Gibraltar Blockchain Exchange is set to launch by the end of the year with a service to allow licensed listing and trading of digital tokens, making it the world’s first conventional hub for initial coin offerings (ICOs).
“ICOs are scaring everyone, and everyone is wondering how to handle them,” Nick Cowan, GBX’s founder, told DigFin. “We’re saying: if your business operates on blockchain, or you want it to, then come to us and get a license.” This isn’t a securities license, as ICOs on GBX wouldn’t be considered securities by conventional regulators. “We’re not regulating ICOs; we’re providing regulatory certainty,” Cowan said.
Jehan Chu, whose Hong Kong firm Kenetic Capital is advising GBX (via a subsidiary, Kenetic Consulting), said, “This is the world’s first global safe harbor for ICOs and tokenized securities.”
The exchange plans to complete an ICO capped at $30 million by mid-December to seed its own token with the ticker name RKT (“the Rock token”). Sponsors, issuers and investors will be able to transact on GBX by using RKT as a membership or access vehicle. RKT will not confer ownership or other securities-like attributes to holders.
GBX has a strong Asia connection. In August, the exchange sold a 25% stake to Hong Kong-based Cyberhub Fintech, a vehicle for Benjamin Soh, co-founder of Hong Kong-based Broctogon FinTech Group and founder of Stellar Partners, a family office.
In addition to partnering with Soh, GBX has other Hong Kong-based partners: Kenetic Capital, while a Hong Kong-based consultant with a Big Four accountancy is advising GBX on governance issues.
Other advisors include law firm KWM and Smith+Crown, a token specialist.
Cowan says Gibraltar opened a traditional exchange, Gibraltar Stock Exchange (GSX), only in 2015. He was brought in to consult on that project. “Then I bought the company,” he said.
His background is trading: he was London-based global head of equities at ING Barings from 1996 to 2004, and then set up his own trading fund in Gibraltar in 2008.
Putting ICOs in a licensed environment
He says GSX based its activities on what the Gibraltar Financial Services Commission could handle, and today it is limited to listed debt and closed- and open-ended funds, with global issuers and pan-European Union investors.
Brexit will change that equation, as Gibraltar will follow the U.K. out of the European Union. “Gibraltar was always a gateway to Europe, but now we will be a gateway to the U.K. capital market,” Cowan said. While GSX may no longer be able to serve as an easy passport for E.U. investors in traditional products, its blockchain affiliate, GBX, aims to become a global center for sponsors, issuers and investors in the emerging token economy.
The Gibraltar regulator took the initiative back in May, when it announced it would set out principles to supervise blockchain businesses and the ICOs that fuel them.
Those regulations go live in January 2018.
GBX, in line with the regulator, has created principles-based regulations to determine when an ICO is fit and proper, when it protects client assets, what constitutes adequate capital and technology to support a token, and the number and types of qualified directors. There will also be accounting and tax standards, and a code of conduct.
One impetus for these governance standards has been the accusations around Tezos, a Switzerland-based company whose ICO raised over $230 million, but which subsequently has suffered from its senior managers trading accusations of self-dealing and other allegations, and which could find itself the subject of investor-led lawsuits.
“Tezos is a warning that ICOs need proper AML, KYC and governance standards, such as a cap on fund raisings and declaring how proceeds will be used,” said the Big Four accountant, who requested anonymity due to non-disclosure agreements. Although he acknowledged that Gibraltar may have the reputation of an offshore center, he said GBX is trying to put in place best practices. “Yes there’s fraud in ICOs because of bad apples, but there are bad apples committing fraud in the traditional securities world, too,” he told DigFin.
Stamps of approval
“When an ICO issuer comes to GBX, it must appoint a pre-vetted sponsor, who in turn puts the company through what I call ‘ICO bootcamp’,” Cowan said. This is meant to be a rigorous process that produces a white paper that meets audit, disclosure and other standards. Companies who meet those are guaranteed a listing on GBX.
Investors likewise must be vetted and pass traditional anti-money laundering and other criteria.
“Issuers get a stamp of best practices with regard to disclosure and transparency, investors get access to high-grade ICOs, and sponsors can bring ICO companies to market in a licensed regime,” Cowan said.
Chu said interest among potential issuers is running high, but GBX will measure success in terms of quality, not volumes: “We’ll probably say ‘no’ 99% of the time.”
Banks and brokers are members of the traditional GSX, but Cowan doubts they will serve as sponsors on GBX. Rather it will be companies who understand crypto-currencies that are likely to serve that function, such as a Kenetic Capital. To prevent rampant flipping, sponsors will have to underwrite and retain stakes in issuer ICOs for at least six months.
Cowan acknowledges the irony of inserting a centralized institution into a world of creating, validating and transacting decentralized assets. “We’re a private blockchain,” he said. “You come into our theme park.” GBX will be the permissioned party that sees all buy, seller and issuer data.
The Big-Four consultant says in the short term, what counts is how the ICO-level operations are run. “The token sale is what matters, not the exchange,” he said. Once a framework for ICOs has been established, however, new challenges will arise concerning the secondary market: will it center around a central exchange, or devolve to a peer-to-peer network? “I have no idea what will happen,” he said.
Cowan sees a day, soon, when GBX may be able to decentralize aspects of what it does. “Decentralized is the future, but none of the rules or standards have been set for that,” he said. He hopes bitcoin exchanges will look to connect their networks to GBX’s, and perhaps allow for dual listings, assuming the platforms’ transaction speeds are fast enough.
“I can see us going decentralized, or having a hybrid model, in 2019,” Cowan said. “But first we need to have standards and best practices.”
Hong Kong offers crypto exchanges path to regulation
But the SFC’s Ashley Alder also declares war on bitcoin futures traders.
Ashley Alder, the CEO of Hong Kong’s Securities Futures Commission, is blazing a path to regulation for crypto-trading platforms.
It offers crypto exchanges a route to becoming licensed, provided they trade at least one virtual asset that is deemed a security. The SFC is therefore taking a huge step toward the institutionalization of digital assets, and giving some operators the chance to use a Hong Kong base to distinguish themselves globally.
At the same time, however, Alder said the SFC intends to take action against bitcoin futures operators, particularly those marketing high degrees of leverage.
“We’ve been concerned for some time about platforms offering virtual-asset futures contracts to the public,” Alder said on stage at Hong Kong Fintech Week. He cited these contracts for being extremely volatile, high risk, and difficult to value, all exacerbated when exchanges offer enormous amounts of leverage, and charges that some of these platforms engage in manipulation by changing trading rules during the lifetime of a contract.
Alder says the SFC will go public with such risks, and warned that those who offer bitcoin futures may be in breach of the Securities Futures Ordinance or the Gambling Ordinance – in other words, engaging in criminal activities.
OKEx has been one platform accused of changing its trading rules mid-contract, according to the South China Morning Post.
Path to licensing
But the big news from Alder is the decision to legitimize those crypto exchanges that can meet the SFC’s traditional compliance requirements for brokers and market operators, opening the possibility they can receive a Type 9 license for exchanges.
Some crypto exchanges hailed the move. BC Group called it a “watershed moment for financial services in Asia and institutional adoption and trading of digital assets.”
Worldwide, the only regime for requiring licenses for crypto exchanges is the state of New York, which in 2014 issued its BitLicense for any entity carrying out virtual currency activities in the state or for New York residents.
Circle, Coinbase and Square are among those license holders.
But what Hong Kong is doing is far more ambitious. First of all, the SFC does not recognize bitcoin as a currency, but it acknowledges the existence of a broader realm of digital assets that is rapidly permeating the traditional world of finance.
The Libra catalyst
It was Facebook’s June announcement of its Libra project, the most prominent of stablecoin ventures, that really galvanized the SFC, however.
“These [stablecoins] claim to have a mechanism to stabilize their value by backing a virtual token with fiat currencies, commodities, or a basket of other crypto assets,” Alder said. “They not one hundred percent stable, but they are in contrast to a crypto asset such as bitcoin which has no intrinsic value whatsoever,” which is why bitcoin and other alt coins are volatile.
Libra has lit a fire beneath central banks, financial regulators and politicians, because Facebook’s reach means Libra can be adopted globally very quickly. Although the consortium backing Libra has since lost prominent members, Alder said, “The Libra project has at least galvanized regulators across the world to look at the opportunities and the risks in digital assets. That is a complete change from the relatively relaxed attitude of last year.”
Instead, officials around the world realize they need a coordinated response involving many domestic authorities responsible for financial supervision, consumer protection, privacy, data, anti-money laundering and other functions – not to mention an international coordination.
“Libra and similar ideas have raised such fundamental issues about the digitalization and potential privatization of money that they’ve already inspired the beginning of a new global, multilateral approach,” Alder said.
The SFC’s plan
So the SFC is taking the initiative to generate progress on creating a structure to regulate crypto exchanges. There are dozens of these operating in Hong Kong; because there’s been no regulation to date, they all operate beyond any investor-protection compliance.
At last year’s Fintech Week, Alder announced regulation for brokers and fund managers, but this excluded the platforms where most people go to access or trade virtual assets.
The SFC is releasing terms and conditions for exchange operators to meet the traditional standards for trading venues around custody, market manipulation, KYC, AML and insurance, along with guidance on fitting these to blockchain, hot and cold wallets, protocol forks and airdrops.
But the new rules will still leave gaps, which require new legislation to address. Platforms that totally avoid listing or trading securities tokens can continue to avoid regulation. Nor will the SFC have the authority to take legal action against operators for market misconduct if they remain outside its supervision. “Essentially it’s a framework allowing a platform operator to opt in to regulation,” Alder said.
“This is just an interim measure…The game-changing proposals involving stablecoins are likely to be a catalyst for accelerated thinking on a globally consistent set of regulatory expectations.”
What Citi Ventures’s incubator seeks in Asia
Victor Alexiev, the regional lead at D10X, talks about the technologies transforming institutional business.
Victor Alexiev is Singapore-based Asia-Pacific lead for Discover 10X (D10X), the new product incubation arm of Citi Ventures. He joined in 2018 and now covers incubation, programs and strategic partnerships for Citi’s institutional clients group.
D10X launched in the U.S. in 2016 to foster innovation from within the bank, encouraging lean-startup thinking as well as coordinating third-party build, buy or partnership decisions with other parts of the bank and its clients.
The following is a transcript of an interview with DigFin, which has been edited for style and conciseness.
DigFin: What kind of innovative models are you trying to develop?
Victor Alexiev: In Asia, it’s about new products and new services in the ICG [institutional] part of the franchise, so the projects we work on are mainly B2B and B2B2C. We’re not just looking internally. We also try to partner with technology companies as we find pain points they address.
What kind of business models are you looking for in this region?
Finding solutions for Citi’s markets, commercial and investment bank business.
Why not for the consumer side, which is such a big part of Citi’s P&L?
We do have D10X in our consumer business for North America, but not in Asia, at least not at this stage. In Asia, consumer fintech and quite fragmented and competitive, and my personal view is that you will need to put in a lot more resources in order to achieve meaningful results.
Is innovation within a huge bank, particularly if you’re focused on B2B – is that an oxymoron?
Yeah, a lot of people think that innovation with corporations is too slow. It’s true in part, as we have to go through a lot of compliance, sourcing and H.R. checks. But we’re looking after companies and people’s money. But once you identify a product fit, you scale much faster. I’m here to build something meaningful within a large institution that has a global footprint.
Within B2B, what kind of ideas are you looking at?
Most projects are new models of customer engagement. Our most public project that was built and rolled out via D10X is Proxymity, an end-to-end proxy voting platform offered to custodians, that directly connects issuers and investors in real time.
Customer engagement sounds very, um, consumery.
A lot of corporate and institutional business platforms for banks is clunky. Or it’s based on business models that just seek to skim basis points by processing large volumes. What will next-generation banking look like? What happens if banks become platforms for others to create value? What do direct-to-consumer models look like for our transaction or investment banking?
So even at the corporate level, you need better customer engagement.
That’s right. For example, an increasing number of clients want to consume our products via an API instead of calling our salespeople. We’ll still need salespeople but we have to be realistic that our evolving client expectations demand a different experience.
What does engagement mean? Can you give me an example?
We’re finding, for example, that buy-side clients are less interested in reading a full research report. But they’re very interested in parsing the underlying data that made that report. Decisions are becoming more quant-driven, so we don’t need to offer as many products. It’s about helping our clients make data-driven decisions and providing them with data-driven products
Is that just a matter of better product design?
No, it means we need to transform the entire organization, to be an end-to-end digital driver – “customer engagement” can’t be just about our front office. “Digital” is about culture and people.
I often hear about banks changing their culture, changing the ways they do business, the mindset – yet the rhetoric doesn’t describe the reality. At best it’s a partial change.
There’s an increasing urgency within banks in general. Margins are thinning, and there is a realization, or a willingness, to transform. We’re trying to speed up the process by providing examples of what “good” looks like.
Where have you implemented new solutions so far in Asia?
Initially we rolled these out in our markets and securities services business. We focused on custody, securities services, equities, and foreign exchange. Gradually we’re bringing new technologies to spread products, corporate banking, investment banking and transaction banking.
And within those divisions, what parts of Citi are you focused on? Operational efficiencies?
Efficiency is important but lots of departments are already looking at this. I also see at other banks a lot of innovation labs doing proof-of-concepts that may not reflect the actual business needs. The projects I work on all have separate, independent P&Ls, and are focused on client-centered new value creation.
You had mentioned client engagement at the institutional level. What are your clients asking help with?
Long-only funds want data to help them with things like modeling ESG portfolios (for environmental, social and governance standards). More short-term trading clients want data-centered models to take faster data-driven decisions.
We explore questions like what do next-generation pension funds look like? What about insurance? How do we support sovereign funds in managing impact-oriented portfolios?
You’re not big on blockchain consortiums and such?
We are, if it meets business needs. We participated in Komgo, a blockchain consortium for documentation in letters of credit that finance commodities trades.
What are the particular technologies that you’re trying to adopt?
Machine learning, APIs and blockchain are the three deep, transformative domains. For these to flourish requires a bigger internal transformation, a broader regulatory understanding of them, and a cultural mindset change.
That’s a lot. Any anecdotes you can give, to make that a little more concrete?
We’re about to publish with ASIFMA a white paper on STOs [securities token offerings] exploring what it would take to make these go mainstream. Our takeaway was interoperability. A fintech can issue a real-estate token, say, in their local jurisdiction, operating under the same local regulation for securities or property. But how do you open that to international investors, or institutional investors, or create a global marketing capability? The complexity quickly goes up. The same goes for, say, using A.I. with certain clients for real-time pricing and execution of F.X. or overnight collateral. What does that mean, how could it change the market? We’re exploring use cases, doing experiments – to do it right, we have to get out of the lab.
Are you finding lots of B2B technology companies in Asia who fit into these needs?
There are few startups that are enterprise-ready, globally scalable and that could deal with our clients. They need to be either close to the customers – meaning they already have insight, client integration of lots of data – or have differentiated tech that it is scalable, high performance, and can help banks solve specific problems.
But I’m bullish on tech in Asia. We’re seeing the dawn of Asian tech: the technology itself is maturing as companies shift from copy-and-paste to developing more core tech. And we’ve seen more B2B fintech move from trying to compete with us to partner with us.
Hope for handling corporate actions?
The industry is shifting from evolutionary fixes to transformational change.
DigFin moderated a webcast last week on the topic of using new tech to handle the thorny old problem of processing corporate actions. Mention “corporate actions” and you mostly have ops and tech people at financial institutions reaching for aspirin, or something stronger.
Corporate actions are anything a publicly traded company does that impacts its securities, debt or equity. Even straightforward things like a stock split come in all different flavors. There’s no one cone to hold all this ice cream. Banks, brokers, fund managers, and trading venues have invested zillions into processing transactions, but corporate actions is always “the poor cousin”, as Dean Chisholm, Hong Kong-based COO for Asia Pacific at Invesco, put it during the webcast. And because of the complexity, vendor solutions have been too expensive.
Mention ‘corporate actions’ and you have ops and tech people reaching for aspirin, or something stronger
But the industry can’t ignore corporate actions. Alan Jones, Singapore-based head of business development for Asia at SmartStream Technologies, pointed out that corporate actions today represent the highest point of risk to operations. As firms look to scale their businesses – with new markets, new products to handle, and an ever-increasing variety of actions to handle – they need to deal with this final barrier to straight-through processing. Do that, they can then begin to add value, like analytics on top that can give investment firms, for example, a view as to how good a job their service providers are doing.
The good news is that technology is evolving to the point that automating corporate actions is looking possible. The biggest enabler is cloud computing. Cloud isn’t just about saving on cost, noted David Fodor, Sydney-based head of business development for financial services at AWS. It’s about scalability and flexibility. Moving to cloud computing is the precursor to handling the vast amounts of data required to come to grips with something like corporate actions.
There’s no one cone to hold all this ice cream
Cloud is just a starting point, though. One challenge is that corporate actions involves many players, said Satyan Patel, senior VP for global client development at Hong Kong Exchange. Stock markets like HKEX connect to depositories, custodian banks, securities brokers, data vendors and investment firms. And then you have the issuers themselves, whose announcements are often in the form of unstructured data (like text on a PDF). The good news is that, beyond firms’ own IT spend, the finance industry is gradually adopting new standards, like ISO 20022 for messaging. That will help reduce the amount of unstructured data.
However that still leaves a lot of data of questionable integrity out there, which defies manual processing. Francis Breackevelt, chief operations head for Asia at BNY Mellon, in Singapore, said the full range of new technology needs to be brought to the fore. Whereas for years, transaction processing was an evolutionary process, he thinks the industry is at a point of major change. From simple robotics to natural-language processing and other forms of artificial intelligence, firms are on the cusp of tackling the variety of corporate announcements. They are looking at distributed-ledger technology to enable industry-wide processing.
Corporate actions processing isn’t going to be solved like flipping a switch. It requires a critical mass of industry player involvement, guidance from regulators, confidence in the data, greater adoption of enabling tech like cloud, and successful implementation of A.I. Then all of that needs to be implemented to the extent great enough to bring processing costs down, a lot. But fintech is making possible the goal of automating corporate actions in a way that until now has been just a dream.