What do stock exchanges need to survive the tokenisation of everything?
- Future of Finance
- Aug 7, 2024
- 49 min read
Updated: Jul 23
The major traditional exchanges have adapted well to the migration of transactional activity to other trading platforms, notably by developing their data and post-trade revenues, so it is surprising that they remain indifferent to tokenisation. With some notable exceptions, traditional stock exchanges have shown little interest in the revolutionary potential of issuing, trading and servicing tokens. Explanations for this indifference vary. Some say the existing markets (especially equity trading) are already so efficient that tokenisation is unnecessary. The fact that exchanges which have invested in tokenisation have yet to earn a return, and are now making economies, is not encouraging. If tokenisation ever does take off, add some larger exchanges, they could simply acquire the successful platforms. The long lists of intermediaries that stand between issuers and investors – global brokers, local brokers, clearing houses, securities depositories, payments banks, custodian banks and so on – also have limited incentives to encourage the emergence of peer-to-peer exchanges. So even the leading traditional stock exchange groups are focusing on a narrow range of token opportunities, such as cryptocurrencies and privately managed assets, and leaving potential lavish operational cost savings and new product earnings untouched. Dominic Hobson, co-founder of Future of Finance, moderated a discussion of about traditional stock exchanges and tokenisation with Marco Kessler, business head of digital securities at six Digital Exchange SDX, Hirander Misra, chairman and CEO of GMEX Group, Ricardo Correia, a partner in the financial services practice at Bain and Company, Benedikt Schuppli, co-founder and CBDO at Obligate and Miryusup Abdullaev, managing director of the Deutsche Börse Digital Exchange (DBDX).
Key Insights
A Future of Finance study of 87 traditional stock exchanges found a majority (59.77 per cent) are doing nothing about tokenisation and that while a substantial minority are investing in cryptocurrencies (20.69 per cent) only tiny minorities are investing in digital securities(10.35 per cent) or infrastructure (8.05 per cent).
Yet a poll of webinar registrants found only a minority (21.52 per cent) believe that traditional stock and derivatives exchanges can survive as they are and that they must either become hybrids that handle tokens as well as securities (43.04 per cent) or become pure digital asset exchanges (25.32 per cent).
The poll of registrants also found that more than 90 per cent believe stock exchanges exist primarily to fulfil their core functions of capital-raising (29.33 per cent), secondary market trading (40.67 per cent) and price formation (21.33 per cent) rather than selling data (6.0 per cent) or technology (2.67 per cent).
The same poll of webinar registrants found that nearly 80 per cent think stock exchanges should stick to traditional services (listing, trading and market-making in securities and futures and options) rather than expand into banking services (custody, payments, credit, financing).
It is reasonable for traditional stock exchanges to proceed on the basis that anything that has a value will one day be tokenised, and that their principal competitive advantages in managing the transition successfully lie in their status as trustworthy, neutral operators of market infrastructure.
Traditional exchanges are proceeding slowly because they do not wish to forfeit that trust, by failing to balance the opportunity of using a novel technology to develop new products and services against the risk of counterparty failure, loss of customer assets, fraud and operational shortcomings.
Cryptocurrency is the earliest profitable use-case, followed by the operational efficiencies generated by the elimination of reconciliation of databases between intermediaries, and thirdly by the application of tokenisation to asset classes with less efficient issuance and trading processes such as fixed income and ETFs.
Another opportunity for exchanges, already being realised by specialist token exchanges, is peer-to-peer capital-raising for SMEs, especially in the debt markets, where bank finance is expensive but the capital and transaction costs of issuing small quantities of bonds in the institutional capital markets are also prohibitive.
Other token opportunities for traditional stock exchanges include privately managed assets, invoice factoring, green bonds, carbon credits and commodity trading finance, where infrastructure is limited, and adapting existing services to the token markets (such as clearing, now being pioneered by ClearToken).
One reason for the lack of investment in tokenisation by traditional exchanges is a lack of clarity over which services will prove viable when the most innovative traditional exchanges are focused primarily on post-trade infrastructure while start-up exchanges are investing in lending, staking, credit, financing and custody.
Regulatory uncertainty is the biggest inhibitor of exchanges. The Future of Finance study of 87 stock exchanges found most jurisdictions (65.06 per cent) have made no progress in adapting law and regulations to tokenisation, and only minorities are making (15.66 per cent) or have made (189.28 per cent) the necessary changes.
The operational efficiency gains from the availability of the cash leg of token transactions on-chain, initially via Stablecoins and tokenised deposits but eventually via CBDCs, are obvious but progress on digital money is out of joint with progress on digital assets and there is nothing exchange can do about it.
Banks and start-ups as well as traditional exchanges are investing in tokenisation infrastructure, engaging them in tokenisation but risking fragmentation into “walled gardens” lack inter-operability and liquidity, though this reflects the nascency of the technology as well as strategies to dominate token markets.
Duplication of infrastructural investment makes sense for traditional exchanges hedging against a tokenised future that affords them significant operational savings, or threatens to undermine their existing business, but it risks an overall market failure if the projects do not yield a return in the short to medium term.
Solutions to duplicate investments that fail to scale include increased interoperability between siloed activities and construction of a common platform for issuing, trading and servicing tokens, akin to Ethereum, though issues of privacy, security, speed and transaction costs (“gas fees”) need to be resolved.
It makes no sense for exchanges to replicate conventional markets in tokenised form, complete with multiple layers of intermediation, rather than capture the efficiency savings and the new product and revenue streams from transitioning to digitally native assets issued according to a single operating model.
Yet exchanges are unlikely to support a common platform because of the proliferation of contenders (such as the Regulated Liability Network in London and the Global Layer One in Singapore) and the more immediate opportunities to build profitable token infrastructures for domestic clients in domestic markets.
In practice, traditional exchanges are most likely to follow the example of SIX and SDX and invest in inter-operability between digital asset issuance, trading and servicing capabilities and their traditional equivalents, to maximise their exposure to innovation while minimising the risk of disintermediation.
One view is that stock exchanges can assume the roles previously fulfilled by the disintermediated, evolving like cryptocurrency exchanges into inter-dealer broker look-alikes, that facilitate transactions, especially in less liquid asset classes, between banks, broker-dealers and other financial institutions.
Generational pressure from Millennials and Gen Z for fast, cheap and purely digital access to digital asset classes, driven by the experience of cryptocurrency investing, is the greatest threat to traditional ways of doing business, and it is not compatible with the survival of all the current intermediaries.
The participation of incumbent intermediaries in various tokenisation Proofs of Concept and Pilot Tests has reached a dead-end, because it is impossible for them to encompass their own disintermediation, and so the traditional market participants are unable to contribute to the growth of a digital asset eco-system.
The senior management of stock exchanges have a greater appetite for switching from the highly intermediated stock markets of today to a peer-to-peer model between issuers and investors than they admit publicly, but nonetheless they may settle for tokenising niche markets and providing interoperability services.
Transcript
00.18 Dominic Hobson: Hello everybody, I’m Dominic Hobson, co-founder of Future of Finance. Welcome to our webinar, `What do stock exchanges need to survive tokenisation of everything?’ Is tokenisation something traditional exchanges can safely ignore, or is it an existential threat to their existing businesses that they must confront and resolve or fail to confront and prepare to die? Or is the choice not binary at all, but a familiar threat-cum-opportunity that has the usual pluses and minuses? To help us work out the answer, we’re joined by five experts, each of which has a unique perspective that will enable us to approach this topic from multiple points of view. Marco Kessler is Business Head of Digital Securities at SIX Digital Exchange (SDX), which he joined four years ago after a decade and a half in management and technology consulting at Accenture, to accelerate the digital transformation of the capital markets. Hirander Misra is Chairman and CEO of GMEX Group which supplies technology to build and operate regulated electronic exchanges and post-trade infrastructures to support both traditional and digital assets, and of ZERO13, a carbon credits Fintech. Importantly for our discussion today, Hirander was in a previous life COO and Co-Founder of Chi-X Europe Limited, the MTF which transformed trading costs in the European equity markets. Ricardo Correia is a Partner in the financial services practice at Bain & Company, which he joined in February this year after nearly eight years with R3, where he was latterly Global Head of CBDC and Digital Currencies. Miryusup Abdullaev is the Managing Director of the Deutsche Börse Digital Exchange (DBDX), a regulated MTF for institutions investing in cryptocurrencies. Benedikt Schuppli is Co-founder and Chief Business Development Officer at Obligate, the Zurich-based regulated platform for the issuance on to blockchain of corporate bonds and commercial paper. In addition to our panellists, we also of course have you, our audience. As always with a Future of Finance webinar, we encourage everybody watching or listening to submit questions and comments throughout this webinar by using the Q&A functionality at the bottom of the Zoom screen. Again as always, we will not be saving questions and comments up to the end but answer them as we go along. So the audience will be an integral part of this discussion right from the outset. And indeed, in a sense the audience has already been part of the discussion.
We’re now going to have a short slide show summarising the answers you gave to our questions. We gave everyone who registered for the webinar the opportunity to tell us what they think in response to a handful of multiple-choice questions. And the answers provide, I think, a very useful starting point for our discussion. In this first slide, second slide really, we asked what a stock exchange is for and we got a pretty clear answer. 41 per cent named secondary market trading, 29 per cent named primary market capital raising and 21 per cent named price formation.
Rather than selling data – just 6 per cent want that – or technology, which just 3 per cent named. In other words, products and services which many traditional stock exchanges now prize above their original duties of capital raising and secondary market trading- namely, data sales and technology sales – attracted the support of tiny minorities only.
This finding is amplified by the second slide. What services should an exchange provide? Here we can see the expansion by the centralised cryptocurrency exchanges into banking-style services- custody, credit, cash lending, payments, all the items highlighted here in red – are not considered that advisable by our audience. Even that idea filched from the big, centralised technology platforms, which is now spreading to every corner of our economic life, namely paying by subscription, is not that popular with our audience. Just 5.62 per cent thought that was a good idea. Our audience very clearly wants stock exchanges to stick to traditional services – listing, trading, price creation through market making and price dissemination, and the associated futures and options – and not to stray into the sort of areas that brought down cryptocurrency exchanges such as FTX.
Lastly, our fourth slide, we asked our registrants what type of exchange is best placed to survive the tokenisation of securities and funds markets. The answer we got is much clearer than this slide suggests. True, a substantial minority, almost 18 per cent, believe that traditional exchanges can survive exactly as they are. But there’s more support for a totally tokenised future. 22 per cent think the exchanges best adapted to survive will be pure digital asset exchanges. However, I think the telling point is that 43 per cent of our registrants think some form of hybrid exchange – in other words, one that hosts both digital assets and traditional securities and funds – is best placed to survive. Now, whether that applies to a transitional period only or for all time is something I expect we’ll be discussing today.
To get that discussion going, on this fifth slide, I’d like to share very quickly the findings of some research we conducted into the token activities of 87 traditional stock exchanges around the world. And as you can see, nearly two out of three of them, 60 per cent, are doing absolutely nothing at all. And the majority of that balance of 40 per cent, namely 21 per cent of exchanges, are providing cryptocurrency products and services, by which I mean Bitcoin spot or futures trading, cryptocurrency indices, ETFs, that sort of thing, only. Not many are pursuing digital bonds or digital equities, or more surprisingly, even building the infrastructure to support them.
Now, in our final slide here, there is one reason traditional stock exchanges might not be doing anything, or anything much, and that’s that the local legal and regulatory environment is not necessarily conducive to investing in tokens and token platforms. As you can see, only one in five stock exchanges are operating in jurisdictions where laws and regulations are sufficiently advanced for exchanges to invest in tokenisation with confidence.
The actual number of jurisdictions where regulations are advanced is actually rather narrower than that suggests, since a significant number of the respondents there are actually based in the same jurisdiction. And again, the role of legal and regulatory uncertainty in deterring traditional stock exchanges is, I expect, something we will be discussing today.
07:10 Dominic Hobson: But I’d like to kick our discussion off by starting with that astonishing finding from our survey of 87 traditional stock exchanges – namely, that more than half of them, that’s 60 per cent, are doing absolutely nothing about tokenisation, and half the rest, or 21 per cent, are focused on cryptocurrencies only – that is, spot, futures and ETFs related to cryptocurrencies. We’ve only got tiny minorities even building the infrastructure, the trading platforms and the operational support for digitised equities and bonds. And virtually nobody said equities. 1 per cent is actually looking at equities. In other words, most of the innovation in this area is actually taking place outside the traditional stock exchanges. My question is, why is that? Are stock exchanges just confident that existing markets, especially equity trading, are so efficient that tokenisation will never have a chance of taking off? Is it that they’ve noticed some of the traditional exchanges that have committed to tokenisation haven’t received as much support from the buy-and sell-sides in their markets as you might have expected? Are they working on the assumption that, if a digital asset exchange does actually succeed, they can simply purchase it? Are they disinterested or uninterested in those asset classes where tokenisation looks like taking off? I’m thinking here of privately managed assets, real estate, bonds, those sorts of things, because those haven’t been terribly profitable in the past for exchanges, and maybe they feel they can ignore them all over again. Maybe they don’t feel they’re getting much support from the banks. The banks are not bringing them the digital asset deals they want. And maybe they’re not getting much indication from the buy-side, the institutional investors either, that they actually want to move beyond cryptocurrency products and services. Marco, perhaps I could throw this question at you first, because SDX has obviously been dealing with issues like this for a while. And my question really is, are traditional stock exchanges right to adopt what appears to be quite a substantial wait-and-see attitude? And I’m sure, Miryusup, you will have some thoughts on this as well, because Deutsche Börse is obviously not doing nothing either. And what you’re doing on the cryptocurrency side is only part of what the exchange is doing. So I’m sure you’ll want to say something. And Hirander too. I’d love to hear your thoughts. Perhaps you must have sense of déjà vu – back to the Chi-X days. So, Marco, you go first, tell us, is a wait-and-see attitude sensible?
09:32 Marco Kessler: Thank you, Dominic. And welcome all. Also from my side, it’s an interesting question. And of course at SIX Digital Exchange (SDX), based out of Switzerland, we have a very peculiar view on this aspect, I would say, because the SIX Group, where we are based, has taken a decision back in 2018 to exactly not wait and see, and decided already back then, almost six years ago now, to establish what became to be the SIX Digital Exchange (SDX), to exactly pursue this journey and this movement, and to be front-running this initiative now. But specifically, to your question, I would say an important aspect is to talk about, and probably we will cover more of this later, what do we mean by exchange? Because indeed, nowadays we could see very well how a lot of new entities, either traditional or new, emerged, calling themselves exchanges, but offering a very different variety of services, some even regulated, some not even licensed or regulated. And I mean, we are in part an example of that as SDX, because, as you may know, we offer both a stock exchange, but also security settlement systems, or a CSD [Central Securities Depository], for all the security services and post-trade. Indeed, I would say my point of view is that, as of today, most of the innovation, technology-enabled innovation, is maybe rather in that area other than in the area of the traditional offerings of an exchange, such as price formation and so on.So maybe to open a conversation thinking in terms of what defines an exchange and what would they be waiting and seeing for is an interesting consideration.
11:35 Miryusup Abdullaev: Thank you very much, Dominic. Also, very honoured to be in this esteemed group of panellists. Happy to be here. Thank you very much for the invitation. So, to pick up on this, on Marco’s points, on how to define an exchange, obviously, most of the bigger exchanges have grown into more than an exchange in the narrow term. It’s more than trading now. It’s everything that comes before trading, everything that comes after trading. And probably the post-trading part is more relevant indeed vis a vis the topic of tokenisation and blockchain. If I may take one step back a little bit, sort of also sort of address the title of this webinar, right? So how do stock exchanges survive the tokenisation of everything? So the tokenisation of everything, how do we actually define this? So it’s really obviously hard to look too far into the future with technological advancements, but the furthest I can see is two-fold. Number one, from the view of the investors, what we envision is that everything that has a value will be investable, supported by the technology that we call blockchain. And now the question is, `How can stock exchanges survive?’ I will probably reformulate it into, `How can market infrastructure providers support this process – this state of things where everything that has a value is investable?’ I think at the highest level, the market infrastructure providers need to be building around their nature of being neutral operators of marketplace, right? This is what the market participants can trust us with. And that’s probably the biggest asset that the infrastructure providers have at this point. So now how do we get to that vision? Obviously again here, two buckets that most organisations speak about. The most viable commercially use-case at this point happens to be crypto, right? Bitcoin was the best performing class asset class of last decade, last year, this year. Its volatility, Sharpe ratio, Sortino ratio type of features are undebatable so far. So, it’s definitely something that we need to deliver to serve the client demand. This is what Deutsche Börse has been doing for the last four to five years, starting from structured products, synthetic exposure, going into native crypto this year. Now, the second part is obviously also interesting. That’s technological change, enabled by the technology we call blockchain. And here, essentially, we see two promises that this technology can deliver. The first one is operational efficiency. So, think about how transactions are settled today and how they can be done on this technology. But also think about really about all of those electronic databases that every function in the market in one transaction serves, builds, maintains and fixes, right? Think about a broker has its own database, an exchange for [the] trading layer has its own database. And also the post-trading central security depository has its own database. Now think about combining this into one source of truth, right? This is what blockchain obviously can deliver. And these are the two parts that make up the operational efficiency promise. The second part, which fascinates me more, to be honest … Now think about, you have all those things at one place now, and you can suddenly connect these different data points and processes basically in an infinite number of combinations and come up with new products and new business models. So, this is basically the second promise that we see in this technology. Then the question is, “I know now what it could do, what it best can do. How do I apply it? To which markets do I apply it?” There are obviously more efficient markets. Dominic, you touched upon equity trading, which is probably rather the case, but there are also less efficient markets. Fixed income, ETFs, especially for trading and issuance processes. So, these probably would be good use-cases to tackle, especially, for example, in Deutsche Börse, speaking from the spot market perspective, we’re not too strong in the fixed income business, so that might offer a good chance to basically enter the business via a technologically superior platform. Now, going back directly to your question, why do not we have too much active products in this field – tokenisation? I would boil it down to two points. Number one, again, trust is our biggest asset. And on the other side, you do have this new technology, things moving fast in crypto and blockchain. So how do I balance delivering, keeping to deliver on this trust of market participants, that things simply run [and], on the other side, being quick with new technologies and new products. And the second part is that it is taking more time than probably everyone would hope for. But it really has to do with the fact that the risks are too high in capital markets versus maybe other industries. But it’s also about industry collaboration that we definitely need here just to maybe share the investment costs needed to get to that vision.
16:38 Dominic Hobson: Thank you Miryusup. Hirander, I’m interested in your perspective on this. As I said, you probably have a sense of déjà vu here, but I wonder if perhaps some of the traditional exchanges are having a sense of déjà vu here as well. And they’re thinking, well, our core business of IPOs is in secular decline. It’s all been privatised. Secondary market trading left for ATSs [Alternative Trading Systems] and MTFs [Multilateral Trading Facilities] many years ago anyway. So, our future lies with selling data mainly, perhaps a bit of selling technology, and who cares anyway? We seem to be creating lots of value for our shareholders, if you look at the share prices, without taking any notice of tokenisation. So, what does it look like to you? Having demolished the complacency of established institutions all those years ago once before, is it going to happen again?
17:28 Hirander Misra: Yes, it’s really interesting, because even with the current hat on, we engage with markets of different sizes, especially in the SME [Small and Medium Sized Enterprise] exchange space – everything from crypto exchanges to digital asset exchanges, to traditional markets such as Vietnam. The statistics that you put up there actually aren’t surprising. More recently, earlier this year, I was at an Association of Futures Markets conference in Bangkok. And on the panel that I had, along the lines of a similar topic, which was mainly SME exchanges, I said, `Well, actually many of you think the world isn’t changing around you, but if you’re not careful, it will change quicker than you think without you being ready. And you’re just reliant on listing revenues primarily in those cases, because there isn’t a lot of secondary market liquidity. And if you don’t change, you’re going to cease to exist and you won’t be relevant any longer.” There were gasps in the room, but actually it created a provocative discussion because obviously we have our colleagues from SIX and Deutsche Börse on this webinar, and of course, some of the larger exchanges are doing something about it. It’s a process, not an event, because, as they know, many of their typical members on the institutional side are still building out digital markets infrastructure. And it’s in nascent form, or typically, everyone speaks about blockchain as one ubiquitous technology, but actually it’s multiple blockchains, both public and private. And there’s a lack of interoperability between those different walled gardens that are being created. I mean, some of it intentional, because everyone thinks that they’ll become the dominant force in this space, but some of it also because it’s nascent, and some of those standards are evolving. So, for example, on the delivery versus payment (DvP) side, I’ve been in workshops like the Regulated Liability Network (RLN), with eight banks looking at a deposit token in terms of Sterling, and also things like the BIS Innovation summit in Basel recently. And it’s a matter of when rather than if. I mean, whether it’s CBDCs [Central Bank Digital Currencies], whether it’s deposit tokens, forms of digital currency – and the JPMorgan Coin is already out there – these are going to come for pre-funded markets [and] reduce that kind of multi-day delivery versus payment leg. Yet even though there’s been announcements on the bank side, many of which are members of the large exchanges and some of the medium-sized exchanges, most of those banks, despite the announcements that you see, are still building infrastructure and are still in nascent form where they’re doing pilots that are moving into production with bond issuances. But a lot of these assets are already under custody. So, I think one of the challenges when we speak to exchange CEOs is a lot of them are saying, “Well, actually we see all this around us, but we can’t see the business case and where do we start?” I know our colleagues on the call mentioned certain markets. Certainly, you’ve got activity outside the mainstay exchange space with entities like GlobaCap, looking at private markets and pre-IPO [Initial Public Offering], which provides that feeder into main markets and listings. And certainly there’s opportunity there. We’re seeing some opportunity around invoice factoring in digital form, where the exchanges don’t take the invoicing risk, but they match both sides in a typical exchange function in the SME space. And the hottest area at the moment that we’re seeing, and it’s a classic use case for blockchain, is on the carbon credit sustainability side. Again, nascent, because regulations are evolving. It’s not very electronic. I was shocked, coming from the securities and equities side, into how nascent these markets are, where certain registries don’t even have APIs [Application Programme Interfaces].But certainly we’re seeing opportunity where some of these exchanges, like JSE [Johannesburg Stock Exchange]in South Africa, in partnership with existing carbon players, have launched offerings recently and others are looking at it, even though carbon credits and sustainability, sustainable assets, aside from green bonds and things like that, are a step removed from where these securities markets typically operate. So, we’re seeing a big opportunity there. And also, actually we’re seeing a big opportunity where there’s a big cost to implement this infrastructure, as my colleagues intimated. And if everyone does it, there’s no economies of scale. Now, the large banks and players can afford that. But then if you look at exchange members, there are a lot of members that are smaller or medium size, and really all they want is existing infrastructure that they get economies of scale from. And so there’s a big opportunity for exchanges here, whether it’s them acting as the governance mechanisms. And everyone on crypto kind of mentioned that there wasn’t a need for clearing houses initially because it was all decentralised, not knowing much about markets. But we know that there’s initiatives like ClearToken now building clearing capabilities in this space. So there are opportunities for exchanges on the post-trade side, even if they don’t want to get into digital custody. And I think some of them should, because a few years ago I said the exchanges should be more like IDBs [Inter-dealer brokers] and the inter-dealer brokers should be more like exchanges. And those boundaries are becoming less well defined because all bets are on. So I think we’re seeing some opportunities in the post-trade space to run governed networks as well, where the exchanges can do what they do best, but then harness revenue from that activity, too.
23:16 Dominic Hobson: Thanks, Hirander. I’d like to come back to that infrastructure question, particularly with you, Ricardo. I know you’ll have some views on that, but before we do, perhaps I could ask Benedikt. We’ve been hearing about the asset classes that the exchanges are interested in. Crypto most obviously, and Hirander has talked about factoring and carbon credits. You are actually focused on the conventional debt market. So what, Benedikt, has given you the confidence to go after such an established asset class?
23:53 Benedikt Schuppli: Yes. So, what Obligate does is we use the instrument of the bond, the wrapper, the legal basis, or of a commercial paper, but in the end, the assets are not directly comparable to, let’s say, the public bond market. So, we have issuers which you could position rather to be in a mid-market segment ranging from, let’s say around maybe ten million in annual revenue to a few hundred million in annual revenue. These are corporates that use our infrastructure and platform to raise debt capital ranging from a few months in maturity, so kind of maybe a short-term mode, all over to multi-year bonds with automated coupon payments. But most of these assets, in terms of size, we’re talking about a few million in issuance size here, up to maybe a few dozens of million. So exactly the type of segment that currently capital markets do not really cater to. And here we’ve seen a huge demand from these corporates where they say, “If I want to issue a traditional bond, even if I have the creditworthiness, everything, it will take me a few months to set it up, get the prospectus done, credit rating, et cetera. And if I do it at a low issuance amount, maybe of ten million, the fixed costs are so high that it’s really economically not feasible.” And this is what blockchain technology combined with legal technology has something which is very important to add. It’s not just about the token in and of itself, because the token, without a proper legal framework and strong automated legal documentation, is not a panacea that will just change anything or everything, but it’s this combination which allows us to really lower transaction costs significantly. We base the issuances under Swiss law, the DLT [Distributed Ledger Technology] Act allows for a peer- to-peer issuance of digital financial instruments from the issuer to the wallet of qualified and institutional investors, across jurisdictions. And I think that’s the most exciting part of it. So for this customer segment, we’ve become an actual viable alternative to a privately issued bond. So not a public market bond, not one that’s actually traded on a stock exchange, but one that’s registered in a CSD [Central Securities Depository]. We’ve become a viable alternative to bank-based lines of credit, to syndicated loans or other, let’s say, lending platforms. And another very interesting thing that we’ve actually spotted is another faster, almost our fastest growing customer base, is that we have financial services providers, non-bank lenders, who refinance, whether it’s their factoring business, their lending business, their digital asset lending business. So both from the TradFi [Traditional Finance] and digital world, through our platform, we have some regulated funds, we have a lot of customers from the commodity trading space. So, a lot of these segments where I would say traditional finance either has been pulling back, some of it has to do with the Basel [capital] regulation, the risk weighing of assets, the original RWA [Risk Weighted Assets] for commodity-related assets. And so wherever there’s this market distortion, in our opinion, in terms of access, where we have strong and creditworthy companies that are looking for new funding sources, this is where we see the most traction. And this is why we don’t focus on the large corporates, on the blue chips, because I think they’re catered to quite well with the existing system that works well for them. We still believe there’s going to be large pressure on the cost, because even if Apple issues a bond, it’s still going to end up paying a seven-figure transaction fee for this, if not even higher. Pressure is going to come there. But these are not going to be the first movers and first adopters. That’s where we see really from this kind of mid-market segment issuance sizes between one and 50 million and companies maybe a notch above SMEs [Small and Medium-sed Enterprises].
28:17 Dominic Hobson: Do you worry the traditional exchanges might eventually end up going after that segment as well, just quickly?
28:23 Benedikt Schuppli: Absolutely, I mean, we don’t worry about it at all. I hope they will. They will start using technology like ours because we’re a primary market platform. The instruments are regulated as financial instruments or securities, so we don’t have the actual exchange licence to enable organised secondary market trading. For the time being, there’s not real demand for that. Most of these instruments are just buy-and-hold and issuance sizes with a few million. But now we see the first few customers that have a really strong brand name recognition. We had, for example, Bitcoin Suisse issuing a highly over-collateralised bond on Obligate, and it’s a company with very strong brand recognition. And this is something where we then definitely see the demand for secondary market trading coming. And we’re very excited to actually be partnering with stock exchanges on this front.
29:22 Dominic Hobson: Okay, well, I asked that question simply because it occurs to me tokenisation might help traditional exchanges attract the kind of issues which you’re talking about. We’ve had a question from Ian Hunt which I will share with you in a minute. Panellists, you might like to look at that before I put it to you. But I’d like to bring Ricardo into the discussion here by going back to that infrastructure question. You heard Hirander say that actually it’d be silly for everyone to build this infrastructure in a duplicate fashion, everyone build their own blockchain, if you like. And I can see that argument. I can see there’s a case for a, a kind of public infrastructure which attracts entrepreneurs and capital and works like the Worldwide Web. It’s a version of our common platform, or single programmable platform, we talked about on the cash side recently. But of course, operations have been quite a significant source of income for stock exchanges in recent years, in some ways more profitable than what they’re doing on the listing and trading side. And then you look at these cryptocurrency exchanges, which have hugely stretched, as my slides showed, the definition of what an exchange is entitled to do. You have not just custody of the customer assets, but yield enhancing lending services, cash management, even lending to them, provision of credit, banking style services. So, I’m wondering what your thought is here on … Are you surprised that traditional stock exchanges, with honourable exceptions, our panellists from Deutsche Börse and SDX here, but are you surprised most exchanges aren’t that interested? I think it was like 8 per cent are looking at infrastructure. Should they be thinking more about, if they’re not that enthusiastic about cryptocurrencies or tokenised assets, they should at least be building an infrastructure to support them, if only to hedge against the possibility these markets take off and they’re not ready?
31:15 Ricardo Correia: Yeah, I mean. Well, first of all, thank you for having me on.
31:20 Dominic Hobson: Thank you for being here.
31:22 Ricardo Correia: As you know, my focus comes more from … You mentioned the RLN [Regulated Liability Network]. Of course, the RSN [Regulated Settlement Network] is the evolution of that more from the money side. But these things carry forward, I think, from an infrastructure perspective. While it’s not cheap to build these things, it would be great if there was one public ledger to rule them all and we could all issue onto Ethereum and had all the kind of scaffolding that we needed to make sure that it was governed and properly secured and so on and so forth and had all the right rule books and so on. But it’s just not there yet. Maybe, maybe that is the future that we’ll see where there is just one chain. In the meantime, what you do see is this private kind of chains being built out, but they are expensive. They’re expensive to build and to maintain. But I suppose there is a reason, and the reason you mentioned [is] hedging, of course, as the market evolves, it’s important to make sure that the stock exchanges are keeping up with market evolution. There is a big discussion, certainly discussions I’ve been in, around the portability of these assets across these silos. So how do we make them portable, even if it’s just to make them available within traditional exchanges? Would that be a reason? So technology continues to evolve, regulatory changes continue to move, and of course there’s continued diversification of assets and so on. So just as a hedge, it makes sense. But there’s also kind of a reason on kind of strategic bets, like what bets are we making for what we can start to think is a predictable future. I think the question is: is this going to happen? Certainly, on the money side, we see CBDCs [Central Bank Digital Currencies] and the likes of RLNs [and] RSNs, but also Project Agorá [A project launched by the Bank for International Settlements (BIS), a group of leading central banks and the Institute of International Finance (IIF)] to explore how tokenisation can enhance the functioning of wholesale cross-border payments] coming online. We can start to … the question around, “Is this going to happen?” turns more into. “When is this going to happen?” We know that key projects like the ECB [European Central Bank] digital euro, which would be a great asset in order to have settlement across several exchanges in Europe, is delayed further and further. So we just don’t know when [but] we do think that this is going to happen. Taking a strategic bet on a predictable future makes sense. There is growing demand for digital assets, as we’ve talked about. There are also other reasons. I mean, there’s promise of efficiencies and cost reduction, albeit that the business cases, and I think, Miryusup, you mentioned business case being somewhat unclear, but certainly efficiency and cost reduction is a promise. We have seen projects in pilot that have resulted in significant efficiencies. Enhanced transparency, I think is a key kind of proposition that traditional exchanges can look at. And of course, integration with TradFi [Traditional Finance], as I mentioned, at least having the integration into the traditional infrastructure as a first step kind of makes sense. So, yeah, I think hedging and taking a strategic bet on a predictable future, albeit that these things are not cheap, so have to be well thought through and well managed. These projects have … Certainly what I’ve seen over the years, there’s a lot of appetite in the beginning, but if there’s no real value return in the short to medium term, these projects risk failure.
34:47 Dominic Hobson: But does that argue for … Sorry Miryusup, I know you want to say something, just quickly, does that argue for a public initiative in this space to actually build the infrastructure which would enable these markets to take off and not rely on private incentives?
35:01 Ricardo Correia: Well, I suggest, yes, there are a lot of … there’s a lot of work going on around the public chains in order to kind of, you know, fortify them, if you like. Privacy, performance. Performance is a big issue. Like if we can’t get over the performance and the privacy concerns, I don’t think we’re going to get there. But there is work being done, of course, the work on layer ones, layer twos and so on around that. You know, Solana’s done a really good job of their next generation infrastructure being a hell of a lot more performant. So, there’s work being done there, but we’re just not there yet. I think performance and privacy, security, certainly those things need to be.
35:39 Dominic Hobson: Is that why … Are those considerations why Ethereum is not the answer? I made … I asked this question at a conference the other day and was howled down, “We already have that. It’s called Ethereum.” Like this. It’s that privacy, that lack of security that [means] Ethereum is not the answer.
35:57 Hirander Misra: Yeah, I mean, it’s interesting because we’re using it [Ethereum], working with issuers at the moment for tokenising carbon credits, but just the gas fees associated with the creation of a smart contract per project, just to give you an idea of cost, it varies, but it’s around US$250. And then we looked at Polygon, thinking, well, actually there could be a level of compression on that, but that was still around US$200, even though in reality it should be a lot less given the construct. So actually, try that for lots of smaller transactions, because on a large trade it might just about work, but on a small one, it isn’t working. My other point, Dominic, just to clarify, my point there was there is probably going to be no standard public infrastructure anytime soon. That’s just the way markets work. I mean, even on the digital currency side or deposit tokens, the US is doing its own thing, RLN [Regulated Liability Network] in the UK is doing its own thing, and then the European Central Bank is doing its own thing. But at the same time, I think the big opportunity for individual exchanges is running that infrastructure into their localised eco-systems. And then the point raised about interoperability is a good one. It was interesting because we didn’t realise quite how useful it would be. But in July 2022, on Cosmos Tindermint, ING had built out a Layer Two network for governance of assets, splitting keys and ensuring that there was a kind of multi-custody model around assets, both issuance by the buy-side or the sell-side on behalf of the buy side, and then settlement into the FCA [Financial Conduct Authority] sandbox called Pyctor. We bought that out. But initially when we deployed that for digital asset markets, we saw exactly some of the points you made, Dominic. There was a lack of demand. We couldn’t really see where the revenue streams were. But now we’ve applied that for carbon credit markets, and we can see the revenue case. And at the same time, now we’re integrating that into deposit tokens on the other side, on the cash leg, and you can lock the assets and the cash in the asset leg, and it makes it seamless in terms of delivery versus payment on a prefunded model. So, there are – I mean, just giving that as an example – there are opportunities. And from that we’re garnering transactions because, of course, we run a smaller exchange that’s got digital capabilities in the Seychelles and we’re able to kind of use it as a sandbox. So, you know, I’m saying to some of these smaller exchanges or medium-sized ones, that there are opportunities even in your local eco-system, because, you know, when you engage in South Africa or Kenya, the local banks and other players, they don’t want to build any of this infrastructure themselves, but they’d be happy if the exchange could provide them with something and then working in collaboration, it could internationalise that.
38:53 Dominic Hobson: Well, certainly, if our survey is correct, you’ve got a pretty big market to address there, Hirander. Now, Miryusup, I know you want to say something, but can I ask you also to begin to address – make your point, but also begin to address Ian Hunt’s comment here, where he says, and bear in mind, he’s talking about your opening remarks, yours and Marco’s. And Marco, I’d like you to comment on this as well. “This all sounds like Kodak thinking. Aren’t we just assuming we should build conventional markets for digital assets rather than looking at what native digital assets can do and create a very different, simpler ecosystem for financial services, a single issuance and operating model across all assets. We do that, then the exchange just becomes a venue for issuance and trading of self-executing contractual liabilities flow rather than tokenised venture classes.” This is our old friend native digital assets versus asset backed or digital twin assets. And it strikes me that if exchanges ignore that even in their data business, which they attach so much importance to, they’re going to be missing opportunities because all these tokens are going to be running on smart contracts which devour data from these oracles. We’ve talked here about, some of you have talked about, carbon credits and ESG [Environmental, Social and Governance] bonds, the green bonds and so on, all of that. Those are basically data demands. And so actually tokenisation offers exchanges opportunities, new opportunities to grow their data businesses. Anyway, I’m rambling a bit here. Miryusup, make your point and then tell us what you think about Ian’s point. Why don’t we just go the whole hog here and stop messing about with these halfway houses which preserve all the existing inefficiencies?
40:30 Miryusup Abdullaev: Sure, thanks. If I may just first touch upon the infrastructure point, because there’s private versus public chains, permissioned versus unpermissioned chains; it’s sort of an eternal discussion, right? So we do believe this is going towards the public chains, delivering some components of the infrastructure and other layers on top of it, complementing it. Now, the counterintuitive thing I’m going to say is that I’m actually quite welcoming of bigger organisations. You know, JPMorgan has a private chain, Citi launched recently. Goldman Sachs has a digital asset platform. I do welcome the efforts of these banks to work and build products within their private chains, for the simple reason that this will engage them in the topic of tokenisation and blockchain. That will then allow basically opening it up to a wider network.
41:25 Dominic Hobson: Hold on, Miryusup, that’s not what they’re trying to do. They’re trying to create closed universes. This is like early days of the Internet. This is AOL teaming up with Time Warner to try and keep everything in a walled garden, isn’t it?
41:37 Miryusup Abdullaev: Exactly. That will be the immediate picture and impression you would get. But what I’m trying to picture is that the transfer to a public blockchain is going to be a logical step after these isolated walled gardens basically develop in and of themselves, and then they start connecting with each other, hence going towards basically a wider network of participants. So, I do think it’s going to be an evolution towards public exchanges and evolution versus revolution is probably my answer also to the question of Ian [Hunt] that you voiced just now. So, Kodak effect – got you. And that was something that I was trying to allude to in the beginning, right? So we do see that this is going in a way … So, let’s take an example. I mentioned trading and settlement basically being put into one technical process, and actually [that] is in itself quite radical. Today you have stock exchanges for trading layer, and then you have central security depositories [CSDs] in the post-trading layer. You have depository banks in between and things like that. And blockchain does allow [you] to put this all into one technical process – hence organise yourself, target operating model, and everything else around this one process. So I do think this will be an interesting point to look at. Specifically, an example of Deutsche Börse digitalisation of assets is in the top three priority of our strategic roadmap for the coming five to ten years, right? So we’re looking at it, we’re building capacities and we’re obviously looking at the use-cases, such as cryptocurrencies, where we can also generate some business cases that we can then spend as R and D [Research and Development] into looking at tokenisation. And we are actually quite comfortable that we’ll be ready. And I can also, speaking from the many conversations we obviously have with clients, these are biggest sell-sides, biggest buy-sides, also peer exchange organisations. The awareness is there that this topic is going to change the way we operate today. So, I think the ones who are relevant will definitely be ready if it picks up.
43:43 Dominic Hobson: But what about Ian Hunt’s point here? If we look at what, for example, Deutsche Börse is doing on structured products, all you’re really doing is dematerialising an existing process. You haven’t created digital assets at all. So, it’s something which the German market probably should have done 30 years ago, has kind of just got around to with this fancy new technology. So is the future here digitally native? Marco, I can see you’re bursting to say something as well.
44:10 Marco Kessler: Yeah, exactly. I think it’s a very good point and very good question by Ian [Hunt]. Thanks for raising it. I think, regarding the Kodak moment, it’s a mixed bag because I have encountered several people who see this differently as a Kodak moment and don’t shy away from it and are really asking themselves, “Okay, how can I do the same with new technology?” But just to repeat, what, replicate what we do today? Equivalency, basically. And I mean, that’s one way to look at it. You may also think in terms of the future proofness of technology itself. Now, on the other hand, I think sometimes we see a lot of banks who reach out to us asking for tokenisation of native digital bonds, for example, which you may argue, well, it’s quite efficient, it’s quite standard, it’s not really exotic, it’s quite a simple case. But that’s exactly the reason why they reach out to it. That I wouldn’t classify as a Kodak moment, because I see a lot of organisations willing to test the waters, so to say, by picking something simple, so to say, simple to start with, to make an experience to a learning effect and to learn, “Okay, how can we employ digital assets into our own organisation, into our processes, into our own technology platform in the short, medium and long term to achieve then the real benefits?” So I would see to your direct question, Ian [Hunt], I would see it as a mixed bag, because for sure there are some who are convinced, really being, I would call it a bit short-sighted, but others who rather understand where the real potential is, which is in digital transformation by [inaudible] at all levels enabling, as mentioned earlier very well by the colleagues, operational efficiencies, new revenue streams, better revenue streams for banks and providers. And so [they] understand that very well. However, as a starting point, [they] decide consciously to take a simpler case, which is indeed more a matter of equivalence today rather than evolution, I would say.
46:34 Dominic Hobson: Can I ask you, Marco – I can see Benedikt wants to say something in a second – but you at SDX have chosen to issue … The issues you have hosted have been available both in analogue form and in digital form. You can use the traditional exchange or the digital exchange, the traditional CSD [Central Securities Depository] or the digital CSD. Now, clearly that expresses a view that this is going to be a transition, right? That you’ve actually built a hybrid exchange, if you like, and you expect this transition to persist for a while, otherwise you wouldn’t have invested all this money in building a whole new infrastructure alongside the old. Am I misrepresenting your views? Are you building a hybrid exchange? Is this going to take a long time?
47:16 Marco Kessler: In a certain sense, yes, I would say, definitely. I mean, the main decision for establishing this FMI [Financial Market Infrastructure] separate from the traditional one, and then later on to establish a bridge or a link to the traditional FMI has been one of business sense, I would say, because the point is … It was mentioned very well before these tokenisation islands or many players building their own platform, which works well, but it’s limited to a certain investor base, to a certain limited accessibility. What SIX and SDX decided a while back was to set on the interoperability, starting from traditional to digital, to make it seamless that whenever you have a so called native digital issuance, you can still reach the whole wide market, no matter whether you are already connected to the digital infrastructure or the traditional one. So that was a strategic decision, which I think for us it was absolutely fundamental. Without that one, we would not be where we are today. And definitely both sell- and buy-side interest will not be what it is now without such an enabling moment.
48:37 Dominic Hobson: Thank you, Marco. Benedikt, you wanted to say something, I think.
48:42 Benedikt Schuppli: Yes, definitely. I’m mean I’m probably running the danger maybe of offending some people here. But I do think personally that … I’m not a financial market infrastructure expert, but I am a Millennial. I have a lot of touchpoints to people from Gen Z. I know and understand what the new generation of financial market participants want and expect. And I don’t think it’s what the current financial market infrastructure and the participants can really offer. So, while most of the Tier One financial institutions have played around with blockchain technology and DLT [Distributed Ledger Technology], whether it’s private or public networks, I do think few of them have really embraced, in my opinion, what’s actually needed to bring this forward. And that is just accept there is going to need to be disintermediation. That doesn’t mean we’re going to have a future financial system without banks or stock exchanges, obviously not. But we want to maximise choice. And we don’t need to have a physical process for ripping off a coupon from a bond certificate, putting into a box and sending it to Luxembourg or to Euroclear, so that the issuer agent can administer coupon payments, and still in an extremely manual form. This can be done in one click on a public blockchain infrastructure like ours. And I think technological pressure will move the needle in this direction. And I’m not saying the biggest competition is coming from small players like ours, but also players like Coinbase, where they’ve been able to, in a few years, amass a user base of almost I think 100 million users, more than any or probably all the combined stock exchanges of this world, even those that have direct participants en masse. And this generation that I’m talking about, they are expecting this type of user experience: mobile first, accessible direct trading, and not just highly intermediated through banks. And I think this is why I really believe when you want to talk about adoption of blockchain technology, you need to embrace the fact that it needs to come to some extent with disintermediation or otherwise lowering of transaction costs. Otherwise, there’s no purpose in using it if it doesn’t really heavily lower transaction costs. That’s why I think we really need to move to a different set-up to really fully leverage the potential of blockchain technology. And we have customers that have used the traditional infrastructure. They’ve seen what our product can do. They’re not going back. And that’s just a small example, a small niche market. But that’s why I think probably the biggest threat to the existing infrastructure doesn’t come from … It comes from exchanges like Coinbase that have been built from scratch with a highly efficient, technology-first approach. I’m not saying they’re without fault or anything, but I think this is going to really provide a benchmark on where FMI [Financial Market Infrastructure] infrastructure and services need to go in the future.
52:06 Dominic Hobson: Okay, so you see lessons learned from the likes of Binance and Coinbase and even FTX. Is there anything that the likes of Coinbase, Binance and FTX, where it’s still with us, could learn from traditional stock exchanges?
52:19 Benedikt Schuppli: 100 per cent, obviously, right? I mean …
52:23: Dominic Hobson: What could they learn?
52:24: Benedikt Schuppli: Ideally, both sides learn from each other. I think the crypto people, they have to learn the law is not something that you can circumnavigate. Regulation is not something you can circumnavigate. You need to be compliant first. And er …
52:39 Dominic Hobson: Can I give you a specific example of what you’re doing, particularly in the debt market, that might benefit from what goes on in traditional markets? And that’s the repo market, where we see traditional exchanges, traditional infrastructure, starting to show some interest in that area as an early use-case of tokenisation, because they understand that repo is the key to liquidity in corporate bond markets, and therefore it may be the right place to start. It also has concrete benefits for banks involved in those markets. And Ricardo, I’m sure you’ve got some views on this in terms of cash and collateral and capital savings. Another area, maybe a second concrete example, is green bonds. These seem to actually to be working. We’ve seen a very substantial issue for the Hong Kong government. It was a billion US dollars. We see a couple of issues for Hitachi. So green bonds seem to be an area where there is some success occurring. Are these just tinkering at the edges? Are these a bunch of boomers failing to recognise what’s really happening and thinking they can just adapt the technology to what they’ve always done – repo and bond issues? Or are there valuable learnings for entrepreneurs like yourself in these initiatives?
53:56 Benedikt Schuppli: So, yeah, absolutely. That’s what I mean. I think it’s not … You know, I was, I guess, on purpose, a bit provocative. I think it can only work if, you know, these … both sides actually come together. And there’s going to be merging of traditional finance, maybe with a bit more of the spirit of decentralised finance, where we want to break down jurisdictional borders, we want to break down barriers that have a very clear demarcation between markets. Where you say, well, this is a clear cut-off between private markets and public markets, her there’s a clear cut-off between trading and post-trading. I think these boundaries will start to blur, and I do think this will create a benefit. But obviously, a digital asset eco-system can only work if traditional financial players, which still make up by far the bulk of all financial activity, move to this new infrastructure. And it doesn’t have to be all markets. We should focus on those markets where it really makes sense. That’s why we focus more on private markets than public markets. But I definitely think the job is not done if you sit around with a group of other regulated players and you say, `We’re now doing blockchain PoC [Proof of Concept].” But it’s still the exact same players doing the PoC that are already doing the work in the existing infrastructure. And so all I’m saying is, something has to give, otherwise we’re not really leveraging the benefits of this technology.
55:27 Dominic Hobson: Okay, thanks. We’ve had a question from Max Butti, which I’ll ask in a minute. But Ricardo, I’m conscious you’ve got to leave very promptly. One area where you might be able to contribute very directly from your experience here, is making fiat currency available on blockchains, the cash leg of settlement. Is there something exchanges could be doing to help to bring that about? Or is it something they just have to wait for the central banks to deliver for them?
56:06 Ricardo Correia: There is this concern that the velocity of what’s happening on the digital asset side is not paired to the velocity of what’s happening on the digital currency side. So, the question of will we ever get on-chain, real-time or near real-time DVP [Delivery versus Payment] is out there. So, can we align the velocity such that we can realise this kind of, this real-time DVP opportunity? So, the obvious answer is, well, you can issue your own token, but obviously that comes with a ton of regulation and compliance and concern, operational risk and so on. And the regulation in Europe is not that clear. We’re starting to see more regulation. Japan issued some clear regulation June last year, I believe around Stablecoins issuance but still not for exchanges. But the obvious answer is an exchange can issue their own token in order to enable settlement. That seems like a high bar. Here in Europe, Fnality is issuing somewhat of a synthetic CBDC [Central Bank Digital Currency] if you like, for lack of a better description, and is launching in the US this year. So, they launched last year, December. That token, that issuance of Fnality coin obviously could be used and requires a bunch of integration, interoperability, compliance. Still regulations are not super clear, so [that] still prevents it from kind of moving forward so far as I can see.
57:38 Dominic Hobson: I guess that’s consistent with our finding from our research that uncertain law and regulation is definitely a deterrent to exchanges doing things in this area. But it may be a dangerous delay.
57:55 Ricardo Correia: I mean, wouldn’t you say that’s the highest barrier right now? I mean, what else is holding it back? Technically we know we can do this, I think obviously notwithstanding performance and privacy and other things that we’ve talked about, but I think it’s regulation and clarity on compliance is the biggest hurdle we have right now. So, roll your own, use a Fnality coin or wait for your central bank to issue a CBDC – [but] that could be a hell of a long road. The central bank of the UK suggesting by the end of the decade. The ECB [European Central Bank]? Now it’s I believe 2031. So, it’s a long road. So again, the velocity of these two things are very different. How do we align them so we can bring about DVP? It’s going to be kind of the big challenge so far as I can see.
58:44 Dominic Hobson: We are into our last five minutes now. So, I’d like everyone to sign off with a question – I’ll be asking each of you the same question. But before I do that, let’s address Massimo Butti’s question where he says crypto asset platforms exemplify disintermediated business models. Could reducing the number of intermediaries or disintermediation actually be disadvantageous? So do exchanges see a role for themselves in taking up some of these disintermediated roles and becoming more involved in the deal flow, as Hirander hinted at [stock exchanges] becoming a bit more [like] IDBs [Inter Dealer Brokers], I guess. How would that look for the exchange? Miryusup I’m sure you’ve got views on it, but Hirander, perhaps you should address that first since your name has come up in the question.
59:25 Hirander Misra: Yeah, this is great. Just to touch upon a point that Benedikt made. I mean, we mentioned some of the crypto exchanges, but I really don’t think their back-end infrastructure is as great as it’s made out to be. I mean we get a number of approaches from them where some of it is creaking and its ultimately centralised infrastructure of some kind, no matter how much they purport for it to be decentralised. And seriously, I’m not wedded to either. I’ve got shares in neither centralised nor traditional exchanges nor crypto ones. But going back to another point on DvP [Delivery versus Payment], we certainly see on carbon credits that a pre-funded trade can take seven or eight working days for both legs, the pay and payout, to clear. So certainly, we see a massive role. We see a massive role for deposit tokens out there as well. And in doing that I’ve even forgotten the original question. I’ll look at it.
01:00:28 Dominic Hobson: Are there other advantages to keeping intermediaries or exchanges becoming modified or a new type of intermediary?
01:00:38 Hirander Misra: So Benedikt mentioned obviously the number of users for Coinbase but really, it’s horses for courses because typically traditional markets, and as they’ve gone digital have been B2B [Business to Business] markets. And the problem is many of their members don’t want them to disintermediate them. So many of them have said, “Okay …” We did some strategy work, you know, working with a partner into one recently. And really they said, “Well if we can become – a bit like you said, Dominic -on the data side that kind of go-to point where we’re aggregating different levels of data, but if we do anything to disintermediate the banks or other players that are our members, they’re going to be up in arms.” I don’t, you know … We owned a digital asset exchange in Mauritius a while back that we sold and we managed to find a rule book that could handle both B2Band B2C [Business to Consumer]. But many of the exchanges that we speak to privately do acknowledge that actually to get into that space they’ll have to invest into something, or they’ll have to buy something that runs in parallel because it’s too far away from their existing business models.
01:01:45 Miryusup Abdullaev: Maybe to add on top of that point … I mean, the question was [about] the decentralised crypto asset exchanges. I hate to break it to you, but the biggest crypto asset exchanges are centralised, clearly. I wouldn’t go through the names there. But there is a reason why they appeared. They did provide, in the early times of Bitcoin, the safest access to this asset class to the mass users. So, they do have their right to be and they will be successful going forward. I think I would add maybe or join to what Benedikt said. It’s really about from their perspective, looking into established market share providers, learning from them, and also from our perspective, looking towards them and learning from the other camp.
01:02:33 Dominic Hobson: Okay, our time is more or less up, but I’d like to round this discussion off by asking each of you a question. Ricardo, I know you’ve got to leave, so perhaps you don’t have time to address this, so we will miss your comment on it, but never mind; next time. In a sense, what traditional exchanges are facing here is Clayton Christensen’s famous Innovator’s Dilemma, by which I mean the risk that doing the right thing for your shareholders in the short-term, that is protecting your existing revenues or existing profits, carrying on doing what you’re doing, not over investing in things which might never deliver a return, but that turns out to be the wrong thing in the long-term. Tokenisation technology does in fact, in the end up-end the entire equity, debt capital markets of the world. Are you confident that we … And I heard Ricardo say we do know this stuff works, all that’s missing is the money on-chain and the reg[ulation]s and laws to make it happen. But do we know enough yet about tokenisation to say to all traditional stock exchanges, “It’s time to start cannibalising what you’re doing now because if you don’t, you’re dead in the long-term.” What’s your view on that? Maybe we can start with Benedikt because I think he’s going to say, “Yes, they do need to cannibalise their existing business.”
01:04:02 Benedikt Schuppli: I think if we take a broad perspective, I think there’s going to be some type of cannibalisation. It’s something very interesting we’ve witnessed over the years, being in discussions with stock exchanges and custody banks. And, you know, behind closed doors, many stock exchanges think they would also love to engage more directly with issuers and connect issuers and investors more directly. Some of the custody banks say, you know, “Why do we have to go through the CSD [Central Securities Depository] all the time? We could also just do it in the form of a [inaudible] token for which we can provide custody.” I find it’s an extremely interesting to see how also some of the stock exchanges are not happy with … Because they’re, I would say, fairly cheap when it comes to transaction cost. And I see how much of the costs are taken away from the custody bank. And so I do believe that overall, there’s going to be a, a pricing pressure on some of these entities. And I think a lot of it will unfold, actually between large banks, stock exchanges and large asset managers, and even less so between nimble FinTechs. So that’s going to be quite exciting to see.
01:05:25 Dominic Hobson: Hirander, you’ve been very articulate about transaction costs. With technology out of whack with the traditional markets at the moment, is now the time to start cannibalising the existing business, or is the technology not there yet? I think you’re saying it’s not.
01:05:40 Hirander Misra: No, actually I’m saying there’s an incremental step where there is some opportunity. Through personal experience, the move into security tokens has been slow. We even saw banks like State Street come in and then pare back what they were doing as well, both on that sell-side and then the exchanges themselves …
01:06:02 Dominic Hobson: Also unhelpful regulation, I think, in the case of State Street.
01:06:06 Hirander Misra: Yep. And then also there’s a lot of things we can do, I mean, aside from making corporate actions more efficient, but things like this old distinguishing between security tokens and tokenised securities. Obviously with CSDR [Central Securities Depositories Regulation] and that directive in Europe, you need the assets held in some kind of CSD [Central Securities Depository] or ICSD [International Central Securities Depository] before you can tokenise it, whereas in some jurisdictions that’s not always the case. So I think the biggest opportunity we are seeing … Because again, private markets and crowdfunding as well, we’ve seen some of the crowdfunding platforms, non-tokenised and tokenised come and go, because you get a one-off crowd fund, but where are the secondary trading transaction fees in that? Right? It doesn’t really give you the ARR [Annual Recurring Revenue]. So again, we’re really seeing the big opportunities for exchanges … I mean, you touched upon it, Dominic. One is green bonds and structured products that are predicated on green assets. We’re certainly working with issuers, both on the digital and the traditional side, into products like carbon credits and a weekly NAV [Net Aset Value] to kind of create some of that. And we’re also seeing some of these markets step into voluntary carbon credits. I mean, the big challenge in the room is, there are a lot of walled gardens out there. There might be Go To places for specific types of players. Some of it’s to some extent localised. We are going to begin to see interoperability. But I do agree it’s going to start to happen with payments, and then the asset leg might be within the walled garden and the cash leg can settle in networks like RLN [Regulated Liability Network] or whatever starts to go live. And the exchanges have a real role, actually. I mean, the exchange that becomes that kind of interoperability layer will win. I mean, you’re seeing SWIFT realise that it would become less relevant unless it looks at the digital side, and it’s certainly doing that on payments. And we will see the exchange equivalent emerge beyond the walled garden, which I don’t think, as you rightly said, Dominic, is the right way to go.
01:08:08 Dominic Hobson: It falls to you, Miryusup, to wave us out with some final observations on this question of whether now is the right time is to cannibalise the existing business. I can’t think of a better person, better organization, to ask that of than Deutsche Börse because you’ve got a whole bunch of initiatives operating in the digital asset space which are quite a selection of bets on the future, or hedges against an uncertain future. What’s your final take on this question? Should you do something? Should you do something radical now or not?
01:08:38 Miryusup Abdullaev: It’s an evolution rather than a revolution. And trying to keep it brief, so Innovator’s Dilemma is definitely an issue to take care of. So having a top management who shares and buys into the vision helps. Maybe a dedicated task force to move these things separately to the existing business units might be a smart thing to do, but really invite into thinking that it doesn’t have to be cannibalisation straight up, but rather really an opportunity for these exchange organisations maybe to look at a niche market where they’re not present yet, they want to build some presence there and then really use technology to enable them to have a better product, and then basically transfer the learnings and the standards in a sensible manner to the main business.
01:09:27 Dominic Hobson: Thank you, Miryusup. Commendably brief as well. We must stop there. Our time is up. I’d like to thank our panellists. We’ve lost two of them already, Marco Kessler from SDX and Ricardo Correia from Bain and Company. But still with us is Hirander Misra of GMEX and Zero 13, Benedikt Schuppli of Obligate and Miryusup Abdullaev of DBDX. Thank you all. Before you, the audience leave, I’d like to draw your attention to a physical event we’re hosting in the autumn. Since it’s directly relevant to everything we’ve talked about this afternoon. Following the success of our Digital Money event on the 13 June, which I know many of you attended, we are on 15 October hosting our first one day event on tokenisation and at it we will be discussing things such as the size and prospects of the security and fund token markets, the pressing need – which we’ve touched on today – for digital money on-chain, all the obstacles to the scaling of the token markets, and to Ian Hunt’s pleasure, I hope, the case for native tokens rather than digital twins, whether common platforms – another thing we’ve touched on today – whether they’re the missing ingredient, and, of course, what tokens can offer that traditional securities and funds cannot. So, it’s going to be a fascinating day. Do put Tuesday 15 October, here in London in your diary. We look forward to seeing you there. And with that, it’s goodbye from, originally, the six of us, now the three of us. Thank you and goodbye.
01:10:48 Hirander Misra: Thank you. Cheers.
01:10:49 Miryusup Abdullaev: Thank you. Bye bye.