Future of Finance


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

Key Insights From This Interview

  • The global debt market is massive (US$120 trillion in outstandings) but fragmented by instrument and by different national and legal jurisdictions, which accentuates an intrinsic problem of illiquidity (at least outside government bond markets) in buy-and-hold markets. The operational infrastructure of the global bond markets is also inefficient.
  • FQX has designed an eNote as a generic corporate debt instrument to cover the range of short- and long-term varieties of debt, from commercial paper, through certificates of deposit, to fixed rate term bonds. Its purpose is to enable issuers to switch efficiently between short- and long-term debt and from single investor placements to multi-investor distributions. 
  • Initially, FQX is focused on short term-debt issued by corporates. Though they could benefit from securitisation and digitalisation, the supply chain and trade finance markets are not yet ready for innovation. Expansion into long-term debt is planned but it presents challenges – customised structures and more intense asset-servicing – that FQX has decided to tackle later.
  • Short term debt, being redeemed quickly, reduces the need to develop a secondary market trading platform. However, FQX expects demand for secondary market trading to increase in line with rising issuance size and duration. The ability to fractionalise tokenised financial instruments will increase the need for active secondary market trading of eNotes.
  • FQX has hosted an issue of eNotes denominated in a Stablecoin (USDC) into digital wallets. The company expects tokenised issuances denominated in digital currencies to increase in tandem with increased use of decentralised blockchain-based issuance and distribution networks that are less vulnerable to defalcation than centralised cryptocurrency exchanges.
  • Unlike the Decentralised Finance (DeFi) markets, where lenders rely entirely on heavy collateralisation to mitigate counterparty risk, FQX has designed a legal claim that is enforceable in a number of legal jurisdictions. It facilitates unsecured lending and borrowing but can also be used to supplement the taking of collateral by lenders. 
  • FQX has eschewed the classic blockchain strategy of circumnavigating securities laws and regulations in favour of obtaining legal opinions to provide issuers with a high degree of certainty over the legal status and regulatory treatment of their issue in Switzerland, the European Union (EU), the United Kingdom, the Cayman Islands, Singapore and Hong Kong.
  • The choice of jurisdictions is driven by the availability of a legal framework that can support blockchain-based debt issues. But eNotes are not intended to be specific to a jurisdiction. The goal is to create an international “standard” that allows eNotes issued in one jurisdiction under the law of a second jurisdiction and to be bought by investors in a third jurisdiction.
  • The blockchain-based issuance infrastructure FQX has built can be accessed by issuers issuing eNotes directly to investors. But issuers can also access FQX via third-party matching networks (such as Instimatch) and exchanges (such as SDX, the digital arm of the Swiss Stock Exchange SIX), in which case the eNotes are issued into (digital) central securities depositories.
  • To comply with the FATF obligation to check issuers and investors are not laundering money or funding terrorism, FQX is working with third parties to develop “white-listing” functionality that will use a variant of Non-Fungible Tokens (NFTs) to identify issuers and investors pseudonymously. The purpose is to ensure that on-boarding is as efficient as possible.
  • FQX is also building a RegTech Engine that uses smart contracts to build compliance into the tokenised eNotes issued on to its infrastructure. Smart contracts can, for example, prevent mis-selling, by eliminating the risk of selling an inappropriate instrument to a retail investor. Smart contracts can also constrain the distribution of eNotes geographically.
  • The earliest issuers of eNotes are blockchain-based businesses, such as the automated market-makers in DeFi, and cryptocurrency lenders and exchanges. The current low valuation of their equity is expected to increase their interest in debt financing. FQX also expects conventional technology companies to pioneer eNote issuance to cut capital costs.

FQX is a blockchain-based issuance platform for tokenised debt. Founded in Zurich in 2019, the start-up has invested as much time and money in the legalities as the technology and can now offer issuers near-certainty over the status of their security token offerings in legal and regulatory terms across six jurisdictions. The initial focus is on short-term corporate debt, with the aim of normalising the digital registration, issuance, transfer and trading of generic eNote tokens before expanding into longer term instruments and secondary market trading. Once established, the company believes the savings on issuance costs will encourage issuers to use the FQX eNote structure for public issues and private placements, for long-term financing as well as short-term debt, and for repeated returns to the capital markets. Built on a Solana layer 1 blockchain, FQX has also pioneered Stablecoin debt, with an issue denominated in the USD Coin (USDC) for the Hong Kong and Singapore-based crypto-currency lending house Babel Finance – collateralised by Solana coins (SOL). At FQX, Dominic Hobson, Co-founder of Future of Finance, spoke to Benedikt Schuppli, Co-Founder and Co-CEO, and Daniel Kellenberger, CTO. 

A full recording of the interview is available on this page. A transcript of the interview, which follows the questions below, is also available if you click on “Read the Transcript.” If you click on any question you will be taken to the exact point in the recording where the question is asked and answered.

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

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? 

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? 

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

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

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?

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? 

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

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? 

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?

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? 

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? 

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

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

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

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?

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?

Will FQX provide issues of eNotes with ISINs?

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?

How will transactions in eNotes be settled?

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

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

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

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

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

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

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

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?

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

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

What does success for FQX look like?