Swiss stock exchange SIX wants to democratize digital assets
SIX Digital Exchange’s blockchain-based digital assets platform and distributed central securities depository are designed to democratize investment. The digital exchange platform is a subsidiary of leading Swiss stock exchange SIX.
Leading Swiss stock exchange SIX’s blockchain-based digital assets platform and distributed central securities depository (CSD) is designed to democratize investment, said the platform’s chief client officer Ivo Sauter.
The digital exchange platform, SIX Digital Exchange (SDX), is a subsidiary of SIX and aims to integrate digital ledger technology with a central order-book stock exchange model to “ensure fair market conditions for all,” according to a press release.
- “Coming from a banking background, as I do, there are the obvious products such as equities, fixed income, dAPPs, funds, structured products, etc which can be tokenized and can be done on a digital exchange. But if we look a step further, we see all the known bankable assets — there’s a huge potential which can be tokenized as well and out of that they become tradeable at a much lower cost compared to as it is in the current system.”
- “The easiest example is probably always real estate. So if you look at real estate, the cost for transactions are quite expensive. If you can tokenize it directly or indirectly, that’s going to be much cheaper. Another project which we look at at the moment is also art. Art is always something people love. It’s a heart thing, it’s emotional, but also it’s something which people invest money into. Having a digital twin, which is clearly related to an art piece, I think will be a huge advantage.”
- “In all honesty, if it’s blockchain technology or something else, I think the clients are focused on the products — they don’t care what the product’s technological backbone is. [They say] ‘at this point in time, I’m going to buy a piece of art and I want to have it in a meaningful manner,’ and I think that’s what we’re focusing on.”
- “IDO stands for Initial Digital Offering. It’s basically a marriage between a traditional IPO world where you have regulatory certainty, where it’s clear where this belongs into the framework, and security token offering.”
- “How do we operate to ensure this regulated environment? That’s why we have decided to be on a permission blockchain so we can be the doorman, so regulated players can access it. We ensure the total spending issue is centralized.”
“I believe what we need to do is we need to widen the product range for clients. Democratizing certain assets in there as well because, for example, [when it comes to] art or real estate investment at the moment, only a certain type of clients can afford that, so you democratize these assets,” said Sauter.
The tokenization of assets in various sectors such as real estate or arts could allow for a greater volume of investors compared to the traditional investment market. A pilot version of the platform launched in September also features live trading and instant settlement.
The use of blockchain mitigates a variety of risks such as payment defaults, and also stores all transactions on an immutable ledger. A full launch is slated for late 2020.
“We will be an ecosystem, and on top of that ecosystem, there’s an application as a trading platform. I think the big difference to many of the projects is we have a clear B2B focus. Our clients will be banks … then banks will on-board clients,” said Sauter.
Regulated digital securities
The platform also provides companies a means to offer digital securities tokens, which they name Initial Digital Offering (IDO). The IDO operates similarly to a conventional IPO, with the difference that shares are security tokens issued by SDX.
See related article: Why AAX Built a Crypto Exchange with London Stock Exchange Technology
“It’s basically a marriage between the traditional IPO world where you have regulatory certainty, where it’s clear where this belongs into the framework, and security token offerings.”
According to Sauter, the IDO is the latest evolution in terms of digital trading. After approval from regulators, companies may have greater flexibility in terms of making the offerings accessible to potential investors, particularly with the use of smart contract technology. “So I think the gain from an IDO perspective is that all the post-trading activities can be automated, and I think that that’s a huge step forward.”
In December, SIX and Swiss digital asset bank Sygnum announced an investment in daura, a tokenization platform which may allow small and medium enterprises to sell shares of their companies through digital security tokens online.
The SIX Group is also working with the Swiss National Bank to examine the integration of digital central bank money into a distributed ledger technology infrastructure according to a press release by the bank in October. According to the statement, “this new form of digital central bank money would be aimed at facilitating the settlement of tokenised assets between financial institutions.”
China has plans to release its own digital currency through the People’s Bank of China. Singapore and Hong Kong would be among the first to host the project along with Switzerland.
Listen to the Podcast
Angie Lau: Welcome to this special edition here in Switzerland, I’m Forkast.News Editor-in-Chief Angie Lau. So what happens when you bring the future of digital assets to today’s traditional markets?
Well, in Switzerland you create SIX Digital Exchange (SDX), and it could very well set the new standard for an emerging blockchain enabled economy because of who’s behind it. Sitting with me right now is Ivo Sauter, and he is part of the executive board at SDX. I think for the audience to understand the impact of what you’re trying to build at SDX, first they need to understand SIX. So what is SIX?
Ivo Sauter: SIX is our mother company and is as a group, responsible for the financial market infrastructure in Switzerland. So that means we are owned by the Swiss banks. It’s 140 banks roughly, national and international banks which own SIX, providing several services through the banks. We operate the traditional Swiss stock exchange. We operate the CCP, the central counterparty.
We operate as well as the national central securities depository (CSD), so where every stock is ultimately held, where every Swiss equity is ultimately held. And last but not least, we operate the payment system for the Swiss National Bank. So any interaction in Swiss francs with the National Bank goes to the SIX group. With that knowledge and with that experience, we decided that we want to move closer to the blockchain, and that’s how SIX founded SIX Digital Exchange, a 100% owned subsidiary of SIX.
Lau: So in a way, it’s indirect investment into blockchain innovation in banking and trading from all the banks in Switzerland.
Sauter: Almost all.
Lau: I think that really speaks to the potential of how you regard the digital asset space, so let’s start there. What kind of product line, what kind of trading platform can we expect from SDX? What is the philosophy driving behind how you even define a digital asset and why it’s valuable to a market?
Sauter: As I said, we view ourselves as an infrastructure provider and therefore SDX is billed as an ecosystem. We see it beyond trading, we see it really as an ecosystem. I think the products are endless.
Coming from a banking background, as I do, there are the obvious products such as equities, fixed income, dAPPs, funds, structured products, etc. which can be tokenized and can be done on a digital exchange. But if we look a step further, we see all the known bankable assets –there’s a huge potential which can be tokenized as well and out of that they become tradeable at a much lower cost compared to as it is in the current system.
Lau: Give me an example.
Sauter: The easiest example is probably always real estate. So if you look at real estate, the cost for transactions are quite expensive. If you can tokenize it directly or indirectly, that’s going to be much cheaper. Another project which we look at at the moment is also art.
Art is always something people love. It’s a heart thing, it’s emotional, but also it’s something which people invest money into. Having a digital twin, which is clearly related to an art piece, I think will be a huge advantage.
Lau: So take that piece of art, for example–instead of owning a whole piece, but recognizing it as an investment alternatives it’s going to increase in value. You can’t afford to buy a two or three million dollar piece. But if you tokenized it and if you create a digital asset backed by this art piece, you could potentially own a piece of priceless art.
Sauter: Absolutely, I think it’s two things. Fractionalizing thing is one point you mentioned there, you probably can increase the transaction volume around it because it’s smaller pieces. Typically it’s more held by real estate investors. So there’s usually a bit more of trading and you can own a piece of art.
But even if you think of a whole piece, and in Switzerland, we have a huge private wealth banking environment as well, it’s much easier to buy a digital twin, something it is attached to. From an investment perspective it is easier than going through all the papers in order to buy an actual piece, which is how we do it at this point in time. So in either case, I think it really reduces administrative costs.
Lau: So SDX is really young, it’s not even a year old. Or maybe just a few months older than a year old. It began with a team of 6. You’re now at 130. Who makes up the team? What are they working on? What are you what are you trying to build here?
Sauter: We’re still a project, we are we are not live yet. If you split our team, it’s probably two-thirds to three-quarters focusing on our tech stack. So this includes developers, but also architects, business analysts, and the rest is split between product specialists, sales forces, and overhead like management, HR, finance, etc.
Lau: And they’re all working on a platform that people probably don’t even understand yet. When you go live to market, what do you think the market can expect from SDX?
Sauter: We will be an ecosystem, and on top of that ecosystem, there’s an application as a trading platform, I think the big difference to many of the projects is we have a clear B2B focus. Our clients will be banks because we are applying for stock exchange with the CSD license, and that’s how CSDs can operate, then banks will onboard clients.
I believe what we need to do is we need to widen the product range for clients. Democratizing certain assets in there as well because, for example, [when it comes to] art or real estate investment at the moment, only a certain type of clients can afford that, so you democratize these assets.
But in general, it’s a new product range in a cheaper way, handed to clients where banks or even end clients, if banks have this model, can hold assets themselves in a wallet. So decentralized custody.
But in all honesty, if it’s a blockchain technology or something else, I think the clients are focused on the products, they don’t care what the product’s technological backbone is. [They say] ‘at this point in time, I’m going to buy a piece of art and I want to have it in a meaningful manner,’ and I think that’s what we’re focusing on.
Lau: You’re also creating something called IDO. What is that?
Sauter: IDO stands for Initial Digital Offering. It’s basically a marriage between a traditional IPO world where you have regulatory certainty, where it’s clear where this belongs into the framework, and security token offering. I think [is in the space] where the lines are still not very clear. We tried to bring those things together and that’s how we came up with “IDO”.
Lau: So it’s not an ICO.
Sauter: It’s not an ICO. We use the same technology in order to operate it, in order to do smart asset servicing. We use smart contracts, it is something which exists on our blockchain, which will be driven by Corda R3. But it’s in a regulated corner versus an ICO which can be regulated, but if it is regulated, it’s more an STO, but it is still not very clear what the impact is from a regulatory perspective. We as a regulated institution, obviously we have to be regulated space.
Lau: What did you identify as being the market need? Why did you create IDO? What was the demand that you were feeling from the industry?
Sauter: I would see it differently. If we look at the financial market infrastructure history in Switzerland in the early ’90s, Switzerland was probably one of the first exchanges who went to the electronic exchange called EBS back then. So from the ring where people were shouting at each other, we went to this electronic exchange.
And for me, the digital exchange, which IDO is a synonym for IPO in that world, is the next step in terms of evolution. An IDO by itself means probably that you have a wider range of how companies can access it given that the regulator approves it. An exchange like SDX is not deciding who can be listed, that’s the regulator who decides. So I think what is the gain from an IDO perspective is that all the post-trading activities can be automated. And I think that that’s a huge step forward.
Lau: So help me understand. Once approved by regulators to issue an IDO, how would that function for, let’s say, a blockchain company that decides “I want to raise money in the public market for my company through an IDO”.
Sauter: You need at the end of the day, a banking partner because you will probably need your fiat account, which you want to raise the money. That’s probably a bit of what we do different than what somebody does on a Bitcoin network which will raise bitcoin.
You would raise your fiat currency directly with a bank. It would be listed through a primary market transaction. We will provide you or your service provider with a smart contract generator to apply what kind of definition, what kind of standards you have to fulfill. So the dividend, for example, what are the triggers for the dividend, how it’s going to be distributed? Those are the things were going to support companies with.
Lau: So there’s a lot of this type of innovation happening around the world. What do you think differentiates Switzerland? What is the competitive advantage that is unique to Switzerland compared to what we’re seeing around the globe?
Sauter: I think that there’s a couple of things. Firstly, Switzerland has a very well-educated community. I would say generally we have very strong universities. Secondly, we have a very strong financial background, I think the GDP for a lot of the financial market for Switzerland is still 7 to 9%. So it’s relatively high for Switzerland.
We have a regulator in the government who has looked at blockchain and put quite a bit of effort. FINMA, the Swiss regulator, is probably one of the first ones which came in with clear guidelines about how tokens are to be segregated between security, utility or currency tokens. The regulators understand it, we have some government initiatives around it which are very willing and very capable to look into that and work together with that with the industry.
I think if we look at other countries, that financial market is a big step and they are well regulated, but those regulators have only started to get familiarized with it. Usually there is not only one regulator there. If you look at at the U.S., you have a [various] regulators which fragments responsibility and makes it much more cumbersome to talk to the right people, bring them together. Switzerland’s really in a sweet spot to have a financial market of size where it matters, but still a regulatory environment where people still can sit together and discuss things in a meaningful way.
Lau: One of the most telling signs, as well as the competitive nature, is the talent pool here. Google’s here, Facebook’s Libra is setting up here. That makes it difficult for yourself and other Swiss initiatives to actually compete with homegrown talent.
Sauter: Absolutely, it’s an advantage and disadvantage at the same time. Obviously, if you’re hungry talent, Switzerland comes on your map automatically because Google has the biggest research lab outside the U.S. in Switzerland. People try to come into Switzerland. We have a smooth inflow of talents or at least people interest to come.
The flip side is obviously there’s competition, there are several companies which look into that. We have as you mentioned, project Libra in Geneva, we have Google here. We have the Crypto Valley in Zug, which also has the Ethereum Foundation, quite some flagship offerings.
I believe with SDX’s unique position close to the financial market infrastructure, close to all the banks, we are an employer of choice for everybody who wants to go into that field. That’s that’s how we managed to scale so far and that’s how we intend to scale even further.
Lau: At the end of the day, there’s a number of challenges and bringing it back to the regulatory front, this is one of the most pressing issues in the industry today. So you’ve talked about integrating regulation and creating products where you go to market. It’s backed by the stock exchange here in Switzerland, which is a consortium of all the banks.
So you have this really integrated space. But what are the challenges that you still must overcome? People are talking about the problem with KYC, AML. How do you draw talent here? How do you draw projects here without that regulatory noose that perhaps squeezes some innovation away?
Sauter: We look at it from two angles. One is how do we operate to ensure this regulated environment, so that’s why we have decided to be on a permission blockchain so we can be the doorman, so regulated players can access it. We have a centralized mechanism called “Notary” where we verify transactions. So we ensure the total spending issue is centralized.
However, the causative function is decentralized. That’s how we have to interact and give in on certain topics to the regulatory reality, because at the moment the largest allows certain decentralization, and sometimes it doesn’t. This allows us as well to operate with banks, which are used to KYC, and we can operate between banks in a very regulated environment with all the advantages and disadvantages of that.
Hopefully we can guide people to more regulated environments, which then allows us to position this new technology in a wide way, that’s one thing. The second thing and that’s for me much more worrisome is how does this international technology be internationally regulated? Because the technology doesn’t know borders.
We talk of the internet of value, the internet of money, and that means it’s really everywhere. What we see at the moment is that even though they tried to follow some channel directions, the implementation of each country is quite different and some countries have very strong or non-implementation, think Asia or China as an example, where it’s almost impossible at this point in time.
But as well, the U.S., which has everything as a security and has [everything] follow the securities law without too much guidance around it. Those things are a bit of a worry for me because at the end, that’s going to be an international technology and we need to find guidelines internationally aligned like we have it in the traditional world.
If I look at what happens now, that’s probably still a process which will take a couple of years. But I hope that committees of regulators seek to gather and bring that [fast forward].
Lau: That’s definitely the direction that we’re seeing as well. What can we expect from SDX in 2020-21? What’s your product roadmap?
Sauter: We always build our products together with one or two partner banks and then increase in terms of buy-in with the industry which we are covering at that moment. We have started a couple of product use cases there: this includes IDOs as mentioned, this includes fixed income debts.
This includes funds as well, network as a service … We believe that we will achieve technical readiness at the end of Q1 next year before we really go live with a fully regulated exchange. I believe that’s going to be the end of next year, that’s achievable. It doesn’t mean everything will go live then, but I think the regulator parts will slowly start to emerge.
Lau: We will be watching. Thank you so much for all of your insights and sharing that with us.
Sauter: Thank you. It was a pleasure.