Both DBS Group Holdings (DBS) and United Overseas Bank (UOB) have seized on the opportunity of using digital, blockchain-enabled, distributed ledger platforms for parts of their capital markets business. DBS launched DBS Digital Exchange or DDEX in December last year for its institutional and high net worth customers. DDEX is a fully integrated tokenisation, trading and custody ecosystem for digital assets. DBS provides an ecosystem for fundraising through offerings of security tokens by fractionalising assets, and secondary trading of these digital assets including cryptocurrencies.
Through DBS Digital Exchange, large corporates, SMEs, owners of investment properties and other infrastructure assets can tap on a security token platform to raise capital through the digitisation and fractionalisation of their securities, properties and other assets. This gives companies access to new avenues of fundraising and the issuance of structured investment instruments.
In September, UOB partnered Marketnode in the development of an end-to-end distributed ledger technology-enabled fixed income infrastructure. This will be used for the launch of new products such as digital bonds.
In June, UOB piloted a perpetual security on Marketnode. Marketnode, a joint venture between Singapore Exchange and Temasek, is an exchange-led digital asset venture focused on capital markets workflows through smart contracts, ledger and tokenisation technologies. The platform uses distributed ledger technology (DLT) to connect various parties involved in the transaction — from issuers to investors — and to tokenise the capital security so that smart contracts can be created and conducted for greater efficiency.
Marketnode’s fixed income issuer services platform will provide issuers, law firms and banks with products and solutions such as documentation streamlining, investor engagement tools, ESG reporting and market access mechanisms, all powered by data analysis.
In a separate venture, on Oct 7, UOB and digital securities exchange ADDX announced the digitisation and digital custody of part of a sustainability-linked bond recently launched by Sembcorp Industries. UOB was appointed as a joint lead manager for the $675-million sustainability-linked bond issued by Sembcorp.
See also: MAS enhances FinTech Regulatory Sandbox with Sandbox Plus
ADDX is a full-service capital markets platform with MAS licenses for the issuance, custody and secondary trading of digital securities. It was founded in 2017 and was previously known as iSTOX. Its shareholders include Singapore Exchange, Temasek, JIC Venture Growth Investments (JIC-VGI) and the Development Bank of Japan (DBJ). Individual accredited investors using the ADDX platform today come from 27 countries.
Digitising and fractionalising assets
UOB partnered with ADDX to custodise and manage a $50 million portion of the bond. Digital bonds make use of technologies such as blockchain and smart contracts to eliminate manual processes in the bond’s custody and post-trade administration. A digital bond can be managed more efficiently as corporate actions such as coupon payments can be carried out with self-executing instructions on a single, distributed ledger. Digital bonds are also more efficient, less error-prone and less costly for the issuer, investors and the banks underwriting the deal compared with traditional bonds.
See also: MAS embarks on 'Project Orchid' to build retail CBDC capabilities
“UOB has been intensifying our efforts with regulators and industry partners across our network over the past few years to explore how digital ledger technology can benefit our clients and streamline legacy processes in capital markets. Our successful proof-ofconcept projects, including our participation in Project Ubin, demonstrate the value that DLT can bring to our corporate clients, such as improving cost and time efficiencies,” says Frederick Chin, head of group wholesale banking, UOB, in a statement.
In a recent interview, Eng-Kwok Seat Moey, head and managing director of capital markets group, DBS, detailed DDEX’s ecosystem, and how it was ideal for the launch of security token offerings (STO) for different classes of assets. Eng-Kwok points out that tokenisation enables the fractionalisation of assets into smaller, more affordable denominations so that these are accessible to more investors. It also democratises access to private investment opportunities and allows for real-time settlement.
Tokenisation has therefore opened up a whole new world of asset ownership. DDEX allows the new security tokens to be offered (in an STO, a private version of the IPO) on the exchange, and for investors to buy and sell these security tokens. In a tokenised world, security tokens — which are likely to be backed by illiquid assets such as property or the cashflows of an SME or even a famous painting — can be sold on a digital exchange. This is unlike private market investments, where the only exit is through the sale of the assets or an IPO, Eng-Kwok says.
See: DBS Group to invest $300 mil to grow digital and intelligent banking capabilities
As an example, the ultimate illiquid asset, a collector painting can be tokenised. “A collector painting is very much a private market investment, but with tokenisation, the ownership of the painting can be in smaller denominations so that investors can own part of the painting and trade the tokens if they wish on the digital exchange,” Eng-Kwok says.
“Tokenisation represents an opportunity to create a much more efficient process of buying and selling digital assets in a cost-efficient and seamless way. Secondly, when the technology is mature, with enough people interested to be buying digital assets, it will enhance liquidity and there is value to be unlocked. There is still some way to go before the adoption is widespread and pervasive,” says Leong Sing Chiong, deputy managing director, capital markets and development, MAS.
Notably, DDEX, Marketnode and ADDX are for institutions, corporations and high net worth individuals. Retail investors are unlikely to gain access to these new digital exchanges.
Challenges for blockchain-based exchanges
There is one public exchange soon-to-be on a digital platform that retail investors can trade in though. The move of CHESS — The equities clearing and settlement system of the Australian Securities Exchange (ASX) — to a DLT platform through the help of Digital Asset has been planned since 2016, but wrought with delays, the Australian press says.
In an AGM address, its chairman confirmed the exchange is still on-track for go-live in April 2023. The ASX had planned to move on to the DLT platform earlier, by April 2022, but eventually opened a public consultation. The Australian press reported that the Covid crisis resulted in a massive spike in ASX trading volumes in 2020, which meant the exchange needed to recalibrate scaling demands on the DLT CHESS system.
There was also a call to include corporate actions such as dividend reinvestment plans (DRP) and bonus share plans (BSP). Another feature that will be available at launch is the instant settlement or non-batch bilateral delivery versus payment (DvP). Other additions include more extensive testing.
Baby steps for local digital exchanges
For now the likes of DDEX, ADDX and Marketnode — all three of which our SGX has invested in — are not built to take the place of a public market such as SGX or ASX. “A digital exchange fills the gap between private and public markets, namely the lack of liquidity in the private markets, and for the public markets, the lack of access to growth companies which are not ready for a public listing,” Eng-Kwok of DBS explains.
In addition to providing a platform for state-of-the-art private exchanges, and by 2023, a public exchange, DLT is likely to be an enabler for financial inclusion.
The unbanked population in Southeast Asia is estimated at more than 70%, according to the Centre for Strategic and International Studies (CSIS). For banks with an Asean footprint such as UOB, DLT and blockchain are likely to make their services more efficient and accessible. DLT cuts out the intermediaries. Smart contracts could have a significant bearing on raising the efficiency and safety of financial products and services.
For a regional bank, the proliferation of digital platforms, the ease of transferring money, and the security of transactions are likely to have a significant bearing on extending the use of financial services, and financial inclusion to the parts of society that had difficulty gaining access to these services. And all that is good for the betterment of society.
Photo credit: Bloomberg
