Hi Peter! Let’s start at the beginning. How did you become interested in digital assets?

My interest in digital assets [really crypto] began when I was working with family offices, back in 2013, and started looking at cryptocurrency [‘digital gold’] as a largely uncorrelated asset. I was fascinated by the underlying nature of Bitcoin and how it could be traded. Subsequently, whilst working as systematic quantitative investment manager, I started to consider the market infrastructure that was needed to support these emerging digital assets and associated arbitrage opportunities. My involvement in establishing Turquoise, a Multilateral Trading Facility [MTF] which is now owned by the London Stock Exchange, gave me useful insights and experience with respect to market infrastructure and liquidity, which I subsequently applied to digital asset markets.

Issuing a digital bond on a fully regulated platform is an important step forwards for digital markets. How will SDX continue to develop a healthy ecosystem for digital asset markets, and drive digital asset adoption in the future?

First, we are able to fully exploit our DLT based infrastructure and all its capabilities across the end to end lifecycle of an instrument. On the asset side, our starting point are [listed] bonds followed by equities. In parallel, we are working with banks, market makers to develop a pipeline for future issues both on the equity and fixed income side. In addition, we are also discussing how we can leverage and exploit our capabilities into adjacent areas to develop dedicated market places and [infrastructure] solutions.

Second, we are exploring commercial opportunities in private markets where we believe we can leverage our market structure model to increase transparency and liquidity and close the gap with what we can observe on listed markets. For example, to make these markets more efficient, we could consider embedding monitoring capabilities that arise from the need to ensure compliance of certain instruments i.e., Green Bonds or Carbon investments with broader ESG requirements to more illiquid instruments such as private equity and other forms of debt.

In the future, we believe, clients and investors are ultimately looking to leverage a single platform that provides market participants with more capital efficient cross asset class trading models i.e., through cross-asset class margining and integrated trading and clearing models. We also see market demand for a holistic cross asset class approach towards liquidity, margining and integrated approach towards trading and clearing – i.e., spanning Digital Financial Assets, Crypto and conventional financial instruments. Furthermore, such an approach would yield further benefits such through increased levels of automation.

We also need to consider where the clients are located, and how novel business models can support our strategy and enable greater geographical reach. As such, we are considering growth through geographical expansion and the potential for enabling cross asset class global liquidity. Whilst we have started in our Swiss home market, we are also exploring opportunities together with SBI in Singapore and are looking at other jurisdictions.

How can digital market infrastructures support enhanced liquidity in traditionally illiquid asset classes?

There are differentiators between traditional Financial Markets Infrastructures [FMIs] providers and Digital Market Infrastructure [DMI] platforms and these can have an impact on the liquidity of digital assets when compared to conventional assets.

First, we’ve seen that when it comes to products and structures, it can be very difficult for investors to undertake the due diligence required to understand the underlying assets and accordingly how to value them. In the new world of DMI, imagine a smart contract to which you can attach all the information in digital format pertinent to the underlying asset [individual or basket] so that when you ‘interact’ with the product you have all information on the underlying assets and thus an efficient way to conduct due diligence and evaluate the investment opportunity [i.e., pricing, waterfall, cashflows and curves]. If we can provide this due diligence as an embedded capability of a digital asset, then we are able to attract new investors to this product given that we have been able to lower the barriers to entry for new/ alternative investment opportunities and asset classes. In other words, greater asset transparency, enabled by DMI, can lead to enhanced liquidity.

Second, in the FMI space, we take compatibility between different products and ecosystems for granted – assets can be traded on multiple platforms or moved from one custodian to another. As we move from FMI to DMI, we must be cognizant of the need for interoperability between different ecosystems and products, and the creation of standards and mechanisms for asset transparency and ultimately interoperability. This must be a collective [industry] effort because it will involve competing firms and interests. However, we will all need to collaborate on interoperability standards if we want to collectively be successful in this space. Accordingly, in DMI, asset transparency as a precursor to asset interoperability is another enabler for enhanced liquidity.

In traditional market structures the provision of liquidity and market making generally involves ‘sell-side’ institutions i.e., specialist market makers [i.e., Authorized Participants for EFTs] and other liquidity providers. Will we see the same approach towards liquidity replicated in Digital Financial Markets, or will there be a shift towards other types of liquidity models – and what might those look like?

When we look at DEFI, for example, we can observe that the pace of innovation and development of novel business models including alternative liquidity aggregation models is relentless and when we take some of these models and combine them with DMI, there is significant potential to evolve traditional models and launch alternatives structures that have the potential to disrupt the status quo and the existing setup.

The transition and evolution towards a new paradigm will for some time run on parallel tracks – in that context financial services are no different from other industries. As such, there is a role for traditional market makers and liquidity providers. More to the point, they can play a significant role to kick off or ignite new trading models and provide liquidity into digital asset markets. When we look at the emergence of Automated Market Makers [AMMs] in the DEFI space, I believe, there will also be an opportunity for AMMs to evolve their models to move from retail into the institutional space through decentralized appropriately regulated and permissioned liquidity pools. It will be interesting to see how these DEFI concepts evolve to cater to the regulatory requirements of institutional market participants.