Future of Finance


SDX is betting on openness to accelerate the adoption of tokenised assets

[JUL 2023]

SDX, the exchange for digital assets built and operated by Swiss stock exchange SIX, is working to accelerate the tokenisation of financial assets in Switzerland, Singapore and Germany, three locations whose legal and regulatory environments are accommodating of the new method of raising capital. Interestingly, the SDX strategy is an open one that looks to embrace competitors as well as issuers and investors as the company builds a network of networks of tokenisation platforms and their users. Dominic Hobson, co-founder of Future of Finance, spoke about the SDX strategy with Alexandre Kech, who took up the post of Head of Digital Securities at SDX in November 2022.

Dominic Hobson 00:14: Hello, I’m Dominic Hobson, Co-founder of Future of Finance. My guest today is Alexandre Kech, Head of Digital Securities at SDX, which he joined in November 2022 from Citi Ventures blockchain and digital asset team in Switzerland. Prior to that, Alex founded Onchain Custodian, the Singapore and Shanghai-based digital asset custodian and prime broker, which he founded after 17 years with SWIFT, including seven years in Asia. Our topic, it will not surprise you to learn, is the future of the digital asset markets. Alex, thanks for joining us.

Alexandre Kech 00:54 Thank you for having me.

How will tokenisation happen?

Dominic Hobson 00:58: Let me start with a big question. How do you expect tokenisation to happen? And, in particular, how is it going to achieve scale? Is this going to happen through the migration of the existing securities markets?  Equities and bonds, for example, migrating to blockchain? Or is it going to happen through the construction of a parallel native digital asset industry?

Alexandre Kech 01:21: I think it’s going to be the second. So we are currently building a parallel avenue for issuance of digital assets for traditional instruments like bonds or private equities, for example. And that’s really the objective here. It is to build, leveraging blockchain technology, a new [inaudible] infrastructure that can progressively open up and become global, while the traditional infrastructure is still running. And, importantly, we also want to make sure that we can bridge traditional with the new infrastructure through a link that we’ve established, for example, with the SIX infrastructure, for the purpose of ensuring that we’re not disrupting the markets with our new technology. We are enabling the market with new capabilities.

Has dual listing of digital assets in non-digital form matched your expectations?

Dominic Hobson 02:14: As you’ve just pointed out, you’ve kept the old infrastructure going, if you like, alongside the new one, and the issuers which you’ve hosted at SDX, both the SIX parent company and UBS, they both issued on to the existing infrastructure, but also on to the new infrastructure. Now, that’s obviously part of your strategy. But did the outcome of that exceed your expectations? Did you see more people moving on to the new infrastructure as opposed to the old one (I’m talking here of investors)? Were you surprised by the outcome at all?

Alexandre Kech 02:48: So I guess the outcome was to reassure the market that issuing natively on a blockchain-based system is not damaging them in terms of quality of the products and access to the products. So that was the first objective of having this ability to do dual list on the traditional exchange and the new exchange, and also to settle at the traditional CSD and the blockchain-based CSD. So now that we have reassured the market that works, we do see an influx of interest from the issuer side, but also from the members’ side in terms of joining SDX to start active primary markets trading and secondary markets trading on the infrastructure, as they become more comfortable with, for example, the funding requirements around atomic settlements, and so on and so forth. The objective is really to have them learn with us as we deploy more assets on the platform, and as we deploy more services on the platform as well.

Which intermediaries are easiest to persuade of the merits of tokenisation and which the most difficult? 

Dominic Hobson 03:59: As you’ve just mentioned, you’re seeing increasing interest from issuers, you’re seeing increased membership. And as you look across the marketplace, which group …Because lots of different entities are involved in making tokenisation happen, not just the issuers and the investors, but also all those intermediaries, those banks and private banks and brokers and asset managers. Which of those groups is proving easiest to persuade of the merits of this and which is proving most difficult? Because you have to bring all these different groups on to the platform don’t you?

Alexandre Kech 04:32: Indeed, especially knowing that the membership of SDX as well as SIX are banks and securities firms, so we’re not directly talking to the issuers. So it’s important, obviously, to ensure that these existing members find an interest in using our services. I guess the easy part is that the banks we have engaged with are all convinced and aligned with our vision that most likely anything of value in the future will be tokenised on blockchains. And I use the [inaudible] on purpose, at least at this stage. And they are developing their own capabilities internally to deal with digital assets, to deal with nodes on blockchain. So if our infrastructure can help do that with real transactions, they see it as an opportunity to try it out in a production-live environment for some assets that they’re comfortable with doing today. So it’s bonds, but it’s also private equity, where their current process is not ideal. Today, it’s very manual. So there, we bring immediate value to them, not only to the issuer, but also to the agents that are supporting those issuers, in ensuring that those private shares can be in tokenised form and therefore become bankable assets for their investors. And also to help them orchestrate the old process of managing those private shares which today is most of the time done on Excel spreadsheet, or only at registry services, with no transparency or no or [at least] less visibility than, I would say, in open infrastructure like we have.

How much does it matter that not all markets you are looking to be active in have reached the same level of development as Switzerland?

Dominic Hobson 06:21: I’ll come back to what you’ve just said about private equity and that registration function in a minute. But just before I do, this is clearly not just about Switzerland. This is an international strategy you have here. And the Swiss market is set up, both legally and in terms of the infrastructure you’ve built, in one way.? I suppose there are variations between different national markets. Switzerland, as you say, is full of banks. Your own organisation is backed by, owned by, banks. So are you having to adapt the model as you as talk to other markets, because they have different structures, different histories and different levels of legal and infrastructural development?

Alexandre Kech 07:12: Clearly, yes. But our focus is the low-hanging fruit in the sense that we are focusing on jurisdictions where there is a similar approach to Switzerland. So Singapore is one. There we have a joint venture with SBI and SIX called Asia Next, that is providing services for not only crypto spot and crypto derivatives, but will also look at digital securities or securities tokens offerings, as they call it in that jurisdiction. So, quite interestingly, there we see potential for creating those liquidity corridors and build and starting to build that global liquidity access that we want, that we believe will be the future. Beyond Singapore, Germany is an interesting country, where the law has evolved to enable tokenisation on blockchain of securities. And that helps as well. So we are looking at how we could maybe use Germany as a first step in Europe for expanding our services. I would summarise by saying that it’s a cautious and step-by-step approach that we’re taking in terms of internationalisation because, as you said, it’s not an easy journey and all jurisdictions are not fully aligned. But this is clearly an intention that we have.

Do you face any serious legal or regulatory obstacles to getting tokenisation done in Switzerland?

Dominic Hobson 08:38: You are clearly making progress in jurisdictions like Singapore and Germany, where there has been legal and regulatory progress to make it easier to tokenise assets. I’ve kind of taken it as read that Switzerland is absolutely fine in that respect. But- and perhaps I’ve just asked the question – do you face any serious legal or regulatory obstacles to getting tokenisation done back home in Switzerland these days?

Alexandre Kech 09:05: Not really. Because the law enables …Well, there are multiple legal regimes that enable a licensed exchange and CSD (as we are) to operate on a blockchain set-up. There are [Distributed Ledger Technology] DLT laws in Switzerland and they are enabling direct issuance on public blockchains. We are actually making sure that we can bridge those two worlds. Because we’re currently working on a private blockchain set-up, we want to make sure that we can also link to the public blockchain assets, if you wish, and ensure that our customers have access to both. I guess the challenge we are confronted with is that, when you look at the MiCAR [Markets in Crypto Assets Regulation] regulation in Europe, it will enable CSDs to not only offer custody and management services for what they currently do digitally for securities, but also for cryptocurrencies and for DLT securities or crypto securities. So, what do we see there? Well, Switzerland actually does not have that capability. So, as a CSD, I can only deal with securities. I cannot deal with Bitcoin and Ether and cryptocurrencies. That’s why we have a separate legal entity to do that. So, these are discussions we want to have with our regulators, obviously, to tell them and our lawmakers, `Well, look at Europe, if we do not progress and continue to be at the forefront of regulations in this space, we will be caught up by a competing marketplace.’ So that’s the type of discussions we are continually having with regulators and lawmakers to ensure that we keep our edge in a way, not as a commercial company, but as a market and as a country.

Are privately owned SMEs a particular target for tokenisation?

Dominic Hobson 11:52: You mentioned private assets as low-hanging fruit. Now Switzerland, famously has a lot of small and medium sized companies in it. Are they the classic low-hanging fruit? Are they very attractive as target clients for what you’re trying to do?

Alexandre Kech 11:11: Yes, on the private share side, we definitely have a nice playground in Switzerland, and don’t really need to go beyond Switzerland for the moment, because there is a lot to do. There are dozens, even thousands, of SMEs and FinTech companies in Switzerland operating privately. And we see that those companies are staying private longer, and sometimes never become public companies. So they’ve been historically under-served in terms of how private shares are managed, how their shareholding structure is managed, how transfers of ownership between various private owners of the companies are done – inheritance, and so on and so forth. So the objective of SDX here is to build an eco-system where we can not only tokenise private shares, and ease the settlement of those private shares, the management of those private shares, create transparency for the issuer, and so on, but also to help with funding of those companies as they go through their lifecycle before they become public, or even if they never become public. So, in that regard, we are building what we call a funding support platform where the various actors involved in funding rounds of those companies –  banks, [Venture Capital companies] VCs, and investors through private banks, for example-  can connect [and] see deals that are available, find the necessary information to make a decision on whether it’s a good investment or not, and therefore participate in various funding rounds throughout the lifecycle of the company. So it’s not only about tokenising private shares and making them transparent and easy to settle and easy to hold and easy to move around. It’s also about facilitating the additional funding events of those SMEs and those FinTechs.

What benefits do SMEs obtain from tokenising their shares?

Dominic Hobson 13:10: You have used use the term “funding support” and obviously raising capital is the primary benefit of working with you for these private companies. What’s the rest of the sales pitch? What other benefits do you talk to them about? You mentioned much earlier on the question of share registration – perhaps for the first time they can get a properly organised cap table or share register set up? And I assume cost is an advantage here -it’s a lower cost of capital for them. But when you’re talking to these issuers, these private company issuers, what does the sales pitch consist of?

Alexandre Kech 13.43: As I mentioned, it’s really about mostly orchestrating and helping them with the administration of their shareholders. And through partners that we have, a share registry offering.  Support for general assembly meetings or assembly meetings and other corporate action events. We can make that experience of founding a start-up and building and growing a start-up or founding and growing an SME easier, without the risk of losing track of who actually owns your company – which sometimes happens (you would be surprised) – and ensuring that you can easily progress, if that’s what you want, towards an IPO that will be sound and organised because you will be clear on your agenda  during your private journey. So that’s the main, I would say, pitch for the issuer side. For the investor side and the banks servicing the investors – and I think that’s important as well  – we make those shares bankable assets. So today, if I’m an investor in an SME in Switzerland, or a start-up, I don’t see my shares in my bank account because they are either in a drawer and a piece for paper or in an Excel spreadsheet somewhere. Sometimes I could lose track of it. With tokenisation through the SDX platform, those assets become bankable assets, get an [International Securities Identification Number] ISIN assigned, and I can see it in my custody account at UBS, for example, which is quite neat, not only for the investor side, but also for the issuer side, as a service, in a way to their to their owners and their shareholders.

Are funds a particular target for tokenisation?

Dominic Hobson 15:42: Now, private companies issuing tokenised shares is one thing, but what about funds, including, I might say, private equity funds? Are private equity funds, real estate funds, venture capital funds, on the one hand, the alternative funds, you might call them, a target? Are retail funds, UCITS, AIFs, also attractive targets to SDX as issuers rather than investors?

Alexandre Kech 16:11: Yes, definitely. So this is the next topic that we are talking to VC [funds], for example, and other private fund issuers. So we are in early discussions to enable a similar process to that for private shares for private equity funds, for example. And that, by the way, is through discussions with banks who have their own tokenisation platform and are doing that for the benefit of their customers. But what we are in discussion with those banks about is it’s great to build a tokenisation platform on your own that is accessible to your customer base. But what about we make those instruments also accessible to investors at other banks, that are banking with UBS, or another private bank in Switzerland, for example? That resonates. So we will have some news to announce in the next six months around that, because it’s clearly a target for us to expand a platform with new asset types beyond the bounds of the private shares that we currently have.

How does your strategy accommodate the fact that banks are building their own tokenisation engines?

Dominic Hobson 17:17: That’s a very interesting observation you’ve just made. Can I press you to tell us a bit more about it, because there seems to be a trend occurring where, as you point out, banks are building, if you like, their own tokenisation engines. They obviously have access to groups of issuers, they have access to investors. And this is happening not just in Switzerland, but it’s happening here in the UK, for example, and in other markets as well. So how do you expect this eco-system to evolve if we’ve got lots of different tokenisation engines tokenising assets, possibly in a non-standardised way? How difficult is that going to make it for investors to access these different assets in a seamless way? And how difficult is going to be for issuers to make sure that they maximise the value of the issue they’re making? How do you expect what is becoming quite a fragmented, complex eco-system, on an international scale, to evolve? You’ve hinted at it with, you know, [an invitation to] “make your assets available through us as well.” Is that how this is going to happen, looking forward?

Alexandre Kech 18:25: I would say yes. I see two evolutions. So, yes, these individual banks are creating tokenisation platforms on different blockchain set-ups that don’t necessarily talk to one another. I think one of the trends will be that the choice of blockchain of those banks will evolve towards a standardized set-up. It could be the Canton [Network] blockchain announced recently. It could be a [R3] Corda blockchain that everybody’s using. It could be even a public blockchain. So assuming that it’s progressing in that direction, you will end up with a inter-operable infrastructure that will enable movement of assets tokenised by Citibank, for example, to be held in a wallet that is managed by UBS for a private customer of theirs. We do see also us – [Financial Market Infrastructures] FMIs – playing an important role in bridging those various set-ups and creating that inter-operability. So, until blockchain-enabled interoperability is a reality, which will probably take ten to 15 years, to be fully honest, FMIs like SDX can be the bridge between individual set-ups and markets – your entire market. And that’s what we’re discussing with banks. And they are quite interested in this idea, actually. As SIX is playing a neutral role today of market access to liquidity, we can play the exact same role in a blockchain context with these tokenisation platforms.

How disruptive is tokenisation for intermediaries, in terms of changing their internal systems and processes? 

Dominic Hobson 20:02: SDX operating as a bridge across these multiple tokenisation engines/platforms is an interesting way of looking at how the market is going to evolve. It prompts the thought in my mind that you’re kind of taking away the operational burden from the banks of accommodating themselves to this market. Which prompts in my mind a more substantial, more general question, which is: How much operational change …. We’ve talked a lot about the issuers and the investors already. We haven’t talked that much about the intermediaries. But here you are saying, “We can make your adaptation, Mr. Intermediary, to this marketplace much easier. But how much change do the existing contributors actually have to make to operate in what’s going to be a pretty complex tokenised eco-system initially -things like settling atomically, operating their own nodes, running their own engines? How disruptive is this change going to be, if you’re a bank or a broker, looking to service your clients?

Alexandre Kech 21:04: It is a gigantic disruption, if you want my view, because you are ripping off your heart in a way and putting it in common with other infrastructures. Instead of running your own ledger, you’re going to share that ledger in a way with others in a blockchain and that, just technologically, is a major challenge for banks who are still in some cases running on COBOL- based systems or, if not COBOL-based systems, technologies that are not adapted for listening to an external ledger and reflecting those positions into the account of a customer without having full control of that ledger. So that’s a major paradigm shift for them. And for us as well, as a CSD, for example. We can discuss about that later. The good news there is that all the banks I’m talking to clearly have plans and programmes in place to enable node management, to enable wallet services and wallet management, to progressively deploy services on this new technology. And, probably less progressively, but it will happen, opening up globally. So if we can help in the intermediation or in the interoperability of those various set-ups, while it’s opening up, I think it’s something we should do. That will also position us very well to start deploying services that can leverage on assets that are issued by the various banks in their various eco-systems. That’s on the technology side. On the operational side, treasury management, for example, there are clear challenges to move from … Well, there are current challenges already today to move from T+2 to T+1 [settlement timetables]. We see that in the US people are ready to do that now. But the ultimate objective is that everything will be instant, like it is in cash nowadays, like the FX-to-FX market is pretty much today. That’s going to be the expectation for securities as well in the future. So moving from a T+2 funding paradigm to a refunding paradigm to enable atomic settlement is something very complicated to have to manage for most banks, which is understandable. So it’s also our role, in my view, to provide solutions such as the ability to, for example, reverse repo for two minutes the time for settlement of a transaction, because you don’t have the cash until you have the time to move the cash into your node, for example. So those type of things we are looking at doing and offering. That’s the extra value that’s in the service that we can offer as an FMI or DFMI – Digital FMI, as I call it – as we go and as we grow with our community.

The assumption now is that tokenisation will NOT disintermediate custodian banks and CSDs. Why not?

Dominic Hobson 24:14: Yes, if you thought switching to T+1 or T+0 was difficult switching to atomic settlement is that problem on steroids, isn’t it? Now, you mentioned en passant that you are obviously operating a digital CSD here. If we’d had this conversation – as I think we did – two or three years ago, we’d probably have spent quite a lot of time talking about whether CSDs and indeed custodian banks would survive tokenisation. Would they or would they not be disintermediated? I think it’s now clear that not only are both these types of institutions still with us, but it’s also pretty clear that they are here to stay because they’re fulfilling useful functions. So what does that tell us about the maturity of the debate about tokenisation? That we’re no longer having this discussion about disintermediating CSDs and custodians but talking about how they’re going to help this happen. What does that tell us?

Alexandre Kech 25:10: What it tells us is that CSDs and custodians do not only safekeep assets and settle assets for their customers. They are also performing important roles such as – at least if we look at FMIs – as being the entity that is responsible for making sure that the market functions as it should function and that the regulator has someone to call if something goes wrong. So the role we see ourselves playing in the future will not look at all like what a CSD is doing today. But it will still be an important role in the sense that we will be the entities that are deploying multi-party services on blockchain like a Uniswap, or Aave, for institutional [business], and making sure that the smart contracts, for example, that are deployed are sound, have been audited. And that if something goes wrong, the regulator has someone to call to and blame, actually, as well for any issues that will take place. That’s one role. The second role is giving access to those services. So it’s not going to be like Uniswap and Aave today, where anybody with a wallet can access [the service]. Obviously, for an institutional grade type of service on blockchain, you need someone to KYC institutions to make sure that institution A can have access to this type of instrument and that type of service, based on regulations. And that’s still a role that a centralised operator of services on a decentralised infrastructure will be playing and will be needed, actually. On the custody side, the banks, as you rightly said, will have to operate differently, technologically. But I do not expect you and me and other retail investors to want to manage their assets directly, even if blockchain theoretically could allow them to do so. What will likely happen is that they will delegate that management of assets, like they do today, to banks that can offer them additional value-added services on top of just safekeeping the assets for them. So that’s not going to change in my view. There will be more competition on both sides, FMI sides and bank sides, which is good. But fundamentally, just for regulatory reasons, I think FMIs will continue to exist. And from a convenience point of view, banks will continue to exist as well.

If tokenisation means reconciliations disappear, what will custodian banks and CSDs be doing instead?

Dominic Hobson 27.47: Banks and FMIs will continue to exist. Certainly, in the short term, I imagine, they’re going to carry on doing a lot of the things that they do. And if I could abstract the function which they spent a lot of their time doing, it’s actually moving information, point-to-point – these famous reconciliation processes. They’re exchanging messages, often in SWIFT formats, adding a bit to it, passing it on. So, in a fully tokenised market, when this vision is fully realised, those point-to-point information exchanges are not going to be necessary anymore. What do you think those financial institutions – those custodian banks and those financial market infrastructures, the CSDs – are going to be doing when those core point-to-point information exchanges are no longer necessary?

Alexandre Kech 28:37: Well, they will continue to offer other services which is, well, wallet management, for example. So enabling access to those blockchains in [inaudible] – or maybe one day without blockchain – securing those assets which are cryptographically held on that blockchain. So it’s quite important to ensure that there is no issue with the safekeeping of those assets. So, traditional custody, if you wish. I think they will also be able to offer innovative new types of financial services that are still unknown at this stage, to be honest. Because of the technology, we could, for example, expect that as more and more valuable assets are tokenised on blockchain and [become] very easy to manage, you could imagine that Lombard loans [i.e., credit against pledged assets] will be easier to operate and therefore to offer, meaning, you can use anything as collateral for any financial need. Because it’s easy, because it’s held in the same wallets, because it’s in tokenised form, and because it can be moved around 24/7 if need be. So that’s the expectation. Financial institutions will continue to intermediate for their customers towards that new infrastructure, and will, creatively, likely come up with financial products for the interest of their customers,thanks to that technology. 

Why is SDX co-operating with other, non-bank tokenisation platforms in Switzerland?

Dominic Hobson 30:15: We’ve talked about how SDX is looking to collaborate with the banks who are building their own tokenisation engines. But SDX is also working with other tokenisation platforms in Switzerland. Is the thinking behind your collaboration with them – the strategy behind your collaboration with them – exactly the same as your thinking with the banks? Or is it something different?

Alexandre Kech 30:38: It’s similar. Anybody that really is issuing tokenised assets based on public blockchains or private blockchains, we should have as an objective to connect with them, because the ultimate objective is to make tokenised assets accessible to investors. I always say there are only two entities that matter in our world of capital markets is the investor and the issuer. Anybody else in the middle is someone that is supposed to support the access of the investor to the issuers’ assets and the management of those assets by the issuer, nothing else. So it is in the investors’ and issuers’ interest that we connect with any actors be they a bank or a FinTech, that is enabling tokenisation because ultimately, we are servicing the same customera. So we do obviously connect to a tokenised registry like Aktionariat, for example, in Switzerland, with the purpose of accessing the issuer and then we do the same on the bank side, to access the issuers and investors. So it’s always with the same purpose –  connecting issues with investors and making sure that everything works.

Won’t inter-operability between tokenisation platforms require data standards?

Dominic Hobson 32:07: If you are to realise that vision of an inter-operating network of different tokenisation networks  – a sort of  networks of networks I suppose …You touched on this earlier. This inter-operability depends ultimately on seamless exchanges of data between these different networks, these different blockchain protocols, and indeed, ultimately with the traditional financial services industry as well. So we all agree inter-operability is vital to realising the vision. Does that mean standards? You said earlier this could take 15 or 20 years. But what steps can be taken now towards realising inter-operability through the use of standardisation or other methods? How do you think that inter-operability problem can be tackled now? How should it be solved, starting today?

Alexandre Kech 33:04: Well, clearly, by re-using any existing standards out there in terms of identification of instrument, for example, or even design of [Application Programme Interfaces] APIs to access blockchains. Why not? ISO 20022 could be used for that, as an example. But there are specific standards that are being created and have been created to support tokenisation. Digital token identifier is one of them (ISO 24165).That really enables you to uniquely identify a token on its blockchain, which is important if you are in a multi-blockchain set-up. You could imagine very well that a bond issuance with the same ISIN could be on three blockchains in the future, because it’s a fact of life, because there’s a reason for it. And you need to be able to clearly identify, especially for a company like us who wants to inter-operate and bridge those blockchains, which one is which, right? So those types of standards are critical, and we are working with the DTI Foundation [DTIF] to ensure that every time we have an issuance, we are issuing a DTI [Digital Token Identifier] for it, or sets of DTIs in the future when we will issue on multiple blockchains or make them available on multiple blockchains. So that’s an example that is significant. So, yes, standards are critical. Re-use of existing standards, when they are relevant and creation of new standards when they don’t exist, is critical. And I would add that there’s also an important role for industry groups such as ISSA [International Securities Services Association], such as GDF [Global Digital Finance] on the crypto side to collaborate, and they do, to build market practices and best practices around how custody should be done. ISSA and GDF are about to publish a document, or white paper, on this. These types of collaborations are essential to ensure that this inter-operability, or that bridging of chains, until one chain maybe eventually emerges, is done in the most efficient way.

What is needed to develop secondary markets in tokenised assets?

Dominic Hobson 35:12: One way in which we’ll be able to tell that the vision is getting closer to realisation is when we see liquid secondary markets in tokenised assets developing. What services do you think we need to develop now to support that type of liquid secondary market emerging? I’m thinking here of things like market-making. We’ve talked a lot about the primary market, but the secondary market – what’s needed to make that happen?

Alexandre Kech 35:41: Well, market-making is clearly an important component of the existing financial infrastructure that needs to be somewhat replicated on the digital version of that market. And that’s happening. So if you look …Always look at what’s happening on Ethereum to understand what could be the future of blockchain. And when you look at what happens on Ethereum, on the Uniswap type of service, for example, you have automatic market making [AMM] where people with “excess” tokens of one sort can make them available for market-making purposes and earn a reward, as they call it in the crypto space to avoid regulators going after them. But interesting all the same for another reason. So that’s a model that I think can be replicated for institutional [business] as well. But the traditional way of doing it could also be used. So you could imagine a DEX [a Decentralized Exchange] which traditional market makers have access to and provide liquidity when required. Another way of dealing with that challenge would be – and especially the pre-funding challenge that we discussed, and the atomic settlement part – to create Aave-like services, but for institutional [business], where you can instantaneously borrow an asset that you need for settlement, and then reimburse your borrowing, even five minutes later, by providing back those instruments once you’ve dealt with your settlement. So those things will be put in place progressively in the institutional space as well. But unfortunately, we can’t just copy paste what happens on Ethereum, because this has been built for retail usage, clearly, and it’s not to the level of robustness that regulators and banks and FMIs would be comfortable with deploying for institutional customers and institutional use.

How close are we to having central bank money – CBDCs – available on tokenisation networks?

Dominic Hobson 37:38: Talking of automated market making, I saw an experiment the other day in which a central bank was investigating whether automated market makers could play a role in integrating Central Bank Digital Currencies (CBDCs) into the settlement and trading process. Now,

Alexandre Kech 37:55: Marianna project, right?

Dominic Hobson 37:56: That’s right, yes, exactly. Thank you for reminding me of its name. It prompts a thought on my part, which is that SIX, your parent company, has been working with the Swiss National Bank for a long time on integrating Central Bank Digital Currencies into the settlement process. And you’re about to actually do this for real. What’s the true significance of that? We seem to have been waiting for years for fiat currency to be available on blockchain networks. Is this about to happen? Is this a truly epochal event that’s about to occur?

Alexandre Kech 38:30: It is, because it’s going to be the first time that a production deployment of a wholesale CBDC will take place. In the past, it has been about Proof of Concept [PoC], trying it, trying it out, make it maybe do one transaction to see how it works. Here, we’re talking about a series of transactions if we follow the announcement by the Swiss National Bank, that will be enabled on the SDX platform and will be paid in wholesale CBDC that the central bank itself will tokenise on our platform. So [it is] really central bank money, central settlements on our platform, in the form of wholesale CBDC. So that’s an essential first step towards anything else really. In parallel -I don’t know if you are aware of that – the Swiss Banking Association is looking at models of how they could start tokenising deposits and start exchanging tokenised Swiss franc deposits for Swiss francs between various retail and corporate companies in Switzerland. [It is at a] very early stage, but that can only work, in my view, if you have a wholesale CBDC anchor at the bottom, to ensure that when a token moves from UBS to a ZKB [Zurich Kantonal Bank] customer, that there is a clearing happening between those two banks. The ideal set-up, if everything is tokenized, is that the tokenised deposits are on blockchain, but also the wholesale CBDC are on blockchain to enable this. This is very much the Regulated Liability Network (RLN) that has been tested recently in the US and the UK, in terms of concept. Also the fact that we’re going to start issuing wholesale CBDC for DvP [Delivery versus Payment] purposes first on SDX is opening hopefully doors to other discussions with the Swiss National Bank and the banking sector in Switzerland to see what else can be done. What else can this wholesale CBDC enable in terms of use-cases and in terms of processes?

Have the difficulties in the cryptocurrency markets slowed down progress on tokenisation?

Dominic Hobson 40:38: We’re having a very forward-looking, positive conversation here about primary market issuance of tokens, secondary market trading, we’ve just been talking about how the settlement process is going to become more efficient, how the trading process has become more efficient by adapting innovations from, as you point out, the Ethereum blockchain such as automated market-making and automated borrowing and lending. We’re going to have CBDCs on-chain and so on. On the other hand, the industry which gave birth to all these innovations, the cryptocurrency industry and its offshoots in the Decentralised Finance (DeFi) industry, which gave us things like Aave, they’ve had a very tough 18 months since the bear market set in, in I think November 2021. Yet we haven’t really touched on that at all. Is what’s happening in the cryptocurrency and DeFi markets kind of irrelevant to the digital asset strategy at SDX? I know you have a separate subsidiary dealing with that side of things. But when you talk to customers, are they saying, “Well, you know, the cryptocurrency markets are not doing very well.”  Have these two industries become completely decoupled now?

Alexandre Kech 41:53:  I wouldn’t say that. When you look at the last 18 months, we’ve noticed three things. [First,] DeFi as DeFi, the purely decentralised financial services on Ethereum like Aave, like Uniswap, they really had no trouble, no issue. During the last 18 months, they functioned as they were expected – as they were coded to function through the smart contract. People who had to be liquidated because their collateral level was not enough have been automatically liquidated, and so on and so forth. So the system has worked as it should have in the DeFi space. [Secondly,] what has not worked in the crypto space in general is unregulated, badly governed with awful risk management CeFi [Centralised Finance] services, centralised financial services, such as FTX, for example. These are not DeFi offerings, they are CeFi offerings, which is very essential to mention. [Thirdly,] I think this 18 months of nightmares for many retail investors is I think pushing the whole industry in the right direction. More trust into a DeFi type of approach where code is actually deciding on what should happen, and not human beings with bad intentions. And then more regulation and more requirements for governance and proper risk management of the centralised services such as the exchanges, crypto exchanges, or the lending platforms such as Celsius, for example. So I think it is good. It clearly slowed down the appetite to do stuff in this space for customers of ours but we do not see an “Oh, now we’re going to stop everything”. It’s more like, “Yes, let’s make sure that we are playing with the actors that make sense.” So they are using custodians like SDX as we have this culture of risk management, this culture of security, and therefore they can trust us more than other custodians in the crypto space. That’s one. And second, let’s position ourselves in terms of starting to offer services in that space as a bank, rather than letting our investors or customers deal with unreliable service providers in this space.

How long will it take to develop fully tokenised asset markets on a global scale?

Dominic Hobson 44:26: One final question for you, Alex. You’re on the record somewhere as saying that you believe everything of value can and one day will be tokenised. And, coming from somebody of your background and experience, that’s a non-trivial statement. So how long do you think that vision of yours, that transition to this fully tokenised future, how long do you think it’s going to take?

Alexandre Kech 44:51: It’s the $1 million question, right? If I knew, I would be able to bet and I would stop working immediately. But unfortunately, it’s a difficult question. When I’m asked, I generally say, between five years and 15 years.So five years to start seeing something that is substantial in terms of issuance, trading, and real activity at global level – starting by countries and then progressively becoming global. But for the entire capital markets eco-system to be tokenisable and tokenised, that’s going to take an extra ten years. So, in my view, it’s going to be between five and 15 years. And I might have chosen that 15 years because it’s when I will retire normally, unless they move up the age of retirement again. It’s my psychological answer. But I think it’s going to be long, because it’s not something trivial to do. We’re not moving data here. We are moving value around. And that’s way more complicated to do than managing data or managing something else on the Internet, for example.

Dominic Hobson 46:08: Alexandre Kech, thanks very much for taking the time to talk to the members of Future of Finance

Alexandre Kech 46:40: It was my pleasure, always great to talk to you, Dominic.