Will Diginex’s backdoor Nasdaq listing start a crypto industry trend?

Full Transcript

Angie Lau: Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Forkast Editor-in-Chief, Angie Lau, and your host. 

Well, bitcoin’s return to US$10,000, decentralized finance and central bank-backed digital currencies, the blockchain space and the industry sure made strides in the year 2020. Certainly that’s the case for Diginex here, making a historic moment for blockchain: a crypto exchange on the Nasdaq, the first digital currency exchange to be publicly listed in the U.S., raising US$50 million from private investors and then redeeming shares of its SPAC, or reverse listing, on October 1st, 2020. So we welcome back to the show right now, Diginex CEO Richard Byworth. Richard, it’s great to see you again.

Richard Byworth: Great to see you too, Angie, how have you been?

Lau: It’s been very good, but probably not as busy as you. I think the time we talked before was right ahead of your Nasdaq listing, so congratulations for that and becoming the first company with a crypto exchange to do so. So how has the reception been so far?

Byworth: Yeah, thanks very much for that. It’s been an amazing entry into public life and certainly a baptism of fire as well, just sort of making sure that all governance protocols are in place, having that sort of structure around the board, and risk committees, and all the various different ways that we have oversight. The whole point of getting a company like ours listed on Nasdaq is to really raise the governance standards in this industry and the level of transparency as well. So, yeah, even for us, it’s definitely been a transformative time.

Lau: Well, how are mainstream investors via Nasdaq viewing Diginex? I’m taking a look at your history so far, a year to date. I mean, you’re still pretty brand new, but off your 52-week high of US$13 per share, what do you think is driving sentiment of the sell-off that we’re seeing at the moment?

Byworth: I think Diginex is a name that is not particularly front of mind in the U.S. at this point in time. We need to do a lot of work with investors to get the profile of the company out there. Obviously, the exchange is newly launched — I think last time we spoke, we had pretty much just launched — now we’re regularly hitting US$10 million of volume on the exchange and we’re looking at launching a whole load of new products over the next few weeks. So that will really start to drive volume and I think gain more and more notice across the industry. Then when people find out obviously we’re publicly listed, I think that starts to change the tone. But more and more, people approach me and say, “look, we’ve started to get involved a little bit with your stock. I think that what you guys are doing is very transformative for the industry, but it’s great to have a way to play this in the public markets.” The way we’re referred to in the public markets is a picks and shovels trade. So it’s a play on the ecosystem of the industry, everything that’s going to advance and gain fees as we grow in this industry and grow the underlying asset class.

Lau: So you mentioned that you’ll be presenting or providing some new products to market. Can you clue us in?

Byworth: Well, we’ve got our road map in the public domain, with the SEC. So a lot of what’s coming now is derivative product. We’re starting with the basic leverage-style product of perpetual swaps. That’ll be in bitcoin and ETH, predominantly. We’re also rolling out on exchange credit. So there’s a lot of stuff that’s coming that will really start to focus the mind around EQUOS and what we’re doing.

Lau: You know, it’s interesting. It is that kind of bet that if you’re not deep into the weeds, which is, you know, obviously what your crypto investors are doing on a day to day basis, and if you want to participate from the next level up, so to speak, that you could still participate without seeing the roller coaster rides — that every time we see interest in trading in the markets, either good or bad, the exchanges always make out fine. So it’s interesting that those are the bets.

Byworth: Yeah, exactly. It’s the toll collection trade, it’s like the trade to play or pay. Effectively, markets go up, markets go down; these ecosystem trades, these platform trades, are the ones that benefit. We were always of the opinion that the industry needed to take that step forward, to be able to give a level of transparency and governance that would give people comfort in onboarding on an exchange. I mean, look, you’ve seen a number of issues with centralized exchanges over the last few weeks, even, all of which, by being a Nasdaq-listed, regulated place to effectively have governance around protocols like key storage — these are the things that give a better level of certainty and security to investors.

Lau: What do you think is lacking in the education amongst some of your more traditional investor types, the institutional types that are still a little wary or unfamiliar with the space?

Byworth: You mentioned earlier — I think a lot of us in the industry sit in this sort of echo chamber all day long, and this is what we live and breathe. You’re obviously a big proponent of this for institutional investors as a technology as well. But I think that it takes time to really get your head around what the value attributes of an asset like bitcoin are, or how assets could be moved with a blockchain transmission network. These things are actually a little bit complicated, and I think the industry doesn’t always help itself in terms of overcomplicating things with jargon and so on. So I think that really, to your point, education needs to keep continuing. I spent a lot of time talking to investors about the positive attributes of this technology, but also the particular assets that sit on these networks. So I think education needs to continue. We need to be out there front and centre. People like yourself keep pushing the narrative and explaining to people why this is so important, as you say, during Covid — such an important moment for this as well, in terms of the overall adoption of digital.

Lau: I mean, you just take a look at the space that we’re in, Richard, in Asia, in Hong Kong, and just the adjacent regions. The statistics couldn’t be more clear. There is intergenerational wealth here that is growing. If you take a look at the average portfolio of the Asian investor, 40% of people’s portfolios exist in cash and alternative assets. You know, if that doesn’t tell you about the scope of the opportunity, which is clearly what we see — and this is the market that we are serving as well — there is a lot of money swishing and sloshing around in this region. But I am curious, though, does being listed on the Nasdaq now allow you to draw that kind of investor into EQUOS and Diginex?

Byworth: Yeah, it’s been very accretive already. We’ve seen a lot of investors and people who want to get involved in the space start to finally say, “OK, this is a company that I feel more comfortable with, that I can finally start to onboard.” I mean, to your point, when you’re sitting there talking to a family office or an investment firm that is sitting on 40% cash when you’ve just seen the U.S. dollar money supply increase by 20% over the last eight months, you know, what are you doing sitting on that cash? And I think that this is why we started to see the trend of many public companies move their treasury actually with quite a sizable allocation towards bitcoin, because you’ve finally got a scarce digital asset. And that in itself is a huge, huge value driver.

Lau: It’s a value driver, it’s liquidity into the market, and it just grows those opportunities. Do you expect other companies to get publicly listed? We already know of a few in this space, but how important is that public listing?

Richard Byworth: I think the public listing comes with a number of effective assurances for the investor. We had to go through approval with the SEC: the SEC combed through a 470-page document of every item of history of this company, everything that we’re doing and our forward-looking roadmap. The SEC had to get comfortable with that. We had regular back-and-forth questions and assessment of what it was we were doing. Then we had the process with Nasdaq itself. I mean, Nasdaq is a regulator. As an exchange, they’re a regulator. And again, same process. So once you’ve had two of the most credible regulators in the world look through your business and assess it,  that’s the point where you get that investor assurance. To your question around if we expect to see more private companies in this industry move to being public? Absolutely. I can tell you that since we actually finalized our SPAC, did the business combination, we’ve had three of the world’s largest crypto companies approach us and ask how we did it and what sort of process they would have to go through to get those governance standards in place to become a listed company.

Lau: So sounds like that’s another business arm now for Diginex, the advisory role.

Byworth: But not the Diginex capital again.

Lau: Exactly. Well, I mean, you have mentioned that EQUOS will adhere to the CFTC regulated model. It’s currently based in Singapore. CFTC, SEC, Nasdaq, how do you think the listing is going to drive your roadmap, potentially, into U.S. operations while maintaining your Asian base?

Byworth: So just to be really clear, we are not in the process with CFTC in any way whatsoever at this point in time. We don’t actually onboard any U.S. clients to any part of our platform other than sort of servicing technology. So U.S. is definitely a strategy for us down the road. We just finalized the hiring of a very key person in the United States to help us build our strategy there, but that’s going to be a longer road. We want to finalize what we’re doing with MAS. We want to make sure that we’re helping MAS improve the licensing framework and structure before we start engaging with other global regulators, particularly around the exchange. Our custodian, Digivault, actually is in the early process for FCA regulation for digital securities, and I think that’s the way we’re going to have to be going if we want to see the advancement of broader digital securities — so, securities issued on blockchain networks — and I think we’ve talked about this many times. The first stage of that is private equity securitization and sort of these opaque areas of paper securities markets. So once we start to see that propagate more evenly and openly, then you’re going to need regulated exchanges for securities, you’re going to need regulated custodians for securities, and obviously those securities are digital.

Lau: That’s a great point that you make. In relation to the growth of the derivatives market to allow your clients to use bitcoin as a core collateral, how do you think that the paper-based securities will be translated into digital assets to be traded on your platform, and why hasn’t this been possible yet?

Richard Byworth: It’s really about regulation. First of all, it’s regulation, then it’s about client adoption. So if you think regulators need to be at the point of regulating these exchanges, these custodians, you need a marketplace, you need a place to have a third party custodian for digital security specifically. We’re getting very close to the point of global regulators getting comfortable with that and starting to create regulatory frameworks around it. The harder part, actually, is getting Japanese pension funds or sovereign wealth funds to the point where they say, “OK, we’re comfortable booking additional security in our systems.” Because not only do they have to worry about custody and a marketplace, they need to be able to understand what a blockchain is, what a protocol is, why one protocol is better than another, what a protocol standard is, how it actually gets booked and interacts with the rest of our ecosystem and who are credible custodians that they can diversify across.

So you’ve got a whole host of issues that they need to get through a risk committee, investment committee, before they’re actually going to start to allocate capital to that space. So it’s regulation first, and then it’s a lot of hard work with these investors. I think, again, you and I have discussed this before, but the way that we do it is actually, from our investment banking business, we actually give investors paper securities and say, “when you’re ready, you can transfer that into a digital security, and you can put it back each way.” So effectively for us, what we’re doing is going around just planting seeds with these very large allocators of capital. But the point that they say, “OK, finally, we want to get into this space,” they go “Oh, we traded that security with Diginex capital. Maybe we can start to experiment with that and move it over.”

Lau: Look, it’s great. As you’ve noted, these are huge barriers to entry for even just an interested investor or an interested client, and what you’ve described is akin to opening up a bank account for my three year old. He has no idea what a bank is, no idea what money is, but one day he will. And when such time comes, he’s got one. You’ve got to start them young.

Byworth: Does he know what bitcoin is yet, Angie?.

Lau: You know what the funny thing is? Mom got him one for his birthday. I should have just done the reverse. I was going to do one for every birthday; I should have just done eighteen, and then work my way down to one when he’s eighteen. That’s the way that the prices are going. I have to say, this is an interesting space. But look, the crypto industry can solve this in those very innovative ways that you’ve described, but how else can they — right now there is an issue with liquidity. We’re seeing that being experienced by DeFi, the Ethereum network, we’re seeing a lot of liquidity in the space, then we’re seeing on the other end the actual cryptocurrency, like Ethereum, the prices are also quite debilitating for some of those DeFi products. So how do we solve this issue of liquidity? Is that something that you’re thinking about on the exchange?

Byworth: I think in the particular case of DeFi, and thinking about obviously the gas rates and the pricing of moving Ethereum around, this is a problem that Ethereum has had. They had it in 2017 with the ICO bubble, they had it with the recent run up in DeFi projects, something like US$11 billion of capital wound up in various different DeFi projects at this point in time. So Ethereum has talked about Ethereum 2.0, where you’re going to have scalability, you’re going to have a lot of addressing of these issues around the Ethereum network. But more and more, we’re seeing interesting verticals come along that could potentially help solve some of these problems. I mean, you recently had Polkadot issue their network, you’ve got many others that are starting to appear, so there’s a lot of really amazing minds focused on this particular problem, and it’s not our business to be involved in that side of things. We positioned ourselves very much as protocol-agnostic with what we do in the security issuance business. But we’re very encouraged by the progress that the industry’s made over the last two to three years in this space, with protocols being released. I think if you’re talking about liquidity around bitcoin, obviously bitcoin liquidity for trading has grown quite significantly. Regularly, we have derivatives and spot, we’re talking about US$20 billion daily market of volume. We’re really starting to see, no doubt about it, institutional participation in this market. We talked about the treasury assets; MicroStrategy, when they bought 425 million bitcoin, apparently, Michael Saylor, the CEO, just sat there buying bitcoin on an exchange over a period of 11 days, and he was just amazed that he didn’t impact the price buying nearly half a billion dollars of bitcoin. But this is a liquid market. It is starting to become a meaningful asset. And I don’t think that’s changing.

Lau: It’s certainly not changing. And back to your listing, as you’ve mentioned, you went through a lot of regulatory hoops to get there and the industry is better for it, as more and more move towards making investors feel safe. I think that that’s the perspective of a lot of people. But what do you think about the recent arrest of John McAfee and the ongoing BitMEX debacle? What was your reaction to this series of crackdowns?

Byworth: Look, it’s always the way that we thought about industry, even in 2017, we thought we were going to see regulator clampdown a lot earlier than this. That’s actually why we started building Diginex. And we were panicking at the time, we were like, “oh, my gosh, we’ve got to build this as fast as possible, because everybody’s going to realize this is the way the industry is going to move.” But actually, we saw very little in the way of moving in that direction. In fact, many of these exchanges that you mention continued to just attract huge amounts of volumes, and institutions, they’d speak to us. They would say, “look, we’ve really got no option other than to be transacting on these exchanges, even though we don’t know if we’re interacting with capital that hasn’t been properly KYC-ed or AML-ed.” This was clearly a very, very big problem.

So now that we’ve launched EQUOS, we’re starting to get that focus from these institutions that for so long were stranded for liquidity elsewhere. So I think that it’s a moment in time. It’s the way that the industry had to grow. If you think about the Internet, it grew very much in the shadows in the same way; it was a sort of a dark space in the early days, and I think this is just normal with an emerging technology, because you need to have those first movers to drive the growth to prove to the people that are going to bring the regulatory and the higher standard that there’s actually a business to be done here.

Lau: When you take a look at the globe right now, your footprint is pretty much everywhere, but you don’t have a U.S. business quite yet, even though you’re listed on the Nasdaq. A lot of the business and a lot of interest is here in Asia. Why would exchanges still prioritize the U.S. market? Why can’t the Asian market support the volume while liquidity is not as developed as we’re seeing in the U.S.?

Byworth: I think liquidity is there in the U.S. I think that actually, the way that I think about it is, you say obviously China, you’ve got 1.2 billion people, you’ve got 700 million emerging middle class. So while the wallet is interesting from a numbers perspective, from an actual cash perspective, it’s much smaller than you would get from the 300 million population that you have in the United States. The other thing to mention is that the business is focused on this industry. A large proportion of them do sit in Asia, but actually a very large proportion of them also sit in the United States. So many of these guys want to be onboarding to a platform, but we can’t actually onboard them yet because of U.S. nexus rules. So we have to just wait until such time that we can either partner with someone around the license or actually build our own platform in the United States, but that is a limitation and it’s certainly something that we want to take seriously and address as the business develops.

Lau: Well, Richard, the last time we talked, you told me that your goal in a year’s time is that we would be sitting here at Word on the Block talking about 10x to 20x growth in the derivative market. Where are we on that?

Richard Byworth: I think we’re about stable, largely because it’s taking time for these platforms like ourselves to roll out within regulatory frameworks. But Bakkt, CME, they’re both doing record volumes at the moment in institutional derivative products. We’re seeing massive growth in the option market, massive growth in the futures market. I think last time, it was only two months ago that we were sat here, the majority of derivative flow was perpetual-focused, so the perpetual product that we see on a lot of the crypto exchanges. Now, I think that that’s an important product. But I think it’s also very important that we get more and more of that option trade, because that was the point that I was talking about. When you have all the various strikes, all the various time structures, you are able to construct other derivative positions around that, things like variant swaps, vol swaps, VIX products, and then you get a whole slew of structured products and that really feeds the market, and then you have that overall growth and it becomes very cumulative very, very quickly. So, yeah, I still stick it: 10x the size by this time next year.

Lau: Well, I think that part of that growth story has got to be the foundation, and you’ve got to have a trusted foundation, as you noted those many years ago before you built this product and brought it to market. It’s about education, quite frankly, as people recognize what’s going on in this world with the real perpetual liquidity being the central banks of the world and wondering about the value of actual cash. That’s, I think, also in the background as we watch you grow. It was great understanding where you are today, where we are on track, and the listing – congratulations again.

Byworth: Angie, thanks very much for having me. Really appreciate it.

Lau: Absolutely. It was great to have you on the show. A big thanks to Richard Byworth, Diginex CEO, and a big thanks to you for joining us on this latest episode of Word on the Block. I’m Forkast.News Editor-in-Chief Angie Lau. Until the next time.