Switzerland’s stock exchange has announced a new initiative to create an integrated infrastructure for the digital asset value chain, addressing the divide between existing trading and post-trade activity and the emerging frameworks for the burgeoning crypto investment environment. The offering on the exchange owned and managed by SIX is the first fully integrated trading, settlement and custody for digital assets from a market infrastructure provider.
“This is the beginning of a new era for capital markets infrastructures,” says Jos Dijsselhof, CEO, SIX. “The financial industry now needs to bridge the gap between traditional financial services and digital communities. This is the role that we at SIX can play.”
Since SIX already runs the entire securities and payments value chain for Switzerland, Dijsselhof sees it as well-placed to create the appropriate digital ecosystem for existing and new market participants to develop their respective business models for capitalising on digital investment opportunities.
Significantly, SIX Digital Exchange (SDX) is being created in close collaboration with Swiss regulators, FINMA and the Swiss National Bank. SIX is regulated as an operator of Financial Market Infrastructure (FMI) by the two authorities. The aim is for the SIX Digital Exchange (SDX) to enjoy the same standard of oversight and regulation.
“We are in dialogue with the legislative and regulatory authorities to ensure that the regulations governing this ecosystem are both robust and appropriate,” says Thomas Zeeb, head, securities & exchanges, SIX. “The digital space currently faces a number of key challenges. These include the absence of regulation that ensures official safety, security, stability, transparency and accountability – all of which contribute to a lack of trust. The challenge is less in the trading of assets, but rather in the custody and asset servicing, including asset safety.”
Given that the core function of an exchange is to bring capital to business, SDX will be looking to provide that functionality for digital assets. The demand for such a service is evidenced by the existing pipeline of Initial Coin Offerings (ICOs) and Tokenised Asset Offerings (TAOs) observed in multiple markets.
SIX plans a phased approach for what is an ambitious and comprehensive initiative. The first step is to build a regulated exchange platform for digital assets and then to offer a service to tokenise existing bankable assets.
Zeeb sees no fundamental impediment to tokenising such assets. “As with depositary receipts, what is needed is to provide clarity under the law regarding title to a share of an underlying asset,” he says. For institutions to engage, he suggests, they need legal certainty in that regard.
A third phase of the project will offer the tokenisation of non-bankable assets, providing new investment possibilities, including, for example, real estate and art.
Zeeb says that while digital asset offerings will need to cover the processes that institutional investors expect for existing assets, future new issues on the digital exchange may well lead to new forms of issuer activity. “Take the example of corporate actions,” says Zeeb. “Stock splits, for example, will be unnecessary, if the assets are tokenised. In the meantime, we will create the necessary bridge for investors and market participants to move at their own pace.”
Ultimately, however, Zeeb sees the value chain for digital assets evolving to leverage the inherent benefits of tokenisation. “Do you adopt a model with many sub-custodians, including inefficient interfaces and with inherent risks, or do you go with a recognised and regulated infrastructure provider who provides all steps of the chain in an integrated and secure model?” he asks. He suggests that end-custody of digital assets at a token level should rest with a financial market infrastructure; “otherwise certainty of the link between the underlying asset and the tokenised share of ownership is eroded.”
For the cash side of a digital transaction, it is understood that current plans involve SIX creating a liquidity cash token linked to the Swiss franc, with supporting funds held in a segregated account at the SNB. The resulting tokens would be used for settlement against securities tokens within an integrated processing framework and not as a cryptocurrency tradable in its own right.
The first SDX services will be rolled out in the first half of 2019.