Future of Finance


Blockchain technology is not enough to build a global digital debt market

A transcript of the Future of Finance interview with Daniel Kilenberger CTO and Benedikt Schuppli CEO at FQX

Dominic Hobson 00:13: Hello, I’m Dominic Hobson, Co-founder of Future of Finance. My guests today are Benedikt Schuppli, Co-Founder and Co-CEO of FQX, and Daniel Killenberger, CTO at FQX. FQX is a Zürich-based FinTech whose ambition is to digitise corporate debt so it can be registered, issued, transferred, and (eventually) traded on a blockchain infrastructure. Benedikt and Daniel, thanks very much for joining us. 

Benedikt Schuppli 0.42: It’s great to be here.

Daniel Kellenberger 00:44: It’s great talking to you guys.

00.46: What fundamental problems in the debt markets is FQX designed to solve?

Dominic Hobson 00:46: Benedikt, perhaps I could start with you. What – I’ve just referred to, corporate debt, digitising it – but what fundamental problems in the debt markets is FQX designed to solve?

Benedikt Schuppli   00:58: Thank you, Dominic. So if we look at the debt markets, which are, you know, some of the oldest markets in the world, historically, they’ve grown to become extremely fragmented. And liquidity is stuck in silos. So that is in national silos. We have different legal frameworks, depending on whether you have a bond in Germany or whether you have one in the US. And then we have fragmentation across instruments. So a bond is registered on an entirely different infrastructure than, for example, a loan or a certificate of deposit is. And so this fragmentation, vastly informed by, you know, national legal, jurisdictional silos, just I think inhibits the true potential of the global debt market. And then, of course, there’s legal inefficiency comes with a lot of infrastructure inefficiency, where we just see, you know, in order for a bond to actually arrive at the end-investor, from the point where it’s, you know, issued from the borrower, it takes so many different steps and so many intermediaries, and we believe with blockchain technology, we can vastly alter the way corporate debt is being issued.

02.19: The term “promissory note,” which FQX uses, is a generic term. Is the “eNote” sufficiently flexible to cover all facets of the debt markets or just some parts of it? 

Dominic Hobson 02:19: As you’ve just said, corporate debt takes many different forms. It takes in business loans or certificates of deposits. There’s commercial paper. And promissory notes is a generic term, which can cover all those different varieties of debt. Now, is the … your own concept of an eNote – is that sufficiently flexible to cover all those different facets of the debt markets or just some parts of it? Some of those varieties or all of them?

Benedikt Schuppli   02:46: It’s an excellent question, Dominic. So the idea behind the eNote really is that we have a kind of one in all generic corporate debt instrument, which can cover a variety of financing purposes. Now, of course, as a start-up, we have to apply focus when going to market which is why we focus on a niche that revolves around short-term debt, as it’s not as much catered to and it’s not the most competitive market, or one of the most ones like the bond market is. Now, in terms of what the instrument can cover, this goes back to the previous question. And that is, we believe, the instrument itself that are, you know, on vastly different infrastructures, actually have also grown to be this different historically. And we believe at least some of these delineations, which separate the commercial paper from a bond from a certificate of deposit, are much more artificial than they are inherent by nature. And so if you can actually create an infrastructure that levels the playing field and is blockchain-based, we believe we can fulfill most of these financing purposes for which a bond, the commercial paper, is used with one of the same instruments and you achieve a much higher flexibility and modularity on the side of the issuer. So, you know, an issuer can just switch between short-term and long-term. It doesn’t mean it becomes actually a different instrument. The issuer can switch between, you know, just having one investor having a bi-lateral loan over to having hundreds of investors making a kind of a commercial paper or bond product. That’s our vision. 

04.33 Your initial focus has been on short-term debt (i.e., less than 12 months) – money market instruments and trade and supply chain financing. What was the reason for that? 

Dominic Hobson 04:33: Now, your initial focus has been on short-term debt. i.e., debt instruments which are less than a year away from maturity, money market instruments, and trade and supply chain financing. What was the reason for that? Why didn’t you go straight to long term debt as well?

Benedikt Schuppli   04.52: The great thing about the promissory note is its abstract nature, right? It’s an unconditional promise to pay. And this means that it has some superiority compared to instruments, which are very prevalent in the factoring or supply chain finance space, because they’re most of the times just [the] receivables space. And you don’t actually have an abstract unconditional promise to pay. You don’t have really an instrument or a debt instrument. That’s why we figured this would be actually a great niche to start alongside corporate debt. But we then also realised over time – and I think that’s just some of the things you have to do as a start-up is fail and learn and adapt – is that the market is not flexible enough to really embrace innovation of the kind that we offered. So we wanted originally to also work with, you know, financial intermediaries offering supply chain finance solutions to corporates. And you could tell, although many of these corporates are in dire need of innovation, they don’t have the culture to embrace it. And this is why also we have focused now more on corporate debt, actually, and less supply chain finance, and also are going much more in the spirit of digital assets, because, culturally, these companies are much closer to us as a blockchain start-up.

06.23 Do you have plans to extend into the longer-term debt markets (i.e., into fixed rate fixed term bond issuances)?

Dominic Hobson 06:23: Do you have plans to extend into the long-term debt markets? By which I mean to include fixed rate, you know, term bond issuance as well.

Benedikt Schuppli   06:34: Absolutely. I think once we’ve established our instrument, as a market standard for blockchain-based debt issuances, focusing on short-term debt in the initial phase, we will then venture out also into the long-term market. There is one, I would say, caveat to this, we thrive on standardisation. So the more standardised an issuance can be, the better for our instrument. If we go into the really long-term space, you know, so syndicated loans or long-term bonds up to ten years, they’re oftentimes so customised, that it’s difficult to leverage blockchain technology and standardisation and digitisation to really make it worthwhile. So that’s why I think a natural caveat is in there somewhere.

07.25 What are the challenges, such as the need for more intense asset-servicing, of getting into the longer term bond markets?

Dominic Hobson 07:25: You’ve just mentioned that the difficulty of servicing very long-term bond issues, but are there other challenges, apart from the duration issue? In other words, do they make more demands in terms of asset-servicing? They have coupons. The coupons can be variable, and they have redemption schedules, and so on. Is that an obstacle to getting into the long-term bond markets as well – those sort of issues, that asset servicing side?

Benedikt Schuppli   07:50: Absolutely. I think from a mere technical perspective, right? The more kind of payment flows in one asset lifecycle we have to include, the more complex it gets. And that’s why also our initial products- we’ve already gone to market with our zero-coupon instruments – where we basically only have two payments, and that is the issuance and the redemption, and we don’t have any interest or bullet payments in the duration. Now we understand that many, you know, investors are used to this but also over time, you know, we can cater to both. We can have interest payment paying loans. We do actually believe the standard [inaudible] to actually just a zero-coupon instrument in the short-term space.

08.36 The recent Babel Finance eNote issuance to raise USDC (a Stablecoin) indicates FQX is moving into digital lending using Stablecoins and crypto-currencies as collateral. How important is that potential market to your long-term strategy?

Dominic Hobson 08:36: Now, Daniel, perhaps I could bring you in at this point. This is not just theory we’re talking about here; this is practice as well. And the recent Babel Finance, you know, issuance, which raised USDC, that indicates that FQX is moving into digital lending, something Benedikt referred to a minute ago, using Stablecoins and possibly cryptocurrencies as well, as collateral. Now, how important is that as a potential market for FQX in the long-term?

Daniel Kellenberger 09:08: I think I will elaborate quickly, first on the short-term, which is that we’re actually quite focused on exactly this kind of market to begin with. In a certain sense, our new platform will cater a lot to the Stablecoin kind of lending applications. And we do that because we as a company believe in the future of finance being mainly on the blockchain, as tokenised assets and currencies become more prevalent. And this is mainly for the reasons of transactional efficiency, but also just for custody reasons. Clients and users are able to hold those assets directly in their wallet, which as we’ve seen in the recent kind of meltdown of centralised finance corporations which have lost customers’ assets, [is better] Given that they were managing them, and [their] customers didn’t have direct access, and not direct custody, you can see how problematic centralised managed assets can be if they’re not properly managed. And, yeah, given the future outlook, Stablecoins and tokenised assets are something that we’re really focusing on both in the short-term and the long-term. 

10.43 Where tokenised issuances have taken place so far, in the DeFi markets, they have had to be not just collateralised but over-collateralised. Are all FQX issues going to be fully or over-collateralised or can they be partially collateralised or even uncollateralised? 

Dominic Hobson 10:43:  As you mentioned a minute ago, you are focused on digital assets, tokenised assets, being issued on to blockchain networks. Now, where that has been happening in the recent past, in the in the DeFi markets, for example, all those issues have been collateralised. So are your issues going to be fully collateralised, partially collateralised, or even uncollateralised?  They’re going to follow that DeFi model?

Daniel Kellenberger 11:07: Yeah, so we’re going to follow the DeFi model, and in terms of it feeling like a DeFi experience. But we will distinguish ourselves by really backing the token by this legal claim, which … So I think a good way to explain it is that in the sunny case, everything goes well. You go through a process that feels like DeFi, where you deposit your investment and, after a certain point, you will redeem your yield. And it will feel all like DeFi. The difference being that you don’t have to necessarily provide collateral as an issuer of the debt instrument. You can do it completely uncollateralised given that, in a worst-case scenario, you have the legal backing of the underlying token, which you can then [use to] enforce that claim in a court of law. So there’s two aspects here that are really the thing[s] that we think distinguishes us from potential other companies. [One] is that we do DeFi experience in the sunny case where everything works well. But in the worst-case scenario, you do have this legal claim, which will cover you, in case of a default or a similar scenario.

Benedikt Schuppli 12:30: Maybe to add to this is, really, we have built an instrument that covers really the full range, from fully, or even if you want to, over-collateralised, to completely unsecured, right? And this is just, in the end, kind of a spectrum. From if someone wants to go unsecured. Obviously, they will have to deliver some kind of proxy or credit rating. We can facilitate this by, you know, providing anything from a Moody’s credit opinion to a fully regulated short-term rating, which is provided by some service providers in Europe. All [the way] over to then, you know, just a secured and collateralised transaction. Overall, because we provide this globally enforceable and secure legal framework, we believe we can lower the loan to value ratio, and just create more capital efficiency. And I think that’s the gist of it.

Dominic Hobson 13:33: Now, you’ve both said in your different ways that you can do this uncollateralised, which makes it very different from the DeFi markets which have been characterised, if anything, by heavy over-collateralisation. So you are saying, are you not, that you can actually reduce the size of haircuts on average and in some cases they won’t exist at all. But in other cases, they will be much lower than that very heavy over-collateralisation we’ve been seeing in the DeFi markets. Is that right?

Daniel Kellenberger 14:00: Yeah, that will be correct. 

14.03 How does FQX find investors and how do they express interest in lending to issuers?

Dominic Hobson 14:03: Okay.  Now, how do you go about finding [investors]? You’ve got to find investors as well as issuers. How do you go about finding investors? And how do they express their interest in lending to the issuers which you found?

Daniel Kellenberger 14:20: So I think there’s multiple ways of investors finding opportunities to invest in. So, firstly, there’s the way to come through third-party integrations, and they’ve already found their counterparties and are submitting those they wish to invest [in] through a third-party into our API [Application Programme Interface]. On the other hand, we will also emphasise more our own platform, with a marketplace where investors and borrowers can find each other. And also, of course, we’re going to be looking to directly co-ordinate some of the liquidity and work with and are working to line up partnerships to have the liquidity provided into our marketplace. So, yeah, that’s the main avenues we’re looking at right now.

15.18 One of the aims of FQX is to provide issuers with the flexibility to do bi-lateral issuances (one issuer and one investor) and multi-lateral issuances (one issuer but dozens of investors) and to return to the market repeatedly without incurring excessive issuance costs. What are the barriers – especially the legal and regulatory ones – to doing that? 

Dominic Hobson 15:18: One of the things you’re looking to provide those issuers with is flexibility. In other words, they can issue eNotes to one investor, i.e., bi-laterally or they can issue notes to dozens of investors – do it multi-laterally. And you also want to give those issuers the benefit of being able, particularly if they’re coming to the market very frequently, and very big issuers will be in the market on a weekly basis, almost, [of lower issuance costs]. You can cut those issuance costs. It will be extremely valuable to those to the issuers. What’s the … what are the difficulties? What are the barriers to actually making that happen? I’m thinking here really not of technical barriers, more of legal and regulatory barriers to allowing an issuer to do a bi-lateral issue here and a multi-lateral issue there, sort of do them sequentially and frequently. Have you encountered legal and regulatory barriers to making that happen?

Benedikt Schuppli 16:14: Well, thanks so much, Dominic, I think this is really a very pointed question. And if you look at kind of the evolution of blockchain finance, decentralised finance, you know, starting from the ICO [Initial Coin Offering] era over to DeFi or CeFi, people have always tried to circumnavigate securities regulation, right? And they tried to argue, sometimes in a very exotic fashion, that, you know, their tokens, although very clear investment vehicles should not be considered securities from the perspective of many different legal frameworks around the globe. FQX has done a lot of groundwork to enable the product that we offer. And so we can actually offer fully regulated debt securities – something which really barely anybody else can, in this sense. And that is because we’ve done a mapping part for the past few years, making actually sure that we can account for the difference, because you’re absolutely right, a bi-lateral issuance between one investor and one issuer, in most cases, does not qualify as a security. It may qualify as, you know, a regulated banking business or Lending Act, etc. but it mostly does not qualify as security. If we venture into offering, you know, a series of standardised notes – you know, emulating a bond or a commercial paper very clearly – in most jurisdictions around the globe this will be qualified as a security. And we have a number of measures that we take to mitigate the risk and make sure that what we offer is compliant. And this can be, you know, from just restricting it to [a] qualified investor base over to making sure that it’s a private offering not a public one as it relates to prospectus obligation, etc. So there are barriers. But we also know [that] because of these barriers there’s a large opportunity out there and we’ve done the work – both the legal and the engineering and the technical work – to make sure we can master those.

Dominic Hobson 18:27: That legal engineering has been in Switzerland or has it been in multiple jurisdictions?

Benedikt Schuppli 18:32: So we have flexibility to actually offer several jurisdictions, both as they relate to which investors can we address, which issuer base can be addressed, which applicable law can we offer. Most of our work – research, you know, non-action letters by financial authorities or financial conduct authorities – has been focused on Switzerland, European Union, UK, and then some, let’s say digital asset-heavy markets like Cayman, Singapore and Hong Kong.

19.10 What has been the reaction of traditional sources of short-term finance such as cash-rich banks and money markets and asset managers to the emergence of FQX? 

Dominic Hobson 19:10: That sounds difficult. It also sounds expensive, working all that out. But you’re also not entering a marketplace, which is completely de novo. You’re entering a marketplace where there were existing sources of short-term finance, cash-rich banks – increasingly, asset managers are willing to fund corporates as well. What’s been the reaction of the – if I might call it – the traditional short-term finance industry to your emergence [and] to your plans?

Benedikt Schuppli 19:42: So I think we’ve seen quite a full spectrum of reactions from huge enthusiasm, you know, especially I guess [from] product, experienced people – you know, they see the benefits. That on the one hand, we are conflating huge inefficiencies on the infrastructure side. And we can create by, you know, bringing everything on [to] one infrastructure, and on a blockchain basis … We can deliver so much customer value. So many see that, and I think this is where the space is going. And it’s kind of an inevitable direction. And others, of course, I would say, are more protective of their own business. They fear that this may have some cannibalising effects. We feel it’s, you know, we feel it’s less the case in the short-term space than in the long-term space, but even here, right, when talking to banks, some of, you know, let’s say their head of corporate banking, may fear that this would actually start competing with their revolving credit facilities. And others may think that this would compete with some of their investment products. But, if this is the kind of spirit that you embrace, then you’re never going to be able to master innovation and [the] changing times that we live in. And so, at the same time, we’re so happy there’s so many innovative financial institutions out there, both from the digital asset space, and also from the TradFi space, that are aware of this. And they know this is an inevitable change, and they have to prepare for where it’s going. And with those we are working together, and we are continuously going to work together.

21.30 Issuers can access the FQX infrastructure directly but also via Instimatch, CLST and SIX – and in future via other platforms and exchanges. Will indirect approaches to FQX outweigh direct approaches, both now and in the future?

Dominic Hobson 21:30: Daniel, can I ask you a question about, I suppose it’s distribution really to issuers. As I understand it, issuers can access your infrastructure, the FQX infrastructure, directly, but they can also access it via intermediaries like Instimatch, CLST and SIX, the Swiss Stock Exchange. And presumably, there will be other third-party distributors or intermediaries, if you like, which you’ll be willing to accommodate – other exchanges even. Now, as you look forward, do you expect those indirect methods of accessing your infrastructure to be more important than people coming directly to the platform? There may be a different answer to that in the short-term to the long, but what do you expect? Are you expecting indirect approaches to be more important than direct approaches now and in the future?

Daniel Kellenberger 22:21: So, currently, for indirect approaches, we’re actually expecting a lot of the issuance to happen within a CSD [Central Securities Depository]. That’s where the traffic from integrations is coming from mostly. In the near term, and in the future, we’re actually expecting to be growing our platform issuances directly with customers, directly through our platform, using the direct approach and the blockchain as the most efficient way to issue notes directly to investors. And we’re expecting to grow this market together with the blockchain eco-system as this grows, as well, and it gets more established and more recognised. We’re also expecting to then grow into what is currently the traditional finance, which will then be able to use the blockchain infrastructure as the efficient settlement layer, which it is.

23.34 Issuers and investors are “white-listed” by FQX. Does that mean FQX conducts full KYC, AML, CFT and sanctions screening checks on issuers and investors? 

Dominic Hobson 23:34: Now FQX, like everybody else, including the cryptocurrency industry, is captured by the FATF [Financial Action Task Force] recommendations on [anti-] money laundering [AML] and countering the financing of terrorism [CFT]. Now, you’re going to have to put issuers and indeed investors through some sort of vetting process. You’ve got this whitelisting idea. Are you going to be doing this yourselves or are you going to be relying on third parties to do those checks?

Daniel Kellenberger 24:08: So we are currently building the KYC [Know Your Client] and KYB [Know Your Business] process. Some of that will be internal and some of that will work with third parties. And we’ll be looking to automate a lot of that as well so, with third parties, the experience of on-boarding is as smooth as possible. Now, given whatever on-boarding path ends up being chosen for the company, we will then be issuing … Technologically, we’ll be identifying companies using actually NFTs [Non Fungible Tokens] … Using NFTs to identify companies to be able to participate in the programmes that we’re deploying to the blockchain. So you can imagine the protocol itself being open. But us, as a service provider, when we deploy such an issuance programme, and us being the authority to authorise such programmes to happen, we will only authorise those programmes to happen if you show up with such an identifying NFT. And no matter what process needs to happen on our platform before, in terms of KYC and AML, we can reflect this in the NFT or even on our platform directly to see that you’re fulfilling those requirements and are able to participate in these programmes. Even though the protocol is open we can still, as the authority on those programmes, steer who’s able to participate, based on these access control rules.

Dominic Hobson 25:56: Would it be very misleading, Daniel, to regard your NFT model as akin to a digital identity?

Daniel Kellenberger 26:06: Well, it’s not directly an identity, given that you’re not going to be able to directly inspect and see who this entity is, right? So this is more of … It’s going to be pseudonym and it’s going to be able to [inaudible] so that programme knows if the NFT is in possession of this wallet; it’s been identified by the authority, which is us; and is then allowing participation. So, in one sense, we know it is an identity but for the general public looking at the blockchain, they cannot inspect it directly to reverse-engineer the identity. 

Dominic Hobson 26:51: Right, so you get the benefits of running the checks, but they also get the benefit of not having to disclose who they are or … 

Daniel Kellenberger 27:00: Yes. The identity will not be directly disclosed to the public blockchain as such.

27.06 Are issuers and investors free to work with third-party “white-listing” service providers or must they work with FQX-approved providers only?

Dominic Hobson 27:06: Am I right to think from what you’ve been saying that issuers and investors can work with third-party providers, which you have kind of approved because they provide a good enough service? Maybe one for you, Benedikt? I don’t know, you know, can an issuer or investor choose who runs those AML, CFT, KYC checks?

Benedikt Schuppli 27:26: So certainly, the goalpost would be to incorporate as many existing providers as possible, so we can really cover, you know, as many … the broadest user base possible. And many of these services, right, it would be I think not prudent, as a start-up, to build all of this yourself, trying to reinvent the wheel, because a lot of excellent groundwork has been done. Some really, really great products are out there in the market. And we just need to enable these products and incorporate them into our service offering. So you can really bank on all of the work that has been done.

28.07 What are the benefits of “white-listing” to issuers and investors?

Dominic Hobson 28:07: Daniel has begun to talk about this, but what are the benefits of that white-listing process, both for issuers and for investors?

Benedikt Schuppli 28:17: So the benefits are, I think, you know, clear too … Network effects you can generate because, just very logically, we’re going to create more efficient markets by allowing more potential issuers to participate, and more potential investors to participate, thus increasing liquidity available, and thus, really, then creating more efficient markets, lowering transaction costs. And I think this is something that underlies most of our product features. That really the idea of the spirit to lower transaction costs, to generate more efficient market conditions. And that’s why also, for example, you know, we enable the connection also with CSDs, such as SDX [the Swiss Digital Exchange CSD] because, this way, we can tap into more institutional liquidity, which otherwise wouldn’t be able to participate in some of these blockchain-based instruments.

29.20 FQX has a RegTech “engine.” Is whitelisting what the RegTech Engine does?

Dominic Hobson 29:20: Just very quickly, before we leave the subject of whitelisting, you refer to having a RegTech engine. Is the whitelisting what the RegTech engine does?

Benedikt Schuppli 29:32: Thanks for bringing that up. I think the whitelisting will be part of the RegTech engine. The RegTech engine is a concept that is associated with the notion of compliance by design, right? So if you look at how regulatory authorities worldwide  – whether it’s the Financial Conduct Authority [FCA] in the UK, or BaFin [Bundesanstalt für Finanzdienstleistungsaufsicht, or the Federal Financial Supervisory Authority] in Germany, or the SEC [Securities and Exchange Commission] – work, is they work by kind of instilling fear and with sample rates. But it’s a hugely inefficient work because either they’re going to have to find kind of like, you know, the bad apples that actually violate securities law, but they’re not often actually going to find all of them. So we have to assume there are so many unregistered securities offerings and violations of securities law, especially as they relate to a cross-border basis, even more so in, you know, the vastly unregulated crypto blockchain space where we know insider trading is a huge problem, front running is a huge problem, in unregistered securities offerings. We believe that, you know, regulation that is here to protect markets and consumers makes total sense. And we can actually use, leverage blockchain technology, to make this regulation more efficient. What I mean by this is, you can envisage now what we call the programmable security. So you have your blockchain base, you know, which is, let’s say, a short-term bond. And we can programme regulatory logic into this token, by using smart contracts that say, this token may never end up with a non-qualified investor, or this token may never end up with a US-based investor. And before you would actually really have to rely on – as the conduct authority – on sample rates. A financial services provider has to have a huge legal teams making sure it doesn’t violate this law. And here we can actually bring the emphasis to the programming and just create a compliance by design. And I think that there’s a huge, huge potential to also change the way financial system works and how they interact with the law.

31.39 FQX enables issuers to issue into digital CSDs such as SDX and Deutsche Börse D7, not least to comply with European law, which insists securities are issued into CSDs. Apart from compliance with the law, what benefits do issuers derive from issuing into a CSD?

Dominic Hobson 31:39: You’ve talked quite a lot about law and regulation, and you’ve made it pretty clear that the issue is that eNotes [issued] onto your blockchain platform are going to be doing so on a fully regulated, fully compliant basis. Now one of the regulations in in Europe insists that securities – which is what we’ve talked about earlier in this interview – have to be issued into a CSD. Now I understand you’re working with the two principal digital CSDs in Europe that’s SDX, the Swiss Stock Exchange digital CSD, but also with D7, the Deutsche Börse digital CSD as well. And Daniel referred to this earlier, about CSDs being an important vehicle for the growth of your business. What does issuing into a digital CSD mean for issuers? What do they get out of it, as opposed to complying with what the regulation says, with what CSD law in Europe, says?

Benedikt Schuppli 32:41: I think the issuers they can benefit from the fact that the digital CSDs, they work more efficiently. And we believe that, you know, this is now just the beginning. First of all, I think we will see a big shift of many other CSDs moving to digital asset-based technology, some of it Web 3.0-based technology, some of it not. But then, overall, the CSD itself will I think also withstand a challenge in the future, because the future is pushing towards bringing issuers and investors more closely together. And a CSD inherently has a high level of intermediation. And so we know right now, however, the way the law is written, many of the institutional investors can only invest if the assets are in a CSD, you know, provided to them in a regulated delivery versus payment. And there’s a lot of benefits to that in the short-term. We believe in a long-term. A lot of these precautions can be replaced by technology, specifically with three technologies, such as smart contracts and blockchain-based debt instruments. But so, yeah, the benefits for the issuers right now are they can nonetheless benefit from a more efficient system if they use the digital based CSD. They can actually build understanding, learn how to educate or how to interact with a Web 3.0-based financial system. And I think this will also, you know, make them ready for [the future] once we enter a kind of a further step of decentralisation in the future.

34.32. What are the characteristics of the issuers that are prepared to pioneer the FQX model and issue directly into investor wallets on a blockchain network instead of issuing in the conventional way into a CSD?

Dominic Hobson 34:32: Benedikt, as you say, the logic of the technology is to bring issuers and investors close together and therefore the endpoint here must be issuers issuing directly into digital wallets controlled by investors on a blockchain network, whatever the law and regulation currently currently says. And you were starting to give a flavour there of the type of issuer, the character if you like of the type of issue who wants to experiment in that way. Is it very obvious to you what the characteristics are of that issuer who’s prepared to issue directly, as opposed to that issuer who would prefer to stick to the tried and trusted method of issuing into a CSD? Are you seeing those two types emerge already from the issuers you’re talking to?

Benedikt Schuppli 35:18: It’s really an excellent, excellent point of discussion. I mean, there is an obvious candidate, which is, as you know, blockchain companies as issuers. This could be a variety from, you know, blockchain or crypto exchanges, which are in need of additional liquidity. This could be, you know, crypto market-makers. This could be your crypto trading firms, all over to crypto lending platforms. Another interesting candidate is the crypto foundations, right, which still have vast amounts of liquidity, many of them, but they their asset values have taken a dive. And so they don’t want to liquidate their current assets at this, you know, low. And so that’s why they want to have non-dilutive external funding from debt. And previously, you know, crypto foundations were not able to tap into regulated securities markets. We can actually offer that – they can tap into the markets and issue a blockchain-based commercial paper. So the obvious candidates are blockchain companies which have a proximity to the technology; they trust the technology; and they don’t necessarily need to trust in traditional institutions. But I think there’s another spillover effect. And that goes to, in general, tech companies, because tech companies are built very differently from other more traditional companies, because they’re built on the premise of efficiency. And when we talk to, you know, tech companies and many techies, they do not understand the way the current financial system has been built up; they can’t wrap their heads around these layers of intermediation and inefficiency. And that’s why they might not be plugged-in companies, but they understand the spirit and it has a very clear benefit and that is just a cost and efficiency factor. Because with the direct issuance, we can, you know, deliver 10x factor in terms of cost; we can liberate 10x factor in terms of user experience; go to market in terms of how long an issuance takes; self-custody, etc. So over time, I think the spillover will then come even to more and more traditional companies, but they of course, are not going to be the first movers. So first movers are blockchain companies. And then, generally, tech companies.

37.49 Will FQX provide issues of eNotes with ISINs?

Dominic Hobson 37:49: As you say, many of these blockchain companies come from a culture and background from the old ICO era, in which the purpose was to cut the costs, cut out the intermediaries, go directly to the source, if you like. Now, do that group of issuers understand the benefits? And I’m talking here about another aspect of CeFi, if you like, the traditional world of finance I’m referring to the use of unique identification numbers, ISINs, international securities identification numbers. Is that a service you’re going to be providing to issuers of eNotes? Are these eNotes going to have ISINs? 

Benedikt Schuppli 38:34: I think generally this will be opt-in. The issuers, you know, based on their type of investor that they’re targeting [will choose]. As an issuer, you need to have some kind of idea of, `Who am I targeting with my offering?’ If they say, you know, these are your traditional financial investors, they’re going to be very happy having an ISIN number. For some of them, it’s going to be kind of a nice-to-have. For some of them, it’s going to be a requirement, right? But then the requirement oftentimes comes with more and it has to be in a CSD; has to be delivered or catered, provided by delivery versus payment. FQX can already cover ISIN issuance in a number of jurisdictions. If it’s going to take place in the CSD, then the ISIN issuance will be covered by the CSD itself. If it’s going to be off CSD, we can cover that in a number of jurisdictions. And in some of them it works in a more automated fashion, where we have contingencies of ISINs from the local national numbering agency. In others it’s a more manual process. But. as we go, it’s definitely the idea to build this network globally so that the issuer can freely choose, `Should this issuance have an ISIN number or not?’

39.49: At present FQX does not provide a secondary trading platform but only an OTC noticeboard for investors to advertise their eNotes for sale. Is this a function of the initial FQX focus on the short-term finance markets only, which tend to be buy-and-hold markets, so there is less need for an active secondary market? Will FQX offer a full secondary market trading service in the future?

Dominic Hobson 39:49: Those ISIN numbers will be very useful in secondary market trading. We’ve talked almost entirely so far about the primary market, about issuance. And at present, as I understand it, you don’t provide a secondary trading platform – just a notice board, an OTC notice board for investors to advertise for sale their eNotes. Does that mean you’re presently, with your focus on the short-term finance market, basically operating in a market which is a buy and hold one only? And you’ll start to develop the secondary trading functionality as you get into longer term forms of debt? Or does it mean something else? You probably both views on this, but maybe Benedikt first.

Benedikt Schuppli 40:36: Thank you so much. I think you’ve put it quite well. This is the outset. Because we said we want to focus on short-term debt in the beginning, very naturally, there’s going to be a bigger emphasis on primary issuance compared to secondary market trading. But there’s two caveats to this. The higher the issuance size will become – the average issuance size – and the bigger the brand of the issuer, the higher the need for, you know, a secondary market to come into existence. And so as we move on to other larger issuances, larger issuance sizes, more recognised brands, even still, if we go to, you know, six months or 12 months maturity, there will definitely be a secondary market out there. And I think there’s a great need for that. So we will see the emergence of let’s say, kind of, you know, let’s say you have your biggest crypto trading company with a couple of billion in market valuation, or market cap, if they will issue a one year note, I’m pretty convinced there will be enough market data and interest to create a secondary market around that. If we move further up the ladder, you know, let’s say have Coinbase issue their first one-year eNote, then there will definitely be a very interesting secondary market around. Daniel, over to you.

Daniel Kellenberger 42:05: Yes, especially if you go into higher fractionalization, so you split the total value of the initial issuance into many fractions, you can see how this becomes a liquid market quite quickly. And it’s also one of the reasons why, technologically, we’ve decided to go to Solana initially is because we’re anticipating having a secondary market in that way. So once the volume of [inaudible] becomes big and the fractions and fungibility becomes real with high volumes on Solana, given the standard token program that’s been established as like a standard that we’re also deploying and using, it becomes almost trivial to deploy an order book directly on the blockchain using something like PROJECT ZERO. It could also then be directly integrated into our platform or potentially also offered on other platforms as secondary market solutions. So it’s definitely something we’re anticipating but you’re right, currently starting with short-term debt, if you have one eNote, it’s not going to be necessarily something you’d be looking to sell on a secondary market with an order book.,

Dominic Hobson 43:23: That a full secondary market trading service is a natural evolution of what you’re doing is what you’re really saying, right?

Daniel Kellenberger 43:31: Yes, it’s a natural evolution, but we’re anticipating.

43.35 How will transactions in eNotes be settled?

Dominic Hobson 43:35: Now, we’ve talked about the primary market, we’ve now talked about the secondary market. What about the third stage, if you like, which is the clearing and settlement of transactions in eNotes and indeed issues have to be bought and sold as well. So how is the settlement process going to work?

Daniel Kellenberger 43:53: I think that this is where the strength of blockchain and smart contracts really comes and shines is where you as an issuer, you pay back your debt, and you transfer it into an escrow. And basically, as a holder of this eNote, this gives you a claim [inaudible] that you have. If there’s 100 notes [in escrow] and you have five notes, you’ll get a 20th of what has been put in escrow and it will be paid out. Your token will be that which represents this eNote. It will be either destroyed or change status. This will make it super-simple and trivial to have the repayment happen as efficiently as possible. But on the other hand, if the issuer fails to settle, this is where the legal framework comes into place. What I alluded to in the beginning, is that in the dark times, you have the claim that you can enforce in court as well. So you don’t need this collateralization if the issuer fails to pay.

45.11 Where can FQX investors hold their eNotes – does FQX provide a digital wallet they must use or can they use their own digital wallet? 

Dominic Hobson 45:11: And the custody side? Where are the investors going to hold these eNotes? Can they bring their existing digital wallet along? Or do they have to use one which you provide?

Daniel Kellenberger 45:21: So we’ve made the decision that customers can bring their own wallets. And we believe that we’re not trying to solve a problem that is not in our domain. So we believe that clients should bring their own wallets. And there’s many companies that solve this problem very well. So, for example, we’re working closely with Fireblocks to integrate their solution and as well with WalletConnect in the near future. And they have very sophisticated solutions in terms of four eye principle, etc. And, yeah, we’re really focusing on bringing to [inaudible] security. And we are not meddling in kind of the technology of the wallet, where the user actually has custody over those assets. We’re just responsible for creating the assets.

46.16 What factors governed the FQX choice of Solana as its Layer 1 blockchain?

Dominic Hobson 46:16: And, Daniel, you’ve mentioned Solana more than once. Many people would think that going to Ethereum was the right and obvious choice to make. So what factors – we’ve touched on some of these already – but what factors persuaded you that Solana was the right choice for you to build your platform on?

Daniel Kellenberger 46:36: Right. So we were really trying to optimise for user experience. And just the fact that Solana is able to basically almost instantly settle those transactions, you get a user experience that is very close to something like Web 2.0 where you just click, do your thing, and you receive instant responses. Now, with Ethereum, you might have confirmation times up to multiple minutes, which, depending on the transaction complexity, if there’s multiple transactions, will add up to quite substantial times and will decrease or make the user experience less enjoyable, less snappy, as such. But also there’s other factors like the programming model, which to us, when we evaluated it, just seemed more scalable. Okay, I’ll elaborate a little bit. So in Solana the data and programmes are separated, right? So for example, there’s one token programme, which is able to create many tokens, and the tokens are specified in their data structures. Now, on Ethereum, you have standards on how to implement tokens, but they’re all their own smart contracts. They all bring their own programme, right? And this standardisation in Solana allows us to not just ask everyone who uses Solana to build on those standards and through that have inter-operability between programmes, but also be able to build on top of those programmes. So using this SPL token programme, which is responsible for maintaining and creating tokens, we were then also able to, for example, integrate something like PROJECT ZERO, which offers an order book for those tokens. And you can choose two token pairs and build an order book on that. And there’s many examples like this, where there’s managed token solutions that we can build on top of, and this inter-operability is really, as we judge, second to none. And, yeah, just factors like developers, developer growth, but also wallet growth, which gives someone a certain network effect and a certain growth metric that we also found quite attractive. Now, this doesn’t mean that we’re not looking to also expand later on into other blockchains. It’s just that for the prime user experience that we’re trying to build with this initial launch, we have chosen Solana for this, for the reasons I alluded to.

49.22 How important to the success of FQX is inter-operability with other Layer 1 blockchains?

Dominic Hobson 49:22: On that last point, you brought up there, can I raise that question of inter-operability now? You know, [inter-operability] across multiple blockchain verticals will clearly be helpful to investors, particularly to investors with their different wallets and so on, but also to issuers as well. That must be vital to your long-term success. So how important is that inter-operability?

Daniel Kellenberger 49:46: So I think what we are in the short or medium term focusing on is actually bringing in the liquidity from other chains. And there’s protocols that allow us to do this – something like Wormhole or wrapped tokens where we’re able to bring tokens from other chains onto the Solana chain. And you could imagine that, if you’re holding your USDC on Ethereum and you want to invest in the eNotes on FQX, we would build a bridging mechanism with one of those protocols where you could actually fund it into an address on Ethereum, bridge it over to Solana and have it escrowed on Solana and also exit that way as well. So you could also exit back onto the other chain. So that’s what we believe to be the most pressing use-case in the medium term. But also we’re looking to potentially bring the eNotes themselves and the programmes themselves, like the issuance programmes that issue those eNotes onto other blockchains, potentially Ethereum. Bring those tokens [themselves] also to those chains. But that would be a lower priority after the liquidity has been dealt with, I would imagine. 

51.14 What steps are being taken to address the vulnerability of any bridges built to other blockchains?

Dominic Hobson 51:14: Well, talk of bridges will make some people listening to this somewhat uneasy since they have acquired a reputation for creating vulnerabilities and openings for hackers to steal your assets. Clearly, you’ve got a long-term solution to that. But how large does the vulnerability of bridges loom in your concerns at this point?

Daniel Kellenberger 51:39: Vulnerabilities in bridging protocols are definitely something to be taken seriously before we launch any of these kind of bridging solutions. We would definitely have to evaluate them very deeply and thoroughly before we make any decision to integrate them into our system. 

52.00 In how many jurisdictions is FQX able to offer issuers legal certainty?

Dominic Hobson 52:00: I promised to come back to a question you raised earlier, Benedikt, on legal certainty. You’ve obviously done a lot of work to achieve legal and regulatory certainty and in more than one jurisdiction – not just Switzerland; I think you mentioned London, Singapore, Germany, possibly. I can’t remember if you mentioned the United States as well. But how are you offering that legal certainty? And in how many jurisdictions are you able to offer it?

Benedikt Schuppli   52:25: To chime in here first, legal certainty is probabilistic until you end up in a court and then it becomes binary at some point. That’s kind of the last instance. But nonetheless, as a system to provide trust, and financial and business transactions cross-border, we can talk about legal certainty and our framework is built on new and also existing legal frameworks that provide a basis for blockchain-based debt instruments. And so we have eNotes that can be issued under Delaware UETA, the Uniform Electronic Transactions Act, which provided the basis for electronic promissory notes, going back even to 1999. But also [the] Singapore Electronic Transactions Act, which is much more novel legislation, or Swiss DLT [Distributed Ledger Technology] registered securities. We will expand this basis to also cover German electronic securities, [and] soon also UK promissory notes which are blockchain-based and digital. The reason why we offer such a wide variety of legal bases and applicable laws is not because we have to offer one for each jurisdiction we want to be active in. It’s very similar to, let’s say, the derivatives market where the ISDA [International Swaps and Derivatives Association] agreements are the standard legal framework. And they are either issued under New York law or under English law. And this, of course, is accepted around the globe. It’s the same with our infrastructure. You can use our eNotes if you are in Singapore, and you can use it based on Swiss law, or you can use it under Delaware law. The difference is there are local proclivities to use an applicable law that you’re more inclined to use, so you feel more familiar with. And that’s why we offer this variability on this front. But the certainty we can offer [is] because these legislations offer a framework for blockchain-based debt securities. And so we have built the tech[nology] and done the legal engineering in a way as to comply with these provisions. And we can do this on a global level. The global standardisation we reach via arbitration, so we can make sure that the parties, wherever they may sit around the globe [have legally enforceable rights]. If you’re part of 169 countries that are member-states of the New York convention on the recognition and enforcement of arbitral awards, then you can enter into an eNote transaction [and] we will make sure that it will be enforced in a court of law – actually no matter where the issuer sits.

55.25 Does FQX offer or plan to offer staking as a service to users?

Dominic Hobson 55:25: Now, this is not a legal question but it’s an interesting question in terms of the additional services you might be able to offer to investors in particular, and maybe it’s question for you, Daniel. Are you able to offer staking as a service to the holders of the coins?

Daniel Kellenberger 55:44: So you could imagine, kind of indirect staking solutions with, like, having your collateral staked in some protocol or something like that. But currently, we have no plans to directly stake any tokens in our platform. It’s features that we are thinking about with collaterals. But currently nothing concrete. No.

56.06 What is the FQX commercial model – an ad valorem fee from every issuance and every transaction or something else?

Dominic Hobson 56:06: So, an important question, Benedikt – what’s the commercial model? How is FTX going to get paid? Are you taking your fee from every issue or every issuance? Are you also taking a fee when you get the secondary market trading going from every transaction as well? How are you going to get paid? What’s your model?

Benedikt Schuppli 56:27: So I think the basis will be an issuance fee. It already is, as it’s already applied on our current product. And here, of course, we can earn an attractive margin while still being highly competitive, right, because we can cut the cost basis. If you think about, you know, you look at a bond issuance, where in, you know, let’s say a European market, mid cap, mid-sized company, issues a bond of maybe 100-150 million, you’re going to have to pay 40-50 basis points to the bank, which is, you know, 600,000 bucks, just for issuing this instrument. So we have a huge basis where we can cut costs and still earn quite an attractive margin. And so this is the basis on which we scale the business. We will have some additional, ancillary services that can also be priced in, you know, for example, potentially collateralising, or securing a transaction can cost a bit more. And adding modularity. If you, for example, want to add an option – something we haven’t talked about. You know, we could technically also offer structured notes, where you have an option element to it, where the investor gets to choose which currency they want to be paid back at maturity, which can still be done with an eNote, but technically it becomes a structured product. And so there are several elements where we can add, you know, additional pricing. But you know, for us, this is not just about squeezing out the market or whatever possibility there is, we all really want to create more efficient markets and just deliver customer value. So I don’t think – we haven’t decided – but we don’t want to curb secondary market trading by including, you know, additional fees, just if we can.

58.28 Crunchbase records FQX has raised US$6.7 million from third party investors. Are you planning to raise more and, if so, what will it be spent on?  

Dominic Hobson 58:28: Among the people looking forward to you scaling the business are going to be your investors. And when I looked at Crunchbase, I saw you’d raised US$6.7 million from a bunch of well-known venture investors, including six FinTech ventures. You’ve obviously spent some of that money on this detailed legal and regulatory research that we’ve talked about. Are you planning to raise more money in the near future? And if so, what would you spend it on?

Benedikt Schuppli   59:01: Yes, so we’re actually just closing a small round at the moment. And we will then raise a Series A next year, once we have provided further proof of the huge market opportunity that we have with our product. And most of the money that we’re going to raise next year will really be spent just on, you know, scaling the business. And that means just, you know, actually adding more marketing and experienced, you know, high-profile salespeople to the team on the one hand, but also just continuously expanding the product bases, adding features, etc. And so we have really enough to spend it on. And as we’ve grown success, I think our team will definitely continue to grow. 

59.55 What progress has FQX made in terms of the numbers of issues and investors and the value and volume of business done?

Dominic Hobson 59.55: So some of the money will go on sales and marketing, as it were. What progress have you made so far, in terms of the number of issues that you’ve launched and the number of investors you’ve attracted? What’s the value and volume of the business you’ve done so far?

Benedikt Schuppli   1:00:10: So we have talked a lot about the research, the infrastructure we’ve built. The most resources we haven’t allocated on business development or sales in the past, but really on legal research and building the product, because it’s an extremely sophisticated product – as far away from being trivial [as possible]. Now that we’ve done this groundwork, actually, since a bit of a time now, we have gone to market. First we had a PoC [Proof of Concept] phase, so it was really about creating validation for our hypothesis that this tokenised debt instrument can be used on an institutional grade level. We’ve done a, you know, big pilot transaction with Credit Suisse, where they provided financing based on, you know, two public companies. We’ve done a number more of them. And so last year we ended with still, I would say, moderate total issuance sizes. We have now in the past half year, grown that by more than 1,000 per cent, so the average transaction revenue has risen, and the average transaction size [has also risen]. So currently, the average transaction size is around, you know, seven-digit numbers. So low, low millions. And this will also continue to grow now as we also have the first series of eNotes on SDX. Yeah, so it’s looking good. And we just see a continuous growth. And we’re looking very forward to now entering the market of really standardised tokenised debt instruments with our blockchain- based commercial papers and soon also blockchain-based bonds.

1.01.48 At present FQX is focused on German-speaking Europe plus Singapore. Does the company have further international expansion plans?

Dominic Hobson 1:01:48: Is one of the things you’re looking forward to further international expansion? You’ve been very clear about the markets. You’ve done this heavy lifting in terms of legal and regulatory research, and you’re obviously making progress in those markets. And are you planning to expand into other jurisdictions as you look forward?

Benedikt Schuppli 1:02:05: Absolutely. I think, the Holy Grail, the US market, is still up for grabs. But it is something we will do at a later stage, because it’s kind of a one-shot opportunity, and we first want to build a global brand and global trust in other markets, because we know not only is the US market still the largest one, it’s also the most competitive one that already offers a wide variety of short-term financing solutions. So in order for there to be successful, we really need to have all our ducks in a row. And, yeah, whereas in Europe, short-term financing is actually much less populated. And if it is, then it’s mostly by banks, but very few alternative funding sources. And the same actually applies to Southeast Asia. So these are the natural markets for us to grow in the near future.

1.02.59 What does success for FQX look like?

Dominic Hobson 1:02:59: This is my last question. I’d be interested in a thought from each of you, in response to it and perhaps, Daniel, you could address this first. What is success going to look like for FQX? How will you know when you’ve succeeded?

Daniel Kellenberger 1:03:16: I think FQX has succeeded if we have dramatically increased efficiency in financial markets, using those automatic issuance and settlement programmes that we’re currently developing. So, and having brought self-custody to our customers, and give them that security and efficiency increase that will bring their ability to finance and get yield to the next level. I think that will be the success for FQX in my eyes.

Dominic Hobson 1:03:51: Benedikt, I’m sure you’d endorse what Daniel has just said, but do you have anything to add to it?

Benedikt Schuppli   1:03:59: I think just, really, if we get large companies and even at one point a traditional company, to use our blockchain-based infrastructure for short-term or long-term debt transactions, I think that will already be success to show that, you know, we have brought blockchain technology to use in a way that we really think it can create value for users. And then in the end, also for society as a whole. If we could just generate more efficient sources of liquidity and a more level playing field access to liquidity – that’s going to be success for us.

Dominic Hobson 1:04:42: Benedikt Schuppli and Daniel Killenberger of FQX, thanks very much for taking the time.