In the interview, Marco Kessler, Head Digital Assets at SDX, discusses the evolution of the capital markets’ understanding of digital assets, emphasizing the learnings from recent digital bond issuances on SDX. He highlights the potential for digital bonds issuance, driven by the proven advantages of digital assets, such as enhanced programmability and accessibility. Marco sees the trend of banks developing their own tokenization engines as an opportunity for industry-wide collaboration, highlighting the importance of interoperability to link various tokenization platforms to accelerate market adoption. Additionally, he underscores the operational efficiency and new revenue opportunities that Distributed Ledger Technology (DLT) offers the financial sector, making processes more transparent and cost-effective.
Hi Marco! Issuers on SDX (SIX, UBS, Lugano, World Bank) have issued on to both the new infrastructure and the old. What learnings can we share with the industry?
The broader industry, including corporate investment banks, corporate trust banks, issuers, and buy-side investors, has been evolving its understanding of digital assets and the future of capital markets. This understanding is reflected in the recent issuance of digital bonds on SDX, such as UBS, Lugano, or the World Bank. I believe a significant reason for these issuers to issue digital bonds on SDX was to explore the implications and opportunities of issuing digital assets, as well as to compare the issuance of digital assets with traditional asset issuances.
There are several learnings from this, the first one being the launch of the SNB’s wholesale CBDC pilot demonstrating how the issuance of digital bonds can leverage the best quality settlement assets on chain – wholesale CBDC, enhancing the overall process and capital usage for banks. I believe this is just the beginning, and we see a momentum building with more issuers showing interest.
An increasing number of issuers and banks are approaching us with innovative ideas on leveraging digital assets to offer superior investment solutions, making it easier and more attractive to attract investors. For instance, by utilizing the programmability feature of digital assets, it is possible to embed additional data and logic within the asset, enhancing asset servicing efficiency and providing every holder of a security token with access to reliable data. This is particularly relevant when economic payouts (e.g., interest payments) are directly linked to external events and data, or when investors wish to see the direct outcomes of their investments.
These are only a few examples illustrating how digital assets can fundamentally reshape the understanding and use of financial instruments in capital markets, driving significant positive impact.
Do you expect a growth trend in digital bonds issuance?
Yes, I do anticipate more upcoming issuances on SDX. The recent announcements of new digital bond issuances by the World Bank and UBS indicate a strong and increasing interest in this space. The proven stability, security, and functionality of our regulated infrastructure make this an opportune time for more issuers to join and learn from this transformative experience. It is also great to see that the Swiss National Bank supports the private sector by providing wholesale CBDC to service digital assets on SDX as a way to demonstrate the benefits of token-based model.
We have seen banks like Goldman Sachs, HSBC, and Northern Trust developing their own tokenization engines, do you perceive this trend as a threat or an opportunity for SDX?
I see this trend as a clear opportunity, not just for SDX but for the entire capital markets industry. No single player can drive this evolutionary step forward alone; it requires a collaborative ecosystem. It’s encouraging to see more players, both at the infrastructure level and among banks, and the broader ecosystem, believing in this future and moving beyond experimentation to live product offerings. This broader engagement benefits the entire market.
SDX plays a specific role in this ecosystem by providing unique infrastructure services. The emergence of multiple tokenization platforms, often referred to as digital islands, highlights the need for broader distribution and interoperability. These platforms often have limited reach, confined to their customer base. To address this, we are in discussions with various players to provide infrastructure services that enhance the distribution potential of digital assets. Establishing links between different platforms and our CSD is crucial for achieving interoperability and scalability, ensuring that the benefits of tokenization extend across the entire market.
We achieved our first significant milestone in interoperability a few years ago by establishing bi-directional links with the traditional Swiss CSD (SIX SIS). This enables digital assets to be accessed by the broad market connected to SIX SIS, while also allowing traditional assets already issued in SIX SIS to be tokenized on SDX.
Could you expand on the advantages that Distributed Ledger Technology offers to the financial sector, particularly in terms of data sharing and synchronization?
Distributed Ledger Technology (DLT) is notable for its unique ability to enable the exchange of data and information in a trusted manner within an inherently trustless environment. This means users can rely on technological constraints and design to ensure the integrity and transparency of data sources, preventing manipulation or opaque modifications. One key characteristic of DLT is its support for programmability, allowing business logic to be embedded into code that executes automatically when certain conditions are met. While programmability itself isn’t new, combining it with the immutability and trustless environment of DLT creates a powerful synergy. This combination ensures that transactions are transparent, reliable, and efficiently processed.
In the financial sector, DLT offers significant potential benefits. Currently, institutions within the financial value chain receive, process, and transmit data in a complex, cascading manner. Each institution maintains its own view of the data, leading to substantial efforts in synchronization and reconciliation, which are both technologically and labor-intensive. When errors occur, the resolution process can be particularly cumbersome. DLT addresses these challenges by enabling institutions to rely on a single, shared view of data, significantly simplifying processes and reducing the need for extensive reconciliation and synchronization. This can lead to streamlined operations and lower operational costs. Furthermore, institutions can delegate certain activities, allowing entities to trust that these activities are performed transparently and according to predefined rules. This could shift the burden of some processes away from banks’ back offices, potentially centralizing or outsourcing them in a more efficient manner.
From an operational efficiency perspective, DLT reduces the complexity of maintaining data integrity and synchronization across multiple institutions. Additionally, it opens new opportunities and revenue streams. For example, DLT can enable banks to offer services around the clock or fractionalize assets, making previously inaccessible investment opportunities available to a broader range of clients. Tokenization of real-world assets can mobilize capital that is currently parked, particularly in wealth management, offering banks new ways to design investment products that satisfy their client needs and mobilize idle capital at the same time.
While many of these benefits could theoretically be achieved without tokenization, DLT makes them economically viable by lowering costs and complexity. This technology ensures that the expenses associated with offering new services or investment opportunities do not outweigh the potential revenue, enabling new valuable offerings for the financial sector.
Interoperability is pivotal for advancing the adoption of blockchain-enabled digital asset services. What is SDX’s perspective on interoperability?
I believe that interoperability is crucial for the widespread adoption of blockchain-based digital asset services, and SDX recognizes its importance across multiple dimensions. Firstly, “legal interoperability” is a significant consideration. Digital assets, especially digital securities, are subject to varying legal frameworks across different jurisdictions. These legal frameworks determine how digital assets are recognized and treated from an investment and financial instrument perspective. Ensuring that digital assets can be seamlessly integrated and recognized across borders is essential for facilitating cross-border transactions. Every investor seeks assurance and clarity when acquiring an asset. They desire confirmation of the asset’s legitimacy and a comprehensive understanding of the associated risks and rights.
Secondly, technological interoperability is a key focus. There are numerous tokenization and DLT or blockchain-based platforms, utilizing a variety of technologies. Some leverage public blockchains, while others operate on private, permissioned blockchains. Each of these operates under different technological frameworks. Many players in the industry are still in the experimental phase, with varying levels of progress. Some have launched live products, while others are still developing their solutions. The absence of consensus on interoperable standards poses a challenge to scaling these endeavors. Technical and operational interoperability is essential to ensure the security and stability of cross-platform interactions. This ultimately allows investments made on one tokenization platform to be safely accessible to the broader investor community, regardless of the platform or blockchain network they are connected to.
Interoperability extends beyond blockchain. Most investors are still connected to traditional infrastructures, not solely blockchain networks. Therefore, establishing interoperability involves ensuring that assets transferred between platforms, networks, and chains are accurately represented and retain their value. This requires robust mechanisms for discharging obligations and ensuring that assets hold their intended value regardless of the chain or platform they are on.
Additionally, there are considerations related to claims and liabilities when assets are transferred between chains. Typically, an intermediary takes control of assets on one chain and makes them available on another. The asset holder on the target chain must be protected from risks associated with the intermediary. It is crucial to minimize or eliminate the risk that the assets could become worthless due to issues with the intermediary.
In summary, interoperability involves addressing legal, technical, and operational challenges to ensure seamless integration and value retention of digital assets across different platforms and jurisdictions. This is a complex and evolving area, but it is foundational for the future growth and adoption of blockchain technology in the financial sector.
Thank you, Marco!
About SDX
SDX is licensed by Switzerland’s financial market regulator, FINMA, to operate an Exchange and a Central Securities Depository (CSD). SDX offers issuance, listing, trading, settlement, servicing, and custody of digital securities. SDX is committed to working with partners, members, and clients to promote and build out a new market structure for digital assets globally.
