SDX, the new exchange being designed by SIX Group – the main financial infrastructure provider in Switzerland – is not building yet another crypto trading venue.
Its ambitions are bigger than that. Alpine, you might say.
Martin Halblaub, SIX Digital Exchange’s Zurich-based CEO, sat down with DigFin to outline the project’s scope. Three aspects seem most relevant to investors, banks and brokers worldwide. So do another trio of big unknowns.
First, he says, SDX will be an exchange for all asset classes. It wants to launch next year with traditional securities – equities, bonds, structured products – and with exposures to new ones such as real estate. And then it can add bitcoin or various tokens.
“From the end user’s point of view, SDX will let you access every tradeable asset via your mobile device,” he said.
Second, SDX is meant to be global. Unlike national stock exchanges such as its parent, anyone through their broker or other financial institution can list, sponsor, invest or trade on SDX. (Not to be confused with this SDX.)
Today, SIX Group holds the entire value chain of finance in Switzerland. It owns the national stock exchange, the central clearing house and the depository, and it runs the national bank payments system. SIX in turn is owned by 130 Swiss financial institutions.
But, Halblaub said, “SDX is not ‘Switzerland Inc.’ It is a global exercise.”
Third, the exchange is using blockchain technology to cut out a lot of the post-trade processing that typifies traditional exchanges. This is what also enables it to be global, and multi-asset. Unlike most crypto exchanges, SDX is strictly wholesale, and it will be under Swiss regulation.
Setting up SDX
There are still plenty of unanswered questions, but he says the exchange will go live in the first half of 2020. By which point most of these unknowns will have to be resolved.
These include the need for standards, legal changes, and scalability.
Although important, though, Halblaub says the bigger picture is about recreating the value chain of financial transactions using new technology. “How can we change it and start a growth business, not just for cost efficiencies, but to create new business opportunities?”
SDX will let you access every tradeable asset through your mobile deviceMartin Haublaub, SDX
Plans by Facebook to launch its own cryptocurrency are just more evidence that there are big companies out there with huge warchests that will enter traditional financial markets. They are a threat to the status quo, so SDX wants to position itself as a solution.
“We’re a digital intermediary at a time when the crypto world is beginning to disintermediate the financial sector,” Halblaub said.
He has been a banker and stock-market leader in his native Germany, with executive stints at Hannover Stock Exchange and Norddeutsches Landesbank, before starting up his own consulting, which included advising SIX.
“I left banking after the GFC because it became boring,” he said. In early 2018 he and SIX’s top management cooked up the idea of a digital asset exchange, and SIX’s brass asked him to serve as CEO.
“I said yes because it hits home with the things I’m interested in,” he said, before counting off on his fingers: “Potential industry impact. Learning curve. It’s challenging. And it’s fun to do.”
Work in progress: standards
There are several lines of unfinished business before SDX is ready. One is the lack of standards regarding digital assets. This is the case worldwide, and many entrepreneurs have simply ploughed ahead, but SDX is meant to be institutional and regulated.
For example, KYC, everyone’s favorite topic. Halblaub says SDX will not be responsible for doing KYC checks. Instead it sets standards, and the blockchain governs this. But he concedes, “This is still a work in progress.”
What about the need for standards, to attract institutions and win regulatory approval – and the risk these end up squashing innovation? “It’s difficult,” Halblaub said. “We have to develop this industry over time. Everything is in flux. We are taking a stepwise approach.”
It’s challenging. And it’s fun to doMartin Haublaub, SDX
Generically, he contrasts SDX with today’s unregulated digital-asset exchanges. “They can list any ICO, and there’s no user protection. So they need to evolve toward transparency and basic principles so investors don’t get ripped off…these things will vary by market segment. There’s no one-size-fits-all.”
That will also go for fundamental questions like, how do you classify a token? How do you value it? SDX is likely to come to its own standards, which it hopes will become industry standards, but expect plenty of variation worldwide.
Industry standards go hand in hand with regulation and international law. These areas are unsettled, but Halblaub insists SDX is not engaging in regulatory arbitrage to attract liquidity or other boons. Instead, he wants major jurisdictions to develop a minimum standard: Who issues a right that can be transferred in a way that is legally binding.
However, legally binding how? For example, do digital assets fall under companies law, as equities do? Or under civil law, is often the case for national securities depositories? How does this work if SDX is listing assets to be traded by global players anywhere?
While SDX can deploy all of its systems from Switzerland, and the technology doesn’t require a physical presence elsewhere, the company is alert to the fact that it might need feet on the ground in some markets, both for sales as well as for cooperating with local regulators. “We would probably do so through local partnerships,” rather than opening SDX branches, Halblaub said.
The initial market challenge will be attracting use cases for listing tokens on SDX, instead of securities on traditional venues. Quickly though it might become ensuring the blockchain undergirding SDX can handle global trading at scale.
In other words, like any trading venue, SDX will be competing for liquidity, best execution, and quality market participants.
However, this is the one challenge that SDX and its partners, including vendor R3, can control.
This is a risk-decreasing exercise on an industrial scaleMartin Haublaub, SDX
(SDX selected R3 because it’s already a major B2B vendor, but the exchange is handling many aspects of the build itself: the policy engine on top of R3’s operating system, the matching engine, the connections to outside trading systems, and custody and managing private keys. For R3 chief David Rutter’s take, see here.)
The solution to bringing trading costs way down is atomic settlement: the simultaneous execution of both the cash and securities legs of a transaction, with no central counterparty risk and no delivery-versus-payment workflow. “This is a risk-decreasing exercise on an industrial scale,” Halblaub said. “That’s what we’ve built.”
There will be no role for a Euroclear or a LCH (London Clearinghouse) at SDX, standing between counterparties and reconciling their data. (There will still be a role for a DTCC-type player to clear and settle trades.)
Old models, new models
Getting rid of the clearinghouse will change business models for investors and brokers. For example, hedge funds can’t sell short, and there’s no role or need for collateral management. Asset servicing, including corporate actions, will be executed over the blockchain using smart contracts.
But while this is taking away certain existing businesses, Halblaub expects the platform will create new ones: “We are creating a whole new value chain. Widening the asset spectrum will lead to new business models.”
SDX therefore is making a two-pronged play: on the one hand, creating a far more cheap and safer venue for trading things that already trade on exchanges, like stocks, bonds, structured products and funds. And on the other hand, enabling these to trade side by side with tokenized assets, crypto-currencies and representations of new asset classes, from property to art.