What it takes to build the future of market infrastructure
Structurally, stock exchanges and the broader market infrastructure function have gone unchanged for decades. Whilst innovation has touched the functions of many elements and improved performance, security and safety, considerably, limitations exist because these elements are still separate from one another.
The purpose of a stock exchange is to provide businesses with effective access to capital. But in an era whereby access to capital has gotten easier overall – thanks to crowdfunding and VCs – we at SIX concluded that a fundamental rethink of market infrastructure was necessary for the stock exchange to remain relevant.
The SIX Digital Exchange (SDX) will soon begin offering services to customers. SDX is the first fully integrated trading, settlement and custody infrastructure for digital assets. The service will provide a safe environment for issuing and trading digital assets and enable the tokenisation of existing securities and non-bankable assets to make previously untradeable assets tradeable.
When the team first started looking into the possibility of a digital exchange, the focus was on digital assets, the digitisation of existing assets and what that meant for the industry as it was structured. However, reality soon took over and SIX realized that taking an existing process and automating it with new technology wouldn’t be much of a business case, particularly if the operational infrastructure is cheap the way it is. SIX therefore set itself a high bar to clear in assessing the potential value of the SDX project to the wider industry.
Regulating the unregulated
The creation of SDX involves collaboration with both the Swiss regulator and the Swiss National Bank to ensure what we are building complies with the regulatory market infrastructure businesses operate in.
Our discussions with regulators have mainly been around the licensing framework of SDX. But we have also been talking to them about the accountability of issuing tokens and the risk of digital tokens inflating the money supply. The model currently being explored involves SIX creating a liquidity cash token linked to the Swiss franc, with supporting funds held in a segregated account at the SIC (SIX Interbank Clearing AG). For example, if someone transfers 100 million Swiss francs, SIX would then separate that to a specific SIC account of SDX and SDX would issue 100 million Swiss franc token for settlement.
However, the tokens would only be used for settlement against securities tokens within an integrated processing framework and not as a cryptocurrency tradable in its own right.
Not all blockchain
Joining up the processes of trading and settling digital assets using distributed ledger technology is something that has not been done before. Whist we are striving to create an infrastructure which predominantly utilises DLT, it is also important to remember that we will only apply the technology to functions where it is completely necessary. The overall goal is to ensure that what we build is built using the right technologies to ensure the best futureproofing and maximum effectiveness.
SIX is planning a phased roll out of SDX. The first step has been to build a regulated exchange platform for digital assets and then to offer a service to tokenise existing bankable assets. The third phase offers the tokenisation of non-bankable assets, providing new investment possibilities, including, for example, real estate and art.
With digital offerings becoming more important than ever, exchanges that aren’t exploring the landscape may seriously struggle to put a credible alternative to their present offering. Part of the challenge is to facilitate the involvement of third parties in the provision of services in the digital exchange ecosystem – think of Apple; what makes the App Store so successful is that developers want to develop apps for it. That’s what every exchange will need to attract to be successful.