Where Finance Finds Its Future

Fine art is often cited as a natural candidate for tokenisation. It is illiquid and traded amongst a small class of wealthy investors at prices which are not always transparent. Fine art also has a long history of generating positive returns, if not the sky-high performance often touted, chiefly through capital gains. However, the entry barriers tend to be high. Minimum investments can be large, and the management and transaction costs extortionate. Art also has to be kept safely and maintained because, like other physical objects, it does decay. Frauds and fakes exceed the norm in investment. However, funds managed by experts do exist and provide a lower risk point of entry into the international art market, if not a lower price point. One of them is led by Xavier Olivella, the CEO of ArtsGain. Dominic Hobson, co-founder of Future of Finance, spoke to him about the investment strategy of ArtsGain, the sorts of investors it attracts, and what part tokenisation can play in broadening the liquidity and appeal of the asset class.   Hosted on Acast. See acast.com/privacy for more information.

One of the signal achievements of blockchain technology is to highlight the inefficiencies of financial market silos in which the free flow of assets and transactions is obstructed by fragmented data sets that must be reconciled laboriously and repeatedly. A vision of the future, in which data and the technology which processes it are distributed and market participants are decentralised, is slowly becoming a day-to-day reality across cash, equity, debt, collateral, foreign exchange (FX) and fund markets. More forward-looking financial market infrastructures are embracing that future in ways that go beyond mere flows of data and finance. They are abandoning the ambition to own every aspect of the business of a client in favour of introducing their clients to third-party products and services and inviting providers of those third-party products and services to introduce them to entirely new types of client. Paradoxically, this more open model is proving easier to develop on the foundations of networks that remain relatively closed. Dominic Hobson, co-founder of Future of Finance asked Angie Walker, Global Head of Capital Markets Business Development at R3, how her clients are building financial markets infrastructures that are common, inter-operable and networked. Hosted on Acast. See acast.com/privacy for more information.

The costs of financial crime are staggeringly high. The financial crime compliance officers that responded to a LexisNexis Risk Solutions survey of financial institutions in 26 markets around the world said they spent US$213.9 billion on compliance with financial crime regulations in 2020. If the main finding of a Refinitiv survey of 19 markets in 2018 still holds, and firms are spending 3.1 per cent of annual turnover on Know Your Client (KYC), Anti Money Laundering (AML), Countering the Financing of Terrorism (CFT) and sanctions screening measures, the expenditure is much higher than that figure suggests: US$1.28 trillion, in fact. Despite such vast expenditures, compliance breaches do occur, and regulatory fines ensue. According to the Kroll Enforcement Survey, between 2016 and the first half of 2021, financial institutions paid 338 regulatory fines for money laundering, sanctions breaches and bribery that totalled almost US$26 billion. These fines can be surprisingly chunky. HSBC paid US$1.92 billion in 2013 and ING US$900 million in 2018. Then there is the cost of the financial crime itself. This is much harder to estimate, but the Refinitiv survey put it at 3.5 per cent of the turnover of its respondents, or US$1.45 trillion. And this is the true absurdity: the cost of financial crime compliance (US$1.28 trillion) is now almost as expensive as financial crime itself (US$1.45 trillion). That is the reductio ad absurdum of half a century of regulatory pressure on money launderers, terrorists and other financial criminals. Since the United States passed the Bank Secrecy Act in 1970 to discourage money laundering through secret bank accounts, the financial services industry has assumed a steadily mounting burden of compliance obligations. The PATRIOT Act of 2021 added CFT to the AML requirements of the 1970 Act – and, fatefully, for the first time obliged financial institutions to implement a Customer Identification Program (CIP) to verify the identity of individuals that wish to conduct financial transactions with them. These originally American measures have over the last decade become universal. They are now embodied in the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation, first published by the Financial Action Task Force (FATF) in 2012 and updated regularly ever since. More than 200 jurisdictions endorse them now. The European Union (EU) is on the sixth iteration of its Anti Money Laundering Directive (AMLD VI). Yet the chief characteristic of all these legislative and regulatory measures is that they do not work. Financial crime continues to increase. Mounting quantities of people and technology may have slowed its rate of increase but they have manifestly failed to solve the problem. Indeed, the growing volume of e-commerce, crypto-currency and digital assets business, spurred on by the Pandemic, is once more increasing the rate of increase of financial crime. Meanwhile, compliance is not only despised by the revenue generators. It has lost sight completely of its original objective of reducing crime and become an end in itself: a meaningless set of routines designed to avoid fines and reputational damage for non-compliance, by gold-plating processes, over-reporting data and tolerating embarrassingly high proportions of false positives. In short, all that 50 years of increasingly onerous legislative and regulatory measures have achieved is increased costs for financial institutions. Hosted on Acast. See acast.com/privacy for more information.

Traditional stock exchanges are confronted by a classic Innovator’s Dilemma. They have the installed client base and the revenues to match. But if their digital challengers lack clients, they also benefit from nugatory costs and a new technology powerful enough to extend their reach into whole new classes of investors, issuers and assets. Faced by a potentially long transition to a totally new model in the capital markets, established exchanges know they must work out how and when to embrace change, and in particular when it makes sense to inter-operate with the Blockhain-based platforms built by their competitors. Some are building digital exchanges of their own. Others are eyeing what might be available for purchase. Almost all have concluded that new technology can transform their post-trade costs, and it may well be that it is in the back office rather than the front where the true convergence of the old world and the new will begin. Dominic Hobson, co-founder of Future of Finance, asked Angie Walker, Global Head of Capital Markets Business Development at R3, how Corda is helping established as well as start-up exchanges to exploit the opportunities created by the digitisation of assets. Hosted on Acast. See acast.com/privacy for more information.

In November 2021, the SIX Group issued a CHF 150 million bond onto its own exchange and into its own central securities depository (CSD). Nothing remarkable about that, you might think. Except that the securities became the first digital bond to be freely issued into a regulated environment. More remarkable still is that a majority of investors, offered a choice of the bonds in tokenised or traditional form, opted for the tokenised variety. Creating that choice required considerable operational ingenuity. The digital bonds are listed and traded on the digital asset exchange of SIX Group (SDX) and issued into the digital CSD of SDX, while the traditional bonds are listed and traded on the traditional SIX Swiss Exchange and centrally held by the traditional CSD (SIX SIS). The challenges – in terms of maintaining a register of investors, paying entitlements, enabling investors to switch between the two forms of the bond and maintaining a liquid market – are not hard to guess. Dominic Hobson, co-founder of Future of Finance, asked Stefan Bosshard, product head, fixed income at SIX Digital Exchange, about these and other complexities. Hosted on Acast. See acast.com/privacy for more information.

Fusang is Asia’s first fully licensed and regulated digital financial ecosystem for security tokens and assets. Licensed in two jurisdictions (Hong Kong and Labuan, Malaysia), Fusang operates a fully licensed and regulated digital ecosystem which includes Fusang Exchange, a regulated stock exchange for security tokens. Fusang’s driving force is its vision of making it as easy to invest into a company as it is to buy its products online. Most tokenisation ventures start with technology, their spokesmen and women revel in its cost efficiency and process automation, and with Fusang’s ability to issue, trade, settle, and vaulting services, all housed in one end to end solution, that may indeed be true. It’s therefore not surprising that the aim of its founders is to connect even the smallest retail investors with the biggest issuers, giving the former access to asset classes previously reserved to the institutional realm. If democratising investment through tokenisation sounds familiar, the enthusiasm of Fusang for using regulation to protect investors is much less predictable, Fusang exudes dependability as well as entrepreneurial energy evidenced by its drive to marry a culture of compliance and innovation.  Dominic Hobson, co-founder of Future of Finance, asked Henry Chong, Founder and CEO of Fusang, about his vision of the future of investing and how the company plans to make it happen. Hosted on Acast. See acast.com/privacy for more information.

Post-trade was an early target of the blockchain revolution. Yet progress has proved to be arduous, with legacy technologies, regulatory uncertainty and the protectionism of incumbents making it hard for even successful proofs of concept and pilots to grow into scalable innovations. Signs are now more encouraging, with blockchain-based investments poised to disrupt the securities and money markets from the front office to the back over the next few years. The Corda technology created by R3, which has concentrated since its foundation in 2014 on providing private, scalable distributed ledger technology (DLT) platforms to regulated financial institutions active in regulated financial industries, is behind many of the most promising projects in the capital markets. Corda supports a medley of established firms and start-ups using DLT to reinvent the issuance, trading, settlement, custody and servicing of equity and debt securities and money market instruments. Dominic Hobson, co-founder of Future of Finance, spoke to Goncalo Lima, capital markets eco-system lead at R3, about what post-trade infrastructure is now evolving into.  Hosted on Acast. See acast.com/privacy for more information.

The ingredients of a successful security token exchange are now clear. It must be regulated, focused on asset classes that will benefit from greater liquidity and secondary market trading, and be backed by strong, committed and widely recognised shareholders that are willing to engage actively in helping the exchange to succeed. ADDX, the security token exchange regulated by the Monetary Authority of Singapore (MAS), meets these criteria in full. Armed from 2020 with no less than three regulatory licences spanning securities, funds and a trading platform, and capitalised by a combination of the SGX, Temasek and major financial institutions from Japan, Korea and Thailand, ADDX is concentrating initially on the less than liquid privately managed assets whose liquidity tokenisation is best-placed to transform quickly. Security token exchanges need issuers and investors, and last year saw ADDX gather both. A string of issues backed by its shareholders garnered support from exactly the class of wealthier retail investors looking to diversify into asset classes previously reserved for institutions. A novel distribution agreement was also put in place in Japan. Dominic Hobson, co-founder of Future of Finance, spoke to Oi-Yee Choo, chief commercial officer at ADDX, about where ADDX has come from and where it plans to go next. Hosted on Acast. See acast.com/privacy for more information.

Central securities depositories (CSDs) have always led an unglamorous existence. They are overshadowed by trading and investment activities, even when the post-trade revenues they generate are more reliable or more profitable or even just larger. The rise of the digital asset has not improved their lot. They are threatened with disintermediation by securities tokens issued, traded and safekept on blockchain networks that promise to replace the issuance and registration and settlement services of the incumbent CSDs with a single process on a digital ledger. Central banks pondering the introduction of central bank digital currencies (CBDCs), mostly on to blockchain-based networks as well, seem to have forgotten that every securities transaction settled by a CSD entails a payment as well as a delivery. Other regulators seem to remember nothing except that sellers must earmark what they have sold until it can be delivered against payment, even where the risk is nugatory, or eliminated altogether by a central counterparty clearing house (CCP) or stock loan service. It is near-impossible for CSDs to embrace the burgeoning data economy by developing new products based on data because the data belongs to their users, who often double as their owners. Those CSDs that are able to make the case for change find budgets for investment are far from generous. So are CSDs caught in an impossible dilemma or can they adapt successfully to the age of the digital asset? Dominic Hobson, co-founder of Future of Finance, spoke to Chris Richardson, CEO of Percival Software, one of the leading suppliers of technology to central securities depositories (CSDs), about how his clients are conceiving and preparing for the future. Hosted on Acast. See acast.com/privacy for more information.

This year marks the twentieth anniversary of the PayPal IPO. At the time, the failure of the conventional payments industry to respond to the epic potential of e-commerce on the Internet surprised even the more thoughtful bankers. Two decades later, that institutional inertia looks negligent rather than surprising. The loss of payments revenues by banks to technology companies represents a loss of shareholder value that far exceeds what the owners of banks lost in the financial crisis of 2007-08. With e-commerce continuing to grow, especially across borders, the frenzy created by the indifference of the banks continues. It is estimated that there are around 10,000 payment service providers (PSPs) of various sorts – acquirers, processors, facilitators, aggregators, gateways and digital wallet providers – now contending for pieces of the payments industry around the world. Yet the so-called revolution in payments amounts to no more than twin measures of the negligence of the banks: an increase in customer convenience that the banks should have provided plus a massive transfer of value from the owners of banks to the owners of technology companies. Every one of those 10,000 PSPs relies either on existing payments infrastructures or existing payments banks to provide a service. They are parasitic rather than transformational. A truly transformational innovation would dispense with the need for bank accounts altogether. It would also jettison the continuing reliance on the existing payments market infrastructures such as card networks, automated clearing houses and central bank-operated Real Time Gross Settlement systems (RTGSs) – what payments aficionados call “rails.” Lastly, a true innovation would undermine the current monopolies enjoyed by central banks over the issue of central bank money and banks over the issue of commercial bank money. Just such an innovation is now becoming visible in the crypto-currency and Decentralised Finance (DeFi) markets, which rely on software plus the Internet plus cryptography to enable anyone to issue digital money and anyone to use it to pay and get paid directly using digital wallets. These innovations have the potential to bypass the PSPs. They also have the potential to break the central bank and bank duopoly in the creation of money, allowing multiple forms of money to be issued and used to settle claims. New forms of money could fuse payments and monies into a single process in which money is indistinguishable from payment. Indeed, both payments and monies could be reduced to mere components of a single transactional process in which goods and services are bought and sold through exchanges of data that include the exchange of value. The value created by innovations of this kind will stem not from price or service but from the fact that the transactions they facilitate create data. If that data is owned not by the innovators but by their customers, it will have the power to overthrow more than the banks and the PSPs. It is certainly powerful enough to dislodge banks from their current roles in money creation through manufacturing credit, and in the selection of creditworthy borrowers. It may even be forceful enough to shift the balance of power in capitalism altogether, by making buyers more powerful than sellers. Hosted on Acast. See acast.com/privacy for more information.