Future of Finance


SDX says SMEs are the key to the growth of digital asset markets

[FEB 2023]

A transcript of the Future of Finance interview with Massimo Butti, Head of Equity at SDX.

Dominic Hobson  00:14: Hello, I’m Dominic Hobson, Co-founder of Future of Finance. My guest today is Massimo Butti, head of equity at SDX, the digital asset exchange and central securities depository owned by SIX, the Swiss exchange and post trade services group. Thanks for joining us, Massimo.

Massimo Butti 00.33: Thank you very much, Dominic. 

00:35: Your background is in exchange-traded derivatives. How do you think that’s coloured your approach to digital securities?

Dominic Hobson 00:35: Now, your background is in exchange-traded derivatives. How do you think that’s coloured your approach to digital securities?

Massimo Butti 00:46: More than coloured. I think that I can draw some parallels between the world of derivatives and the world of digital securities. One is clearly innovation. Derivatives have been at the forefront of financial innovation for the best part of 20 years. And that has given me a certain awareness of how to deal and how to cope sometimes with innovation, but also how to always look at the development of products and services on a specific asset class or on a specific market as a continuous innovation process. And I think the [inaudible] is very useful, because that is the way that basically [Distributed Ledger Technology] DLT and DLT-based technologies operate – these continuous cycles of rapid development and change. I think that the other thing is that innovation in derivatives has always been seen as a way to improve efficiency. And I don’t want to be reductive, but we always saw efficiency expressed into areas: better operations, better risk management, improved margins. And I think that looking at the innovation space in in the DLT world, that is also the same guiding principle.

Dominic Hobson 02:24: As you say, in the exchange-traded derivatives markets, you’re innovating in pursuit of efficiency, but one of the other things that happens in exchange-traded derivatives markets is you’re always bringing new products, new contracts, to the marketplace and you need to generate liquidity in those. Has your experience of doing that in the derivatives markets taught you some lessons about how to overcome one of the big challenges in tokenised securities – generating liquidity?

Massimo Butti 02:52: Yes, I think that, again, there are parallels in the two that can be adapted. Definitely some of the lessons learned in in the derivatives markets, especially in the more customised OTC exotic space, apply to the current DLT markets. If you look at the liquidity spectrum in derivatives, again, you go from incredibly liquid exchange-traded contracts with central clearing [Central Counterparty Clearing Houses] CCPs to OTC bi-lateral trades that are very much customised and the liquidity sometimes exists only because two counterparts are willing to trade. If you look at where we are at in the development of liquidity in DLT-based assets, we are very much, on a different scale, on the same spectrum, where you have relatively liquid assets like the top cryptocurrencies, to very customised products in the Decentralised Finance (DeFi) space, where the liquidity is expressed in a completely different way from the central order book. In DeFi, strictly speaking, in the liquidity pool, there isn’t even a concept of a central order book. It doesn’t exist. So when you look at the way OTC derivatives work, [you find] exactly the same thing. There is no central order book. Price discovery is carried out in a completely different way. It’s more based on price formation [through] valuation. And the same thing happens in DLT. So I think that there are a lot of lessons that can guide market practitioners when looking at how to structure and develop liquidity in DLT-based securities.

04: 53: Do you think blockchain-based networks could replace centralised central counterparty clearing houses (CCPs) with decentralised, peer-to-peer collateralisation?

Dominic Hobson04:53: Now, I don’t want to make this interview entirely about what’s going on in the derivatives markets. But do you see things happening in derivatives markets which are relevant or maybe [provide] interesting parallels for what you’re trying to do in the securities tokens markets. There’s been talk of replacing central counterparty clearing houses, for example, by a kind of peer-to-peer collateralisation, and you have seen that happening in the DeFi markets. Whether it’s a good thing or a bad thing, it’s one of the things which FTX under Sam Bankman-Fried was looking at doing. Do you see developments like that as having legs, as we move away from FTX and maybe start to re-think how DeFi will work?

Massimo Butti 05:40: Well, I guess that, when we are looking at DeFi and, for example, as I mentioned, collateralisation and centralised risk pools as expressed in the CCPs, if you look at DeFi, it runs completely counter to that centralisation. It is being built explicitly not to have central risk pools that are managed centrally by the members either by mutualising risk or sharing risk mitigation processes. However, as you mentioned, I think that there are tools in place in the Decentralised Finance world that could benefit the development of, if not hybrid models, but at least the convergence between DeFi and central [Traditional Finance] TradFi in that respect. And here the operating word is convergence, and we will talk about this probably later in the interview. The [Financial Market Infrastructures] FMIs play a prime role in helping that convergence. And we’ve seen that happening in the FMI world, via CCPs and CSDs, adopting DLT technologies to provide better tools, but also to provide a bridge into the DeFi space. I think that the some of these technologies and these techniques and these protocols could help greatly DeFi to reduce the need for collateral when transacting on a [peer-to-peer] P2P basis. They could help better understanding of cross-protocol requirements in terms of margins and collateral. I think that there are some interesting [Proofs of Concept] PoCs that are being carried out across the industry. Some of them, I think, really lead the way to shortening collateral chains and in facilitating risk compression. So I think that, again, to answer your question, it is a convergence process where I think the two worlds will meet.

08:25: Can digital assets rescue traditional stock exchanges from the secular downturn in public listings and the secular upturn in private ownership? 

Dominic Hobson 08:25: Okay, it sounds like we’ll see efficiency gains made in collateral and margin calls in the industry as well. Which I’m sure is true. Now, back to the equity markets. You’ve obviously spent quite a lot of your career at exchanges. You’ve been at London Stock Exchange and NYSE Euronext as well, and now you’re at SIX. Have you brought to SIX, as a result of that experience, a very clear sense of what digital assets are going to do to [traditional stock exchanges] or the opportunities they create for traditional exchanges? I’m thinking here particularly of the fact that traditional exchanges have a problem, which is that, globally, [Initial Public Offerings] IPOs are not taking place on the same scale as they used to. Companies are de-listing. Private equity is on the rise. And even when companies do come to market, often most of the money has been taken off the table already by private equity funds. So they have a problem. They have, obviously, a great data business but they do have an issue at the heart of the business. Can digital assets transform their situation? 

Massimo Butti 09:34: We believe that they can. And the reason is that the market you just described has an issue, which is [that] private markets have always been feeding deals and trades into the public markets. But in terms of infrastructure to support scale, and make those markets more accessible, private markets are completely under-served. They are under-served by FMIs in general. There have been very good attempts to build, curate, grow and guide private companies and [Small and Medium- sized Enterprises] SMEs over the years. You mentioned my two previous employers. They have very good programmes to help SME companies to raise capital in financial markets. However, if we look at the detail, they’re always feeder programmes aimed at ultimately making these companies go public. As I said, the trend is against that. And that has created a lack of support in general from FMIs for private markets and helping investors and entrepreneurs [in] raising capital. And they haven’t worked well in reducing the distance between investors and those capital opportunities. So, private markets require the infrastructure. And infrastructure has to be equally robust and equally scalable as it is in public markets. And, again, we have in my opinion jumped a generation of innovation in providing services to private markets. So they are an under-serviced segment of capital markets. So now we have this opportunity presented to us as FMIs by the technology. And DLT, almost by coincidence more than design, provides the possibility to deliver a lot of efficiency, and actually provide infrastructure that is robust. And also provide the same efficiencies, as I was alluding to before, in terms of cost reduction, better user experience, and in preservation of margins, that the public markets can. Clearly, there are examples of this that are nearly invisible to us. There are companies that go public now, and you discover that they’ve been private for 20 years. And in those 20 years something must have happened. They must have raised capital somewhere. They must have reorganised their investor base, reorganised their cap table. They must have issued private bonds, perhaps, or asked for loans. So all that happened in a bi-lateral, private way, almost, with a very complex chain of intermediaries in between. And yet, again, at the end, what you offer to your investor beyond the investor’s direct investment in your company, is a piece of paper that can’t be really used. It’s not really bankable, in certain terms. It is not part of the classic banking world. Simple things like ownership chains, or ownership titles, are a nightmare to maintain. Now, it strikes me that a ledger-based technology that relies on very simple encrypted records that can keep that [record], and where you can embed smart contracts, for example, which are again an innovation in the DLT, that automate a lot of the process of the maintenance of these securities and then make these securities available in the banking system. It is a much better mousetrap than what we currently have. So I think that the future is more usage of DLT. And we will see entire lifecycle maintenance flows of private equity maintained on DLT systems.

Dominic Hobson 14:59: Can I just unravel a lot of what you’ve said about private markets by asking you this: on the one hand, what you’re saying suggests that – and this could apply to any stock exchange, not just to SIX – [stock exchanges] need to restructure their proposition to the private equity industry. Instead of saying, `Well come and cash out your investment by an IPO,‘ you’re actually looking to change the proposition to them and saying, `Well, here’s a different technology, a different technique, for funding your proposition.‘  So you’re offering something slightly different to private equity. And then there’s this broader proposition that there are all those private companies out there who may never have taken in private equity capital, may never have thought of an IPO, but are raising capital, as you say, both debt and equity, in forms which are not very liquid, and unfortunately, [they] can’t really use as collateral for anything else. So you’re actually offering the private market space at more than one level. This is bigger than private equity. This is about the whole of the privately managed companies sector, right? And on a global scale?

Massimo Butti 16:15: Yes, it is. It  is a new proposition. It is not an enhancement of an old way of doing things. As I said, it is about creating an eco-system for private capital raising. It is about supporting the funding journey of companies. It is about providing also liquidity when needed, without the necessity to go public. Providing, for example, support for options or phantom shares, reward schemes in companies, incentive schemes for companies. It is about providing liquidity, for example, for minority investors who want to, perhaps, monetise their stakes in these private companies. Founder investors want early exits. We are creating all this. And, as I say, it’s [on] a much larger scale. But also it is a thought-through process that guides and supports and curates the fund-raising activity, the financing activity of companies, hopefully from pre-seed all the way through to maturity.

Dominic Hobson 17:51: I’ll come back to that very point about process, and what you can do to help these companies. Just so I’m absolutely clear here, we’re not saying to these privately managed companies, `Well, you might not want to do an IPO, but why don’t you do an [Securities Token Offering] STO instead?‘ It’s actually much more flexible as a proposition than that. There are lots of different forms of capital-raising instrument, which the DLT technology makes possible, in a way that conventional equity and debt don’t. Like sharing net profits or revenues, allowing minority groups to take money off the table and so on. That’s really what you’re saying. And that’s what the SDX focus is now is, on what are popularly called SMEs, right?

Massimo Butti 18:38: Yes. And I think that it’s very important to highlight this in what we’re trying to do:  we also try to recycle some tried and tested processes that work perfectly well but need to be enhanced and made better through the technology, and to create a completely new proposition. For example, one of the things that we are looking at is exactly the format. Our private markets are starting off by doing classical bonds and equity capital – shares. What the DLT and the DLT law in Switzerland allow us to do is for companies to issue intermediated securities in dematerialised form. And that helps us to take these dematerialised securities, turn them into the equivalent of a share, and digitise them, and deposit them and transfer them, make them available for deposit and transfer on the nodes of our custody and issuer agent members. Now, what you’re getting, to all intents and purposes, is a share in a company but the technology and the wrapper underpinning that technology is a DLT-based artefact. It is a cryptographic and encrypted entity that sits on our DLT network. At the moment, we’re doing that within our own private chain. We have a walled garden. It’s our own private chain that runs on Ethereum. And we have an implementation provided by [R3] Corda, for example, to run custody and transfer of these assets on our nodes, and where our members maintain the nodes on the network. It is a permissioned network. But we see that as one way to start transitioning and start building this world where private companies can tap into further sources of capital for their development, and we are making that journey relatively simple. All they need is an issuer agent, who is one of our members on our network, that will basically fill in what we call an asset definition form, and then create a digital asset that is transferable and settleable on our network. We allow atomic settlement. We allow [Delivery Versus Payment] DVP or even delivery free of payment of these assets. The issuer agents and the banks involved in transactions decide that. We allow these transactions to be carried out bilaterally among counterparts. But, for example, we maintain processes and checks and balances that you would expect from an exchange in terms of due diligence run on the issuers. The KYC is performed by the members on the network on their clients, [as are] the suitability checks, and all the compliance – the regulatory and legal checks that are required to maintain these assets within a regulated framework.

23:04: It would be unusual for a stock exchange to take on all the advisory functions associated with a traditional IPO. How extensive do your services have to be?

Dominic Hobson 23:04: Now in terms of making these companies investable in the way that you have described, and you’ve mentioned that you want to re-purpose some of the existing intermediary functions, and that can mean a lot of things. But one of the obvious things is a company being prepared to go public with work with an investment bank, with brokers, with marketing agents, with lawyers. To what extent can you as an exchange get involved in making these private companies more investable and thereby accelerate the growth of your own business?

Massimo Butti 23:37: When we say `making these companies more investable,’ we participate in the process. And the process itself helps make these companies more attractive to a wider audience of investors, although in a private setting. Distribution? It’s easier. As I said, our members are mandated to carry out due diligence on the issuing companies and due diligence on the investors. So KYC and AML measures are the standardised measures that you would accept expect in a regulated environment. And those checks and balances –  that due diligence, that robustness of process that is simple and more streamlined by using digital records, in this case tokens on a distributed ledger – makes them more investable. Title chains, registrations in commercial registries, all the company records, can be easily integrated into the issuance process by creating digital artefacts. They can be managed through using a token for validation, for example. We can automate through smart contracts the whole chain of checks that need to be performed in a way that is perhaps a lot more dynamic than what you have at the moment, where a lot of these processes are carried out based on some sequential algorithms. The other big advantage of this approach is that once the company is digitised and present on our network, there is no necessity to access a central database where you continuously pull or push information. Every time something happens – an event happens – on that security, [it] is automatically propagated throughout the network and visible to all the members of the network. So all of that communication is missing right now. Companies don’t have that kind of tools to inform their investors, inform their advisors, inform their issuer agents, of any corporate changes, for example. All of that is missing. Now we have better tools, and we will build even better tools in the future to capture all those changes so they can be propagated throughout [to] all investors. And in my opinion a company that communicates better, and in a more consistent way, also tends to have better investment success. There is a very high correlation between the way company information – corporate information – is propagated to investors and the success of companies. So we think that that possibility to communicate better and more directly with investors through fewer intermediaries makes the companies more attractive and more investable. Clearly, as I said, we can’t intervene beyond that. And ultimately a company is investable on the merits and demerits of their business and their idea. But if we can take away a lot of the work that is actually now invested by company founders, by owners, by entrepreneurs, in maintaining all that information in making sure that it’s communicated to investors, and to intermediaries, if we can take a even a little bit of that away from them, and make the interaction better, then that is all time that can be reinvested in making the company successful.

Dominic Hobson 28:04: You’re also describing a platform or a set of tools which issuers and their advisers can use to do these capital-raising exercises at lower cost. What you’re not saying is that, `Yes, we’re getting into the corporate advisory business, and helping make companies more investable.’  That’s not your business. You’re just there to provide the platform which those third-party advisers can use on behalf of their clients or the clients as issuers can use directly themselves. I think you’ve made that clear. And I hope I’m right to suggest that’s what you’re saying.

Massimo Butti 28:39: Absolutely. Thanks for pointing it out. It’s clear we are not moving into corporate advice but we want to fulfill our role as an FMI in making that interaction as smooth as possible. There are also barriers to entry at the moment for advisers and potential intermediaries in some parts of this interaction because they don’t have effective tools to access investment opportunities or investors, because there is no infrastructure to do it. There is no seamless tools to connect to investors. We hope to be able to provide that but, no, our role is to provide the infrastructure and provide the tools to execute this convergence between these two worlds.

29:40: Share registrars were once seen as an early target for disintermediation in blockchain-based networks, yet the SDX model accords them an important role. Why? 

Dominic Hobson 29:40:You mentioned re-purposing existing functions. The SDX group itself, for example, has as a digital [Central Securities Depository] CSD as part of its offering. And if we look at the traditional securities markets, and how blockchain was meant to disintermediate functions like CSDs, custodian banks, registrars, [there has been] some kind of rediscovery that these things – these services – are actually useful, not just in the traditional markets, but actually in helping the securities [token] markets to grow. To be specific, do you think that having an independent registrar, for example, will encourage more issuers to come, and more investors to come, to a digitised asset market?

Massimo Butti 30:27: We do. We think that share registry companies and share registrars, and companies using DLT technology to digitise share registry, and in corporate governance the maintenance and execution of corporate actions, have a very important role to play. Because, as I said, there’ll be points where these kinds of actions might be centralised. We don’t know yet. But surely there is an indication at the moment that share registrars will fulfill a lot of those functions. We have partnerships with FinTech companies providing DLT-based share registries. One of the things we are doing is building a connectivity for them to contribute and get data from our platforms, but also links straight into our custody systems. We are looking at a solution that will allow issuers to elect a share registry and a DLT-based share registry that is linked to our CSD members as their share registry service. And that will cascade the information from the issuer all the way down to the depository bank. The records of transfers will be automatically updated. And then all that information will flow back into the share registry. And, as a consequence, will be in real time query-able by the company itself. And all the advisers to the company have access to that. So the company has an up-to-date picture of its share registry each and every time. That, as you know, helps a lot of other downstream processes. The big advantage here is that we are trying to remove and automate the updating of these records by the depository banks or by the investors themselves, so as not to force them to have a manual message going through to the share register company, or the company directly, that then has to update the records in the share registry. So we are trying to remove all that and to automate the process so that it is driven from one central centre of trust. So when the record changes, the same principle of the digital ledger that we operate applies externally: all the records within the share registry are updated. So, yes, we think that external share registry companies play a very important role. And this is one of the services that we are looking to automate. We are on the way. I think that we should be able to push out at least the first version of that automation, or partial automation, next year.

34:18: What are the goals of the partnerships with Berner Kantonalbank (BEKB) and Daura?

Dominic Hobson 34:18: So registrars continue, but not in the way that we have come to know and love. You mentioned partnerships and you’ve formed quite a few of these. I’d like to just to explore how those relationships work with you. Perhaps we could start with the partnership you have with Daura and the Berner Kantonalbank (BEKB). Now I assume that that BEKB brings a client flow. The services Daura provides sounded to me very comparable to what the DTCC is trying to do with its digital securities management platform that it’s building for the privately managed asset markets. Am I right to ascribe those functions to BEKB and to Daura? And how do the partnerships work in practice, whether I’ve got it right or not?

Massimo Butti 35:06: Well, the roles are distinct, but they sort of overlap in certain areas. And BEKB is joining SDX as a member. So, as a member of the exchange, they will act in their capacity as issuer agent, depository and payment agent. They can elect to perform the three functions within our … 

Dominic Hobson 35:41: In that role, they’re not bringing clients from their Canton to the marketplace – they’re actually providing services?

Massimo Butti 35:48: They are providing services on our platform. As you know, BEKB has a fairly important presence already in private markets. They have a platform out there (SMEx), where they maintain markets in private equities and privately held companies, non-listed companies and on structured products. So in a way they are providing secondary liquidity for these issues. And one of the possibilities is that, at a later stage of the development of the relationship, these platforms might be linked into our CSD. Some of these private companies will elect to issue digital securities within our exchange. So all the secondary liquidity, all the trades on the secondary market, could then be settled on our CSD. That is one of the possibilities going forward. At the moment, Berner Kantonalbank is clearly interested in leveraging their position in private markets to help new companies issuing private equities in digitised form and [wants to] be part of that market in providing further services down the road. Daura, as you described, is basically a FinTech, a very smart FinTech, that provides, among other things, share registries, custody of DLT securities and pure tokenisation. They work very closely with BEKB. So they provide a bridge from their DLT securities into the banking world and the plan is clearly to make some of these DLT-based securities bankable by bringing them into our CSD. It’s a way for us to load our platform with new assets. The co-operation is based on those terms.

38:43: What are the goals of the partnerships with Aequitec and Aktionariat?

Dominic Hobson 38:43: You’ve also got these partnerships with Aequitec and Aktionariat. I noticed that Aequitec in particular helped F10 in that private placement of tokenised shares in SDX. As a digital CSD, they helped in that transaction. So how do those two relationships work – Aequitec and Aktionariat? What are you getting out of them? 

Massimo Butti 39:10: The role of Aequitec in that transaction was to provide DLT-based share registry for F10.

Dominic Hobson 39:24: Just what you were describing earlier, then?

Massimo Butti 39:26: Yes, the role I was describing earlier. So they are one of our partners and they are providing share registry for F10. At the moment that  process is not automated, but that’s exactly the spirit of the partnership. [It] is that we are driving together to deliver that automation I was describing before next year. The Aktionariat partnership is also along the same lines. Aktionariat provides share registry. They provide their own secondary liquidity to the companies that issue DLT-based securities on their platform. What we are looking to do is to build the optionality for their issuers and investors to take those DLT-based securities and transform them into intermediated uncertificated securities on our network, so they can be settled by the banking system. The advantage for the investors is that, in that case, they wouldn’t have to maintain a separate custody wallet or custody place. They can use their bank account and their security deposit account with their bank.

41:07: Does SDX allow users to access its services through existing intermediaries such as custodian banks?

Dominic Hobson 41:07: Just as they would if they had an account with SDX as a CSD?

Massimo Butti 41:13: Yes. They would have to be a client of one of the banks who are on our network as a member but, again, we cover about 90 per cent of the Swiss banking clients. Our members, as you know, [include] Credit Suisse, UBS, Zurcher Kantonalbank (ZKB), BEKB and CM-Equity. Investors and retail clients would normally open an account with one of these banks. If they don’t, I can only urge them to ask their banks to become members of SDX.

Dominic Hobson 42:01: To be clear here, it sounds as if this relationship makes it more convenient and more familiar for the more conservative and more established financial institutions to get involved in this market because they can go through a banking system and a CSD account system that they are familiar with, right?

Massimo Butti 42:21: Correct. Again, this is about the convergence I was talking about. This is a way to provide tried and tested processes that people are familiar with but providing them with a new technology engine [as well]. And we want that engine to be completely invisible, by the way. The user experience has to be either enhanced or be equally as good as what they have now. The gains for the for the users are exactly that. It is that there is a certain familiarity, there is a certain consistency in the processes as they are now. So, in the case of Aktionariat, as I said, this would be one of the options that they would provide to their issuers and to their clients. And, again, I think that for companies like Aktionariat, what that represents is a way to expand reach. And the companies who issue with Aktionariat expand the investor base. For the banks, it expands the addressable market in a way that doesn’t force them to take massive jumps away from established processes and also take excessive risks as a way of entering new markets. They can use our processes to start going into that direction without too much risk. And the thing is that the banks can still control the process because, as I said before, KYC [and] AML due diligence is still [controlled] by them in the process of accepting an investor or accepting an issuer.

44:39: Does SIX take the view that the traditional securities markets and the digital asset markets are on a long-term path towards convergence? 

Dominic Hobson 44:39: On that question of convergence – and I’m talking here at a high strategic level – SIX has obviously invested heavily in building these digital asset capabilities. But its view could have been, `We need to hedge our bets because what if digital assets overtake our traditional securities business? We will have this thing and we will be in a good position to survive any disruption.” Or they could take the view, `This gives us access to a whole lot of new assets, new markets, and therefore we will grow our business alongside our traditional business.’ Or they could take the view that at some point, over some period of time, and in the future, these two markets are going to converge. Do you think that the strategic bet which SIX has now placed is actually that the digital asset and traditional asset markets are going over time to converge?

Massimo Butti 45:30: Well, I guess the strategic bet is another one. Clearly [there] is the fact that these digital technologies are going to change the way FMIs operate. They present clear and tangible benefits for investors and in general for any users of financial markets – from payment services all the way down to investments – and the group could wait and do nothing and be then forced by its clients or market dynamics or simple economic circumstances to go into these new technologies and adopt these new technologies or they could decide to take the lead and shape this change. So, this is what, across the group, has changed the thinking. And the expression of that at group level is SDX, but also a lot of other initiatives that connect into these new technologies, across data, payment services and so on and so forth. Now, if we bring that down to our level, where we operate in terms of capital markets, I sound like a broken record. Convergence is the key word here. We are realising that and I gave examples. There are processes that are perfectly good and work perfectly well but [which] can be enhanced and can be used to provide a better user experience if enhanced with these technologies. There is also another aspect that is more important and is more long-term and is more where the vision is going, [which] is that public blockchain, DeFi, decentralised exchanges are not going to go away. But they need the expertise, the processes, the familiarity, that traditional financial players – and, more specifically, FMIs – have with providing consistent processes, with providing trust, with providing regulated environments, in responding to governance and compliance frameworks, in centralising some of these processes. At the same time, we recognise that we need the technology that is being developed in DeFi. We are confronted with new thinking that we cannot ignore, so we either help that transition and provide the right tools and we lead and we shape this narrative or, otherwise, I think we’re going to be submerged by it as FMIs. But also, again, it speaks to our historical role. FMIs are there for a reason – to provide infrastructure for financial markets. There just happens to be new financial markets that will be catering in a different way for different needs in the future, that we simply cannot ignore. But the two cannot live in isolation. They cannot co-exist. I think that they will need to come together. And, again, we are there to provide that – to help that transition in both ways.

49:59: Do you expect SDX to create and lead a network of its own or to be part of a wider constellation of networks? 

Dominic Hobson 49:59: You use the words `lead’ and `shape’ there, as well as talking about convergence. As you look forward, the way in which the strategy will unfold over time, is SDX orchestrating that change? It’s building this eco-system, you’ve got these partnerships, you believe that these existing intermediary functions will survive, albeit in altered forms. So is the vision offered here a kind of networked industry of which SDX is a part or is it going to be a network which SDX is itself building and creating? I think `network’ is the right word. I could use the word `eco-system.’ But does SDX become part of a wider network or does it shape and lead a network of its own and bring along all these other forces and players [that are emerging] as a result of these powerful secular forces, which you’ve described very articulately, about technology, about the decline of IPOs, the need for private companies to access new forms of [capital] in new ways and finance their businesses in new ways. These are all powerful forces to which you’re responding. To what extent can this network be your creation, as opposed to you being simply a part of it? It’s a very long and complicated question there.

Massimo Butti 51:38: You’re asking me to gaze into my crystal ball. I think that we are discovering new things all the time and that is what is exciting about being involved in capital markets at the moment. It is a very exciting moment because we are we are starting to discover new things and new ways of doing things. I think if we look at the world at the moment, the chances are that not only SDX but FMIs in general will be part of a vast network. They will have, in my opinion, a very important role to play in shaping and influencing the way that the network works. There are functions that can be centralised or will have to be centralised on that network. Things like who owns the trust, who permissions certain actions and certain functions, who will make sure that certain compliance permissions or certain regulatory rules are respected. That will probably need to be centralised – they won’t be decentralised across the network. So, you will probably need the centres of trust that still exist. And I think that FMIs will be that and will provide the infrastructure to the rest of the network to carry out that function. So, we can see already some areas where FMIs will provide, will be part, will be a node in that network. And they will provide some centralised functions. If you extrapolate from that, you can think of a future where there will be a necessity perhaps to provide some sort of sub-networked settlement or clearing functions that cannot be relied upon in peer-to-peer exchanges, in bi-lateral transactions.[They will]  need to be still centralised and performed by a centre of central trust. Then, if you look at the `How?’, what comes before that is liquidity, is transactions. Where does that liquidity take place? Can FMIs help that liquidity develop, or that is that liquidity better served by the network itself, free and unconstrained to develop that liquidity as they want and as they wish, and exchanges will perform only post-trade [services], what we call now traditional post-trade functions? I’m sure they will be different. Will the exchanges maintain ledgers where specific transactions are validated or permissioned? So, to answer your question, we think that FMIs in general will become nodes in that network. As you know, not all nodes are created equal. Some nodes are larger. Some are just smaller. Some nodes will perhaps provide specific services. But I think we’re going to be part of a wider network.

56:03: Are there synergies between what SDX does and what SIX SIS does?

Dominic Hobson 56:03: Back on planet Earth, are there concrete synergies now between what SDX does and what SIX SIS does? Or do you at this present moment operate mainly in separate silos?

Massimo Butti 56:15: Well, at the moment we operate in separate silos. As you know, SDX is an independent entity within the group. We have our own separate regulatory licence with [the Swiss Financial Market Supervisory Authority] FINMA. So our CSD and our markets are regulated separately from SIX, as a separate exchange. Then clearly, internally, there are a lot of synergies that we can leverage off that are being built with the traditional world or with the rest of the group. Certainly, we are learning a lot. And a lot of these lessons are clearly being leveraged by the rest of the group. Also, I would like to point out that the blockchain technology/DLT activity of the group is not only confined to SDX. Within the group, there are other areas and other divisions where we’re looking at these technologies and already using and building services based on these technologies. But I think that the different centres of knowledge and skills and competence within the group are slowly trying to get together and in the end they will certainly leverage off each other.

57:44: How does SDX recruit issuers?

Dominic Hobson 57:44: Can I ask you a very basic question about how you go about finding issuers? You’ve touched on this in a number of ways. You’ve certainly described very clearly how the services you provide help to cut the costs of raising capital, and you’ve described very clearly how that doesn’t necessarily mean disintermediating all the functions of the traditional securities markets. I’ve noticed you’re working with CM-Equity, which is, I think I am right in saying, a German introducing broker or corporate adviser with a speciality in in the digital assets area. Are relationships like that how you think you’re going to find the deal flow of issuers going forward?

Massimo Butti 58:35: At the moment, yes, we are relying on external counterparts to provide the deal flow of issuers. We want to enhance that. We want to have more partners that can potentially provide flow into our platform. However, as you know, that’s a lesson from the old world. Exchanges across the piece are very active in scouting and selling their issuance services and their primary markets to issuers directly. The London Stock Exchange is an example of that and other exchanges are too. Are we going to start down the same the same route? Possibly, if we see a benefit for the whole eco-system, for the community, of us being more active in marketing directly to issuers, which is something that we already do in a sense, but in a very restricted and very small way. Are we going to go into that? It’s a possibility. We would certainly do it, though, with our partners and with our members.

1:00:04: How much do issuers care about secondary market liquidity and post-trade services, as opposed to obtaining a lower cost of capital?

Dominic Hobson 1:00:04: And those issuers are impressed when you talk to them about the possibility of cutting the cost of capital, I’m sure – correct me if I’m wrong, whether that argument is failing to land, I’d be interested to know – but how much do they care about other things like custody, by which I mean, the servicing of the assets, the payment of dividends to their investors, how much do they care about secondary market trading – the place where the price is put on their instruments? How much do they care about those things, as opposed to simply getting cheaper capital?

Massimo Butti 1:00:37: The asset servicing part of it is becoming more and more important, because they do realise that it’s a cost that they have to maintain long-term. It is a recurrent cost that they have. In terms of the secondary market, it’s interesting. Some issuers want or would like to have a secondary market in their shares. Some founders, and very recently we spoke to a couple of them, go like, `Why would I want a secondary market in the shares of my company? It’s not in my interest, it’s not in the interest of the company; it’s not in the interest of the other shareholders. We don’t think it’s a requirement for us.’ All the founders we talk to, and we do research with, seem to indicate that they like the principle of secondary liquidity, but they also like the idea that they can control that liquidity one way or the other. So, in a sense, for example, they can potentially white-list investors that can transact in their shares. They can agree with the board in terms of access to those secondary markets. They can, for example, create specific liquidity events for their shares. I think that there is, to answer your question, a heightened awareness of the benefits of the asset maintenance piece. And there seems to be a consensus that it is something that we need to address because it makes a difference in terms of cost, because a lot of that cost is sometimes embedded in fund-raising. So there is a cost associated with that, long-term. On the secondary market, it’s less clear. Some issuers see it as a massive benefit. Some of them see it as a nice-to-have, and some of them are completely against it because they think it’s a distraction.

1:03:20: How much do investors care about secondary market liquidity and post-trade services? 

Dominic Hobson 1:03:20: You need investors as well, and how much do they care about secondary market liquidity and custody? How important, how valuable is it to them to know that they can sell what they’re holding, the liquidity is there, and [that] they can be confident that their assets are being kept safely and, yes, the dividends when they’re paid will be paid on time? Is there a clash of interests here between issuers and investors?

Massimo Butti 1:03:44: When you ask, 80 per cent of investors want secondary liquidity. However, when you drill down exactly [into] what they mean by secondary liquidity, you will notice that they don’t all mean, `We want a central order book where we can transact.’ A small percentage of investors 

don’t care because they say, `We invest long-term in these companies. We have a close enough relationship with the founders and with the boards of these companies. So we can create our own liquidity when it’s needed.’ But it depends on the type of investors. Investors that are classical [venture capital] VC investors that invest long-term are not too bothered to have regular secondary liquidity. They say, `As long as I have an efficient way for my exit that doesn’t force the company invested in to go public, then it’s fine with me, but I certainly don’t need a continuous, auction-based central order book for me to support my investment, because we just don’t invest like that.’

1:05:28: How important has the Swiss legal framework been in helping SDX build its business? 

Dominic Hobson 1:05:28: Right. And how important  – [given that you are] obviously growing this business [in Switzerland], it’s founded in Switzerland, it’s growing in Switzerland – in creating this relatively mature digital asset market in Switzerland have been the developments in Swiss law? Do you think that SDX could be doing what it’s doing without that legal underpinning?

Massimo Butti 1:05:52: DLT law has changed the corporate law in Switzerland more than financial markets law or regulation. So, I think that the law has enabled us to offer new services such as a regulated, exchange-based market for digital securities. The law has brought about changes in

the way companies can issue shares and the type of shares they can issue and also has provided a rail for the recognition of DLT securities. That has then caused a change in the code of obligations of these companies. That is really the key element of the legislation. It enables the possibility to issue equity or debt sometimes in a digital format. So I guess that, to answer your question, it has enabled a lot of the things we do. And also it has enabled the design of new actors, such as DLT share registries and things of that [nature] to come into the marketplace.

1:07:40: How large is the opportunity to attract privately owned and managed companies as issuers? 

Dominic Hobson 1:07:40: Have you been able to size this opportunity? By which I mean this focus on privately managed companies. [Have you been able to] either size it in Switzerland or Europe or indeed the world? Or would that be a fool’s errand?

Massimo Butti 1:07:56: No, we have sized the market opportunity. Although it is difficult, it doesn’t make it a fool’s errand. It doesn’t make it a completely pointless exercise. Actually, quite the contrary. But it is difficult to frame the data you get and also the context in which you interpret that data. However, [I will give you] just a few data points for the Swiss market – and we are very focused on the Swiss market because we want to learn to walk before we run. In Switzerland last year, they were recorded officially 350 funding rounds carried out in the private markets. We as an exchange, as both a traditional exchange and now as a digital exchange in operation for exactly 12 months, have seen the grand total of zero of those funding rounds. So that is our baseline. These are the officially recorded funding rounds in several publications and databases. And these are mostly confined to seed and series As and Bs. On top of that, we have all the funding and capital raise activity of more mature SMEs that are using private capital for growth or banking facilities/loans for short and medium-term capital. That is data that is more difficult to get, but we think it runs into tens of thousands of transactions every year in Switzerland only. So, there is in Switzerland only a substantial addressable market for us. We are very conservative in our estimates. For us, success would be to start capturing, on a regular basis, part of these early-stage funding rounds.

1:10:35: Have tokenised digital assets decoupled themselves successfully from what happens in the cryptocurrency markets? 

Dominic Hobson 1:10:35: I have one final question for you, Massimo. It is a high level one, I suppose. If we look at what’s happened in the cryptocurrency markets since November last year, it’s been a rather sorry story, culminating in the collapse of FTX, which has shaken confidence in those markets to a degree previous events seem not to have done. Yet last week, we heard the chief executive of Blackrock, Larry Fink, say that the next generation for markets, the next generation for securities will be tokenisation of securities. So is it safe to say that the blockchain technology, in the instance of tokenising securities or other types financial instrument, has successfully decoupled itself from the cryptocurrency markets? [That] it now has an independent existence and will succeed or fail on its own terms, and have nothing to do with what’s happening in the cryptocurrency markets? Is that the point we’ve reached?

Massimo Butti 1:11:41: Yes, I think we are at that point. I think that what we’ve witnessed in the last four or five weeks point to a view that the technology is a separate item in this discussion. If you look at the failures of FTX, it’s a very traditional failure, if you look at it, based on leverage, poor governance, poor controls, lack of checks and balances. The list is very long and certainly has been widely reported upon. I don’t think that that has tarnished the value proposition of the technology but, more importantly, [nor] has [it] tarnished the value proposition of building an eco-system around these assets. So I think that, yes, we are at a point where now the two things are being decoupled and where the technology is being seen and considered on its own merits, on the advantages and the promises that it holds for the future.

Dominic Hobson 1:13:05: That’s a great point to end on. Massimo Butti, thank you very much for taking so much time to share with us your knowledge and your insights and indeed your prognostications for the future. Thank you.