The Future of Exchanges: SIX Digital Exchange

Transcript

thanks very much Chris and also from my side welcome here in our convention point we're delighted to be hosting this event for the Krypto Valley Association you know it's focused on on exchange and and where where change is going to happen in the future exactly the opposite I think of a classic car which is nothing but very old technology you can fix it with a big hammer I don't think some of the challenges we've got are going to be quite that that's straightforward to address you'll all be aware that we announced last July the establishment of six digital exchange or STX and over the next few minutes I want to just give you some thoughts as to the

rationale for this our progress as we're moving forward but also our approach is an infrastructure provider we make a very clear distinction what our role is we're very much a b2b infrastructure provider we're not we're holding on to some of the existing structures fully recognizing that over time those business models will change but there's only so much change that I think the particular regulators and the market can bear if we really want to bring the potential and the opportunities of the new technology and the digitalization of assets into the mainstream and make it acceptable not just at a retail level but also at a an institutional level so

I think you know we're really at the cusp now of some very substantial changes in the market I suspect that over the next 10 years we'll probably see more change in how capital markets function then we have done over the past 400 years and that's a that's a very significant challenge that although we're very early on at the moment and there aren't a great number of providers out there that are anywhere close to being mainstream it's going to be a huge challenge going forward and I think there's three imperatives that we really need to look at the first one as we as we move forward the first one is the how does a business network change how

do business models change what opportunity opportunities exist now and will exist in the future for developing business models going forward how do we ensure that rules around asset and investor protection are maintained but there's still enough room for innovation and for for moving the business forward so that's the business side that's already a fair amount to deal with the second piece is is cultural what do the new business models and new ways of working actually mean for how we have become accustomed to working ourselves how we deal with savings how we deal with things like

pension schemes all of which are under pressure what does this this revolution into the world of digital assets and new assets that are currently not available mean for all of these structures and in many ways the savings we rely on for our old age and what our our younger colleagues will be looking at going forward as as they look at what what their savings and what their lives are going to be looking like so at a cultural level we have a number of challenges we see evermore turmoil in the markets as a whole a lot more volatility traditional structures we I think is fairly clear are not that great at dealing with that kind of volatility

and how the new world is going to do that is still very much an open question it's something at the very least we need to think about as we move forward how do we how do we deal with those things because we do have a responsibility that goes beyond just creating something neat and they can make a bit of money and finally and perhaps least importantly there's the imperative of technology least important because I think the velocity of the change is a much more important factor than actually the technology itself how we deal with changing that technology moving away from old systems that tended to be built

and kept for 20-25 years and then legacy platforms replaced we're now moving into a world where this kind of change will be happening on the fly and we need to be a heck of a lot more agile as organizations but also as individuals in terms of how we develop ourselves to accommodate all of that so I don't know I don't have the answers to any of those three imperatives and I don't think anyone in this room does but I think it's something we need to be aware of as we as we look at the opportunities that are ahead of us we look at the challenges we face and we look at how we set ourselves up because we're still at an early enough stage that we can give these things some thought and it's not already written in stone so what are the

opportunities I'd be the wrong guy standing up here speaking to you if I didn't absolutely believe in the opportunities around the digitalization of assets and for us it's not about blockchain or any other specific technology it's really about how does the world of assets change and where are their future opportunities in that and it vastly expands the universe of securities and investments that can be represented and I was speaking earlier with the gentleman it's not just about looking at new native digital issues but also how do we bring all the equities and fixed income instruments

ETFs and so on in the traditional world into the new digital world that's a very significant challenge but gives huge huge opportunities in particular when we're looking at how do we how do we address not just the retail but also the institutional markets part of our role is to provide an appropriate platform for legitimate sources of funding to bring investors together with issuers and apart from some of the pure monetary opportunities that are out there when we were looking at developing SDX one of the one of the core elements really was looking at well how is the landscape

changing and this is there we go this is really the the approach we took going into it that we said look we have a market on on the left-hand side you see the scale it's all about what what kind of asset types are they and at the bottom what's the the model that we're currently using in the traditional space you can see obviously there are no native tokens in the traditional model of stock exchange central counterparty central securities depository this is but this is where all of the mainstream business today is is operating and in the top right you see new players coming in today primarily in

the cryptocurrency space but they're starting to move down into digitalization of assets digital models and looking at how can we move traditional securities into that space now when I looked at it we said look somewhere there's that there's something wrong here it cannot be and this isn't just me being worried about being disintermediated but it cannot be that organizations that already cover issues around investor and asset safeties we already cover AML and kyc activity we are already regulated we know how this infrastructure works and you've got a number of new players who are admittedly

a thousand times faster and more agile than we are but still need to learn those things there's got to be an opportunity there and there's an opportunity here again in the context of a b2b model to bring other elements of capital markets other stakeholders to traditional banks broker dealers investment banks and so on into the digital world and at the end of the day that's part of our role also as an infrastructure now I think Ian you said there is a school of thought that says who the hell needs all these banks and other intermediaries right and maybe that's right and maybe I'll burn in hell but I suspect I'll be in very good

company so I'm not overly worried about that I'm sure that existing business models will fall by the wayside when I'm not sure about is exactly what it's gonna look like and over what period of time it's gonna happen because there are so many parameters that we at the moment can't directly control a lot of it is regulatory a lot of it is extremely fragmented around the world regulators in different countries are addressing the issues very very differently or not at all and so this is this is going to take quite quite an amount of time to do but even if we accept that the old models fall by the wayside and because it's gonna take time I think there's an

old expression that is very apt here and that is if you want to break the rules you first have to understand them you have to master them and that's some that's a that's an area that I think we're already well placed for and I think any one of us that believes that governments and central banks other regulators are going to allow unfettered competition in something that's as fundamentally and profoundly related to how economies function at least in the Western world and increasingly in the Far East as well I think they're gonna be sadly mistaken there's a process that we have to go through to get there it's

gonna take a lot of building of trust to get there and we're nowhere near that yet people don't understand what the opportunities are yet regulators don't understand the opportunities yet and in many cases we don't we're all looking at this thinking there's an angle in there somewhere and there are things we can do and there's some great ideas out there but we've got to build the bridge from those ideas to today's reality so I think governments and regulators will allow this kind of creative chaos to go on for a certain period of time as they have done with crypto exchanges but there's also a truism that probably the most creative innovation is the energy around criminal activity and

one of the things that we've got to try to do if we're going to bring this kind of of asset digitalization and and technology modeling into the mainstream is make sure we address those issues the best example for that is really what's happening with data at the moment I don't think it's an understatement to say that the data is probably considered to be one of the most powerful things in the world at the moment and we've seen data being used and misused we've been giving over the last 15 years personal data to a number of organizations in social media and we're now starting to see what's what's coming about as a result of that the government's will

crackdown on that and there is no reason to believe that digital data related to securities when you open it up whether it's in a blockchain or just making it more widely available is going to be any different on the contrary because you can use that data and potentially misuse it to substantially impact how economies function there's an even greater vested interest on the part of governments and central banks and regulators to ensure that there are at least some controls around that so if we if we accept that and we and we look at how regulators are

looking at what we're doing I think it's it's worth pointing out we're very fortunate here in Switzerland in that the law makers here have taken a very proactive and and constructive approach to looking at how we can deal with digital data including maintaining the core values around asset and investor protection so if we if we look at that we look at some of the challenges that we're facing in today's digital space what have we got we've got very little transparency most current exchanges are little more than unregulated brokers in some cases poorly capitalized

regulated brokers we've got no legally binding accountability what happens if the broker goes belly-up what happens to your assets if you haven't got them on a USB stick you you may have a very significant problem there's an absence of regulation around kyc anti money laundering monitoring of transactions unacceptable in today's in today's time in particular when we're looking at things like terrorist financing and so on it may work for a while in the retail market it doesn't work at all as regards getting mainstream acceptability amongst the institutional investors yeah and these are still the main drivers of wealth

frankly why simply because most of us and most of our peers at a retail level don't have the level of knowledge and aren't interested in managing for instance our own pension schemes that's still being done by institutions on our behalf and given the complexity of the investment world I rather doubt that we're going to see the next generation behind us or even the ones after them actively managing their own pension schemes of being being happy with that type of activity most of us frankly can't be bothered and I say that as someone running a stock exchange in a CSD it's it's a completely different thing if you're if you're

running the local co-op I mean there's just no no affinity to to our world in any way so those are some of the challenges we face what are we doing at six our announcement last summer to launch SDX goes far beyond simply creating new asset classes or or a trading venue to trade them and to customize them in the CSD in earlier applications of various new technologies including DLT we very quickly came to the conclusion that there's no business case in taking old processes and automating them with new technology it

doesn't make sense to keep the old process and so what we looked at is how can we collapse functionality and really get efficiency gains but also provide a basis for a whole series of new entrants into the market to use the fact that you now don't have to have as many layers of infrastructure intermediated between you so what we have today is we have a stock exchange a central counterparty and a central securities depository SDX will bring those three fmi financial market infrastructure functions and licenses together into one legal entity so with

the trade you instantly have the settlement and the booking in a digital wallet by converging those three functions we reduce a lot really a lot of the inefficiency that are in the system today think just for a second about just a normal equity transaction the way it flows through the process you do the trade two days later you do the settlement in the meantime the CCP does matching and netting function and takes responsibility for guaranteeing the settlement that's not free though and we have many billions in collateral and so

called default funds to ensure that if we're guaranteeing that a settlement happens and one of the counterparties defaults we still have in this default fund enough money to cover that transaction so you have inefficiencies related to liquidity you've got collateral deposits in multiple places around all of the financial markets that if you managed to get instant trading and settlement you don't need most of that you need some haircut but you don't be most of it so the intention is ready to go a lot further I see you waving the intention released to go a lot further in providing not only an efficient

infrastructure and opportunities but also to ensure that we're providing that robot ecosystem that allows participants from the entire market to develop their own business models around that at the end if we want to succeed as SDX and as an infrastructure provider six we don't just need to deliver a platform we need to deliver an environment of rules regulations standards that everyone can accommodate and adapt to and provides legitimacy in the process of investing and realizing the benefits out of the

new asset classes we expect the benefits to be substantial I've mentioned just a couple of the benefits here I'm not going to go through them all in detail but part of our role as well is to facilitate the transition from the old world to the new world and that's really where we're looking at it from from an established infrastructure perspective we're running SDX in parallel to the existing structure and the two will continue to run in parallel and clients will have a choice where they want to trade and overtime and I suspect it will take a few years we will then at some point reached a tipping point where we then go out to the mark and talk to clients about is it now time to start decommissioning the existing structures

that we have so STX represents a full end-to-end infrastructure and we're well on track I'm delighted to say we're we're on track in terms of our planning for this year we've got a lot of work still to do it's a hugely exciting project and I'm very much looking forward also to working with a great deal more the stakeholders as we develop our platform further and develop a lab that everyone can work within we'll be seeking out most of you as as market participants to start working with us on the development of that ecosystem going forward you've got a number of great speakers this afternoon I wish you a

very constructive very productive afternoon and all the best of luck in Ventris thank you very much thank you thank you for your presentation what I didn't really get is what 6's takes is really doing and what is the ecosystem

where other people can connect to is there a presentation somewhere or some more detailed explanation series of user groups now ramping up to work with our clients to develop it further we have there is a presentation that covers in detail what we're doing what elements are covered what it's going to look like what protocols look like and so on but that's a developing process as we put the infrastructure in place probably that's internal right there's no for the moment it's still internal the user groups it'll it'll start coming out in the user groups what we what we intend to do is we're on track for piloting

native digital and ICO services in the third quarter this year with five banks and the plan is to then go live in production either q4 or q1 2020 in parallel along with the regulatory discussions we're having we're developing the bridge to the old system so that we can as a second phase in 2020 2021 subject to when the regulation is in place being able to take existing securities and move them into a tokenized environment but this roadmap is not public right that roadmap is public it's public and we're kind of be seen sorry okay thank you

hello yeah you need the exercise so okay just representation regulatory parts and I would be interested if you can okay is it okay not good I would like to short a question about the regulatory parts because I think rip does no not everywhere accepted and if you want to bring them on this level I think it looks like they should be accepted everywhere globally so is there any outfit on this or what is your impression on this our our going in position it has not changed is that it's

not in the first instance about the existing crypto currencies at all it's about taking assets with a substantiative value behind it and moving that into a digitalized environment so whether the crypto currency meets the standards required is one of the tests that will need to be done before any regulated exchange accepts them for poor trading and issues can I ask no quick question you mentioned you're building up a platform and a type of an ecosystem approach are

you treating it as a proprietary solution or will you open up the source to the participants in your ecosystem so people can learn from it and build up the technology further which is just emerging basically in in the b2b space it will be a a permissioned environment but it's not planned to be proprietary now exactly what that means I can't say at the moment certainly it's in our interests and and in the interest of the stakeholders in the market that we're as open as we possibly can be so that everyone can use the elements of the ecosystem that makes sense for them and that's part of the acceptance of it in the traditional world usually the

issuer's are banks and that's most of your members or stakeholders is this platform as the eggs also open for the companies who are issuing their assets or security tokens so you're talking to companies directly or is the first phase only for user groups ie banks which are planning to issue the first tokens the first phase of user group work is indeed with existing intermediaries banks and broker dealers but it's not true that the issues are primarily banks use intermediaries at the moment to

facilitate the issuance in an IPO I don't think that that will necessarily be the case going forward so we we have a standard that will be related to what we do on the IPO side in the traditional world for doing I CEOs in the digital space I fully expect to be that I expect that to be less onerous and therefore available to a much wider range of issues than today's environment is so then issuers like companies could talk to s takes also directly of course absolutely there's questions Tom thank you