• Third wave of trading platforms for digital assets is led by different enterprises
  • DeFi is paving its way in the future of finance and offers traceability
  • Developments in Asia Pacific are removing the regulatory haze around digital assets trading

DBS Bank has already achieved what some would consider an early success with its venture in the digital asset trading space. The Singapore-based bank launched DBS Digital Exchange (DDEx) in December 2020, and since mid-August 2021 the exchange has enhanced its service level to a 24/7 operation. The added availability complements the cryptocurrency trading markets, which has attracted the bank’s private banking clients.

DDEx’s service offerings include trading between the major currencies such as Hong Kong dollars, Japanese yen, Singapore dollars, and the US dollars, as well as frequently traded cryptocurrencies such as bitcoin, bitcoin cash, ethereum, and XRP. DDEx also allows several order types such as market, limit, and fill-or-kill.

Don Guo, CEO of Broctagon Fintech Group, said, “Commercial banks such as DBS are mature players in the finance industry with a wealth of experience in handling markets. However, because of how liquidity currently works in crypto, they too are limited by their own orderbook – their bid and ask prices are heavily dependent on it”.

The trades on DDEx can be secured with the DBS’s in-house custodial services and trust solutions. The trust structure allows clients to conveniently hold these assets, with a peace of mind that they will be safely managed and passed on to their intended beneficiaries, according to Joseph Poon, the group head of DBS private bank.

At a press conference in August, DBS indicated that it has about SGD130 million ($96 million) on its custodial services. It further reported that almost three quarters into operation, DDEx has outperformed both the financial and business expectations.

DDEx has supported trades close to SGD180 million ($133 million) in Q2 2021. While Q2 trading figures may not seem staggering, DDEx carried through just a fifth of this trading value in Q1. The business indicators pointed to the 400 attracted member investors by the end of June 2021. DBS is looking to doubling the investor base by the end of 2021, according to Eng-Kwok Seat Moey, group head of capital markets at DBS.

DDEx is said to cater to three types of memberships: financial institutions, corporate accredited investors, and professional market makers.

Recently, DBS also added DBS Vickers (DBSV) as the latest member of DDEx. DBSV targets the increasing security token desire by corporate clients and has reportedly issued digital bonds valued at SGD15 million ($11 million) through DDEx.

According to Eng-Kwok, asset digitalisation via the issuance of security tokens presents an opportunity for corporates seeking alternative platforms to raise funds from Asia Pacific’s private capital markets.

DDEx is part of DBS’s venture into digital finance. DBS holds a portfolio of several new business initiatives including DDEx, Climate Impact X, EvolutionX, Muzinich Fund, and Partior, expecting revenue streams of around SGD350 million ($258.9 million) in 2022, according to Piyush Gupta, group CEO, during the bank’s Q2 results briefing.

However, these numbers may not be reached. Guo stated, “An established bank may not necessarily have more of an edge compared to a startup, despite how established their brand name is, they might be compelled to spend more to manage their own orderbook, both in organic and synthetic volume, to stay competitive, price-wise. This may translate to a reduced profit margin, or even losses”.

The third wave of trading platforms for digital assets is led by different enterprises
Prior to the development of the digital exchanges and trading platforms we see today, the first wave of cryptocurrency exchanges began with entrepreneurial individuals setting up narrow-focused platforms such as Bitcoin Market (2010), Bitcoin Talk (2010), and Britcoin (2011). This was followed by the second wave, with numerous exchanges emerging globally, such as bitFlyer and Binance in Asia, Bitstamp and Safello in Europe, and Coinbase and Kraken in the US. The third wave is headed by financial technology companies (fintechs) and incumbent commercial banks, as well as traditional exchanges.

At one end of the spectrum, numerous so-called fintechs have emerged and received funding to explore the future of trading platforms for digital assets. In 2018, the Switzerland-based 21Shares offered exchange-traded products that included a basket of cryptocurrencies, and in May 2021, the Switzerland-based Taurus launched TDX, a marketplace for trading with digital assets.

At the other end of the spectrum, incumbent banks are expanding their cryptocurrency trading business. Ulisse Dell’Orto, managing director Asia Pacific and Japan at Chainalysis, stated, “At this time, banks looking to offer exchange services are part of a nascent minority. In the meantime, many banks have already begun the process of rolling out cryptocurrency programmes and have either launched cryptocurrency products or announced their intent to do so”. DBS’s DDEx business marks a move that several other big players such as Citi have also signalled.

Traditional exchanges are also venturing into digital assets. Schneider said, “The financial industry now needs to bridge the gap between traditional financial services and digital communities.” The various observations of traditional exchanges ventures into digital asset trading suggest that they have been organised differently.

In June 2021, Deutsche Börse, one of the world’s largest stock exchanges by market capitalisation, acquired the major stakes in Crypto Finance, which offers trading, storage, and investments in digital assets. 

According to Thomas Book, the executive board member for trading and clearing at Deutsche Börse, there is an increasing demand from established financial institutions that are looking to become active in the digital asset class and want a trusted partner.

While the German company’s move can avoid the more cumbersome regulatory processes, in September 2021, the Swiss Stock Exchange (SIX) announced that it had received approvals from the Swiss Financial Market Supervisory Authority. Schneider said, “SIX Digital Exchange (SDX) set out to build a fully integrated trading, settlement, and custody infrastructure based on distributed ledger technology for digital assets in 2018. This milestone has now been reached with the approval of both licenses and paves the way for the next stage in the development of a future ecosystem”.

In a similar move, the Singapore Exchange (SGX) is exploring opportunities in digital assets. Lee Beng Hong, head of fixed income, currencies, and commodities at SGX, said, “SGX’s bigger vision is delivering an end-to-end digital fixed income infrastructure offering services over the entire lifecycle – from listing and trading, to clearing, settlement, custody, and asset servicing”. 

Both the breadth and depth of digital exchange offerings correlate with the growing adoption of cryptocurrency. However, the different digital exchange observations seem geographically disintegrated. Guo explained, “Crypto is fragmented from a technological and liquidity standpoint”.

Increasing adoption of cryptocurrency supports various ventures into digital assets trading

Although a June report by the Bank for International Settlements (BIS) alluded to downplaying the importance of cryptocurrency, recent adoption studies suggest the contrary.

The BIS Annual Economic Report 2021 stated, “By now, it is clear that cryptocurrencies are speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks, and other financial crimes”.

Meanwhile, in the 2021 Geographies Report, Global Crypto Adoption Index, Chainalysis highlighted that the Crypto Adoption Index was above 880% worldwide in 2021. Dell’Orto said, “Cryptocurrency adoption is becoming more vital as the global economy shifts to digitalised payments”.

Given the difficulties of providing a strict definition of cryptocurrency, recent use cases in the wholesale space give clear indications. For example, JP Morgan’s JPM Coin is a transferable means of payment for JP Morgan’s corporate clients who can purchase and redeem them at a fixed 1:1 ratio with the US dollar. 

In another competing initiative targeting the wholesale space, Nasdaq and 14 banks, including Barclays, Credit Suisse, ING, MUFG, State Street, and UBS, have formed a consortium based on the Utility Settlement Coin project and under the umbrella brand, Fnality. The consortium intends to target institutional settlement and tokens backed by central banks in five currencies including Canadian dollars, euro, pound sterling, Japanese yen, and US dollars. 

Both JPM Coin and Fnality are applying distributed ledger technology to transfer real world assets such as fiat money into a blockchain and convert the rights to assets, including the economic value, into a digital token. A token can then be stored and managed on a blockchain network in a cost-efficient way.

Dell’Orto said, “The great thing about cryptocurrency is it’s cross-border, instantaneous, and transparent, meaning it’s easy to transact with entities anywhere in the world quickly and safely”.

DeFi is paving its way into the future of finance and offers traceability 

The decentralised finance (DeFi) trend will further accelerate the development of digital exchanges and trading platforms. Dell’Orto stated, “DeFi is an area of innovation, powering new types of financial services and instruments”. Arthur Cheong, founding partner of Defiance Capital, said, “We should be aware of how fast the crypto native companies have grown. To illustrate how big the opportunity is we could consider the $18 billion valuation of FTX Trading. A company that started just three years ago”.

Around the globe, the adoption of DeFi comes with the promises of efficiency measures such as faster transfers and lower transaction costs. Such promises have been adopted by established exchanges.

Lee said, “As a multi-asset exchange, SGX is serving international companies and investors, we see significant opportunities to increase trust and efficiency to our global digital market infrastructure, where we can apply our strengths in market operation and risk management”. DeFi is also presented as a solution to the pains of the underbanked and unbanked via smart contracts and the peer-to-peer architecture. 

There are also promises of better governance enabled through traceability provided by blockchain technology, which creates public and permanent records of transactions. The provided traceability creates opportunity for dealing with emerging risks. 

In August 2021, hackers attacked Poly Network, a DeFi platform that connects different blockchains to swap digital assets. The hackers completed the largest heist in the history of DeFi, stealing $610 million worth of digital assets. While the amount was reportedly returned, the recovery hinged on the traceability capacity of the digital assets involved in the heist. 

Dell’Orto stated, “While we can only speculate about whether the attacker always planned to return the funds or found themselves over their head, the Poly Network attack demonstrated the transparency of blockchains, the use of blockchain analytics, and the power of the crypto community that kept its eyes on the funds, all of which made it very difficult for the attacker to launder and cash out stolen funds”.

Developments in Asia Pacific are clearing some of the haze around regulation of digital assets trading

The ventures into digital asset trading may seem prosperous. Meanwhile, a lack of appropriate regulations remains an issue. In his remarks before the European Parliament Committee on Economic and Monetary Affairs in early September, Gary Gensler, chair of US Securities and Exchange Commission, stated, “Crypto platforms provide direct access to millions of investors. There’s no broker in between the public and the platform. Therefore, absent clear investor protection obligations on these platforms, the investing public is left vulnerable. Unfortunately, this asset class has been rife with fraud, scams, and abuse in certain applications”.

Besides the regulators, market actors also expect that mechanisms are necessary to control digital assets trading. Guo said, “Regulatory policies clearly have an impact on market behaviour”. 

The regulators in the Asia Pacific region have implemented various instruments that are applicable regionally and domestically. Dell’Orto gave examples of regional regulations, “Exchanges in Singapore, Japan, and Korea are required to be registered and comply with anti-money laundering and combating the financing of terrorism regulations”.

Cheong gave an example of regulations specific for Singapore by referring to the Payment Services Act that came into effect in January 2020. Currently, the act regulates various activities such as digital payment token services and requires crypto exchanges to be registered and licensed. 

The digital asset trading platform providers such as DDEx and SGX should be more affected in different ways by domestic regulations versus regional regulations. Guo, said “Regionally focused exchanges feel the direct impact of the regulatory policies in their respective markets”.

Regulators in Asia Pacific are promoting digital exchange initiatives via public-private joint ventures, a method that has proven applicable in controlling emerging risks. Dell’Orto elaborated, “Singapore has some of the world’s most established regulatory climate for cryptocurrencies”. 

In a statement confirming the position of Singapore, Guo said, “Singapore is a haven for crypto. With the Monetary Authority of Singapore’s (MAS) open-handed approach, we’ve seen many crypto-businesses flourish in the country because of the growth opportunities that lie here as compared with other geopolitical regions”.

In Singapore, the MAS has crafted Project Ubin which, among several innovations, has generated the Hg Exchange, a virtual assets exchange. Project Ubin has also supported novel collaboration between important players. Lee stated, “In future-proofing our infrastructure, SGX has invested in digitalisation projects in private and public markets, across asset classes. From our pioneering contributions to Project Ubin, to the strong adoption of Marketnode’s digital fixed income platforms, and investments in strategically adjacent networks such as DDEx and ADDX”.

SGX and Temasek announced plans for a joint venture to set up Marketnode in February 2021, a platform for fixed income issuance and to connect with various partners such as arranger banks, lawyers, investors, and paying agents. Another partnership with 10 internationally active banks was announced later in September.

Meanwhile, there are regulators across Asia Pacific that have introduced major obstacles for digital exchanges. Since May 2021, regulators in China are once again using their mandates to impose bans on cryptocurrency mining and halt services related to cryptocurrencies. While in June, the Chinese regulators targeted banks and payments providers facilitating mining and transactions, in September the regulators expanded the bans and targeted transactions.

In a recurring move by the Chinese regulators to protect investors’ assets, the People’s Bank of China classified cryptocurrency transactions as an illegal form of financial activity. Guo stated, “Crypto doesn’t have the benefit of standardisation yet, so a clampdown through regulations is usual in broad strokes, which impacts the industry greatly. Regulators would generally err on the side of caution, and it is difficult for them to balance that with an individual investor’s risk appetite. In this area, we see crypto as bearing many similarities with foreign exchange (FX), before the advent of regulations. For FX, there is an interbank liquidity standard. As FX matured, the policies surrounding it became well-defined and clear – the same is expected in crypto.”

Digital exchanges present unprecedented opportunity for risk transfers and promise greater efficiencies, coupled with greater market coverage possibilities, for example, achieved via additional service availability and round-the-clock operations. 

Both incumbent commercial banks such as DBS and traditional exchanges such as SGX and SIX are venturing into digital assets trading. Such an early move could give them first-movers advantages.

Alongside this development, certain hurdles such as the lack of regulatory clarity need to be overcome. In Singapore, the chosen method has been public-private partnerships, a kind of project-based experimentations that will lead the way in other countries.

Schneider stated, “We have a very fruitful relationship with FINMA that was on board to support us since the beginning to receive the licences we wanted and aspired. I think it is fair to say that the approval process has proven to be an invaluable experience for SDX, for SIX and for the industry as a whole”.