offered enough liquidity for an order book-based approach to make sense. Who knows? Maybe in future that will be the case and you will have much more liquidity on these tokens, and then an order book-based approach would make sense. But we are quite sceptical there. Nevertheless, we are observing how it is developing and we are quite flexible in playing around with different ideas. What we want to introduce next is an opportunity to still, let’s say, place limit orders, in case the company doesn’t provide liquidity anymore to buy back the shares. So you could just say, okay, I want to sell them for a price that is lower than the official Brokerbot price and then if there is a counterparty for this trade, this will be executed. So that’s something that we are working on in addition to the market that we already have, or to this market functionality that we already have, that also offers an opportunity to do trades strictly peer-to-peer without the company being the middleman.
38:53 Dominic Hobson: I imagine you get asked this question quite a lot, but how does [what Aktionariat does] differ from a small cap stock exchange model of the past?
39:06 Nicola Plain: I mean, it definitely has some similarities, it’s just more automated. It’s usually cheaper because you don’t have a party involved in the middle, because the smart contract is doing the matching and the order execution. You don’t have post-settlement activities that you need to take. So everything is settled instantly, which makes it much more efficient and cheaper as well. But of course it has some similarities to what is going on today in these markets.
39:40 Dominic Hobson: Yes, now you’ve been pretty clear that the technology, in some ways, whilst obviously very important to what you’re doing, is unimportant from the point of view of the issuers and investors, provided they’re both getting value. You chose to build action as a public blockchain rather than a private one, and you chose to build it on Ethereum, whereas you could have chosen lots of other blockchain protocols. What governs your choices and what are the pros and cons, the advantages and the disadvantages, of the choices you’ve made?
40:11 Nicola Plain: So, first of all, choosing an open, permissionless blockchain is within the philosophy of Aktionariat. So we really believe in the potential of DeFi and the potential that open and permissionless protocols offer. So that’s why we have to go with open and permissionless blockchain and not a private one. And then of course there are a lot of blockchains out there, open and permissionless ones, that offer more smart contract capabilities. But if you think of it, if I issue ERC 20 token on the Ethereum blockchain, there are thousands of depths of decentralised apps that I can use the ERC 20 token on. And if you are on a blockchain that has less action, let’s put it that way, less action on the blockchain, then the interoperability is also more limited. So that’s why went with Ethereum. So first point is security. We know it has been around since 2015 working, extremely solidly. So that’s one thing, it’s secure and it has a proven track record. And then the second criterion was that it’s just you have the most users on the Ethereum blockchain and we want to be where the action is. So, one example would be if you have your year ERC 20 tokens, you could also yourself create a liquidity pool on Uniswap with these tokens, offer a pair for trading and then earn fees from that. So the interoperability with other Dapps and the huge ecosystem, millions of users that Ethereum offers, was just too attractive to really consider going with other blockchains. This can change in the future, of course, but for now, for these reasons, the Ethereum blockchain was the only meaningful choice for us.
42:10 Dominic Hobson: Finally, I’d like to talk a little bit about growing the business. Obviously, at the moment you’re in Switzerland, you’ve got this very large private company sector you can grow into. When we have this conversation this time next year, on your own plans, you’ll have more than 300 issuers on the platform. Still leaves plenty of growth in Switzerland alone. Are you thinking now about how you can internationalise what you’re doing, or do you think this model has to remain? By this I don’t mean Swiss. Does this model have to be local, national? In effect, you might end up franchising this in lots of different markets, because every economy is going to have a different small company set-up. It’s going to be peculiar to that market. Or can you just take this model and park it in lots of countries and grow yourself a huge multinational business?
43:01 Nicola Plain: Of course, there are some limitations, so it is our aim to grow it internationally. But, as you said, you always have to respect, of course, local law and there are a lot of points that you need to take care of or need to make sure that it works legally. But we are right now in the process of looking at different markets and the regulation in these markets and deciding which one we want to go next. The UK is one of the candidates. We would really like to offer our tools in this market, but we are also in contact with some lawyers from the US and other countries. You would/might think that the most important part in the legal framework would be the DLT law. And of course it’s extremely beneficial if there is a DLT law that allows to mint shares on a blockchain, because the investors would get a token, that is the share of the company. But there are ways around it. So if there is no DLT Law in a country, then you could also work with something like a phantom share – so, let’s say, a contractual right to receive a share. And yeah, this is also an option that we are evaluating.
44:21 Dominic Hobson: You mentioned the United Kingdom, you mentioned the United States. You didn’t mention the European Union. Do you have access to the EU market?
44:30 Nicola Plain: One thing that is kind of disturbing in the EU market is the prospectus obligations. So it’s different in every country. But, for example, in Germany, which would have been also an interesting market for us, you have to come up with a prospectus if you raise more than €1 million a year. Compared to the CHF 8 or £8 million in UK and Switzerland, that’s quite a low threshold. And it makes things much more expensive if you have to come up with a prospectus. That costs quite a bit and makes it much less attractive for our clients. So that’s why we are not looking so much into the European Union. And also the DLT law that they’re coming up with, from what I can see today, it doesn’t offer a lot of flexibility like we have it in Switzerland. And it could be that it’s more limiting than really enabling at the end of the day. So that’s why we are looking in different markets than the European Union. Yeah, sorry to say.
45:38 Dominic Hobson: Okay. You’ve been pretty clear throughout this conversation that this is about lowering the cost of raising equity capital for companies of this size. And that’s an obvious advantage of what you’re doing. Do you think that’s the main obstacle that needs to be overcome? I’m asking you a global question here, but what’s holding back the growth of the tokenised equity markets around the world? Because the advantages seem pretty clear and they’ve been rehearsed very well and ought to be very well understood. What is holding back the growth of tokenised share markets around the world?
46:18 Nicola Plain: I think there are two factors. One is maybe the more obvious one. It’s the law. You have to have a law that allows to mint shares on a blockchain. Because if you have that, then you have a really solid legal foundation and the investor knows this token is the share of this company. So that’s the obvious reason. That’s the obvious thing that is holding us back today. The other reason, which is also extremely important to understand, is people still think, if you say “blockchain,” they think of cryptocurrencies. And with the latest news of the last few weeks and months, let’s say the trust in the blockchain or cryptocurrency sector didn’t grow. So that’s also something. It needs to be really in the head of the people that they understand that blockchain is the technology that provides different use-cases and it doesn’t have to do anything with cryptocurrency. For example, what we are doing, you can use cryptocurrency to buy them, but you don’t have to deal with cryptocurrency at all if you don’t want to. And I think that’s the second big factor. People have to understand that blockchain is a technology. There are different use-cases. Not everything is as volatile, as sketchy, as cryptocurrencies. But you can have use-cases where you issue a token that represents a fundamental value. And if people start to understand, then that’s then I think the adoption of blockchain technology and such use-cases as we offer will increase dramatically. We still have clients that say, hey, we have one or two investors that wanted to invest in our company, but when they learned that it’s on the blockchain technology, they got scared and they thought, oh, okay, it’s not legally sound, it’s not safe, maybe it’s a scam. So there’s still some work to do to change this perception in the heads of the people to understand that blockchain is not blockchain or cryptocurrencies doesn’t mean necessarily that all the blockchain use-cases come with the same issues, let’s put it that way, than the cryptocurrencies.
48:43 Dominic Hobson: Lots of work still to do, both in the minds and actions of lawmakers, but in the minds and actions of potential issuers and investors as well. One final question for you. How will you know when you’ve succeeded? What will success look like for you, however long it takes?
49:02 Nicola Plain: Very good question. So I would say it takes another three to five years at least. And our ultimate goal, to be honest, would be an exit. So to sell the company to a bank or to a competitor or even perform an IPO, but maybe rather sell the company. So that would be success. And then, of course, we could talk about how much money should it be worth at the end of the day. But I think that’s a different discussion. But if we reach a size that we could be bought by a larger bank, I would say that would have been a successful journey.
49:45 Dominic Hobson: Nicola Plain, thank you very much for taking the time.
