Interviewed By Emmanuel Daniel
Richard Byworth, CEO at Diginex, discusses his entrepreneurial journey in leading the first digital asset financial services with a crypto exchange to be listed on NASDAQ in the US.
One of the key focus of Diginex is to bring digital asset ecosystem to the capital markets through a multi-venue trading platform that plugs into some of the world's largest trading technology companies and portfolio management system providers.
With a background in investment banking and the vision to drive decentralisation of finance, Byworth is leading the initiative at Diginex to transform paper-based securities into digital structures that can trade on 'EQUOS', its listed digital asset exchange.
The following key points were discussed during the interview:
The following is the edited transcript of the session:
Emmanuel Daniel (ED): Very pleased to be able to speak to Richard Byworth, the chief executive officer at Diginex. A company that came to my attention when it was listed on NASDAQ, just earlier this month. But curious thing about Diginex is that it's promoting itself as the pioneer of digital assets exchange that has been listed on NASDAQ. I want to test him on a number of ideas in terms of where this whole concept of DeFi, which is decentralised finance, will take us and the structures that he's building, not just in the basic trading of the digital assets, but the whole community and the capital markets and all of the supporting infrastructure that he's already figured out in his mind. Richard, tell me to start with a little bit about Diginex.
Richard Byworth (RB): As you say it's a fairly large milestone for both the company and the industry to be bringing the first digital asset ecosystem to NASDAQ. We're very excited about it. To give you a little bit of a framing of what we do, we have at our centre an exchange called 'EQUOS' (the exchange division of Diginex group). 'EQUOS' actually operates out of Singapore, under the MAS regulatory framework, the Payment Services Act. We have an exemption from MAS until such time that we get the licence. We operate that cryptocurrency exchange which sits in the middle of the full ecosystem.
The ecosystem around it is, for example, a trading platform that we have called Diginex Access. Diginex Access is a multi-venue trading platform that plugs into some of the world's largest trading technology companies and portfolio management system providers. This is extremely important for people coming into crypto certainly from the institutional space. All the managers currently in crypto that don't have portfolio management solutions. What's interesting about our platform is it allows you to get access to the entire industry from Binance to Bitmax to Coinbase, as well as our own 'EQUOS'. This is a big problem for the industry. It's about liquidity aggregation, and creating all of that in one single place, and then be able to arbitrage across these platforms, or run algorithms across the platforms in different types of stratagems, for example.
We also have an asset manager. Our asset manager is Bletchley Park Asset Management. It operates out of Switzerland and also is regulated in Hong Kong. We operate a fund of hedge funds that are focused specifically on the crypto asset class. If we think about broader institutional adoption of this asset class, trying to put their first foot in the water, they want a nice alpha-centric product.
What we've done is a very high grade operational due diligence across the industry. We've met with 250 funds and selected a portfolio of very market neutral-based strategies, very high Sharpe that have allowed us to create a really nice portfolio that's much diversified across the different types of strategies in the industry. We also have a custodian built by Ministry of Defence in the UK to CREST certification standards for cyber security, as well as Cyber Essentials Plus, which is the Ministry of Defence’s own designed cyber security accreditation. Finally, we have our investment bank. So investment bank is Diginex Capital which is focused on securitisation mandates, from hard assets to private equity, LPs (limited partners) through to private equity, direct deals, and what we do there is really tokenisation of these securities and distribute those on our platform as well.
ED: How do you get alpha on hedge funds for crypto today?
RB: There is a lot of alpha in the industry. There's a lot of fragmentation and liquidity to lots of different platforms. For example Binance bitcoin price could trade at some points 10-20 basis points higher than a different exchange, but you can only access that if you've got an account with both, and you've got balances on both. If you've got balances on both, you've got account with both, then you've got free money to be taken as alpha.
ED: At the backend, how much of the exchange mechanism in crypto is similar or superior to traditional securities? Is it just as robust and up to date in terms of speed and everything?
RB: Absolutely not. It was for that exact reason that we felt that this industry didn't quite have an institutional offering. I'll give you a couple of examples. API connectivity is the way that technology connects to other technology in the financial services industry. There is an API protocol called FIX4.4. FIX4.4 is a standardised language of communication of numbers and trade information between exchanges, banks, private banks, etc. We are one of a few exchanges in the entire crypto industry that use FIX4.4 as our protocol because that's what institutional users need. We build all the various different API's that are used across the industry. Our FIX API is used by majority of institutions on our platform.
Another is derivative infrastructure. Today, if you go into a private bank and you're running a derivative position, or option position against your collateral, all of that will get blended into a single portfolio. Effectively, you'll get margin calls based on that portfolio's value. What happens in crypto is that nothing's associated with each other, you don't get that portfolio margining. You may be running one of those arbitrage trades that have good trade in the future versus the spot price. In bitcoin, there's a lot of money to be made in arbitraging those two. Even if you're running it on the same exchange, say Chinese exchange and we're running a short versus a long spot position bitcoin price flies, you can end up getting stopped out on your short position, even though you're delta neutral. Obviously, there's no way that you can manage a portfolio efficiently and make sure that you're guarding that alpha for your investors. So a lot of the information that we've garnered over two and a half years of building our fund of funds actually informed how we build our exchange.
ED: How capital-intensive is this business? Do you need to put up capital of your own to fund that liquidity in order to be a player?
RB: The market makers obviously have this problem. You need to have liquidity so managing that across all your exchanges, you've always got this capital efficiency issue. A few of the banks out of the US have started to help with that and have created settlement networks between the different platforms for fiat. Silvergate is a good example as a signature bank. This is exactly that sort of problem, it is capital intensive for the players.
ED: Why didn't you think of ICO yourselves?
RB: We really struggled with the credibility damage that ICOs did to the industry. 95% of them were just outright scams and people jumped on the bandwagon. We looked at that, and said, obviously this is going to end in tears. Our investment bank, Diginex Capital, is focused on bringing digital-based assets but being a security, it's really just improving the transmission rails and leveraging the technology to actually deliver the same quality of securities that we have in for the moment private markets. I do anticipate seeing that move into broader capital markets.
ED: What were the due diligence points that you had to go through with NASDAQ to qualify for the listing?
RB: The main focus for approval was the Securities and Exchange Commission (SEC). We submitted a nearly 500 page proxy filing to the SEC in October last year. They were interested in how we were going to be running a capital markets business, whether or not we were doing ICOs or offering ICOs or helping with ICOs. The SEC had a quick turnaround on our filing but with very detailed questions and once they signed off we started the process with NASDAQ.
ED: What was the one most important thing that you needed to assure them on?
RB: The one most important thing at this point in time was that we weren't operating in the United States without proper authorisation.
ED: How did you assure the regulators how you are able to distinguish your client base?
RB: We have a very deep KYC and AML process for people onboarding to our exchange. It's obviously something that the SEC has had problems with. Look at where they've cracked down. It's been on exchanges that don't do KYC and AML and have unwittingly onboarded US persons and corporates without the necessary regulatory licences.
ED: Richard, you come from a traditional investment banking background and here you are pioneering a marketplace for digital assets. If we take the narrative of how the traditional securities industry has evolved up to this point, where we left it off in 2008 was that the regulators were saying that they wanted to get more of the OTC transactions on regulated exchanges, but the bond market really didn't buy into that. Then there are very specific markets that insisted on operating outside the purview of regulated exchange, and then came the rise of digital assets. Here you're building markets and there's the element of the network effect, which is somewhat different. Is it different from the principles that are in operation on a regulated exchange on an OTC and now on an exchange of digital assets?
RB: We've actually been very cautious in rolling out further listings on the exchange because we do actually want to bring a standard to the industry around listings so that when people onboard to our exchange and see certain assets listed, they feel the comfort that this has gone through in the same way that NASDAQ does, that this has gone through the EQUOS approval process. Therefore, as an asset, that is something that I can be comfortable with investing in. We are not a market maker. We don't market make on our own exchange. We do have traders that help with facilitation for OTC and some of the liquidation process but we do not do any market making on our own exchange.
ED: How do you think it's going to play out on an exchange of digital assets? I think that there should be a network effect on exchanges but I don't see it at all. Most exchanges operate in isolation silos. How do you think that it will play out if at all?
Digital asset exchanges solve liquidity and inefficiencies characteristic of traditional market
RB: We had a saying in traditional markets that flow begets flow. So the more flow you have, the more flow you get, because more and more people want to interact with liquidity. When you talk about the fact that you've got these exchanges operating in separate liquidity pools, you're absolutely right. By having Diginex Access, you actually start to aggregate that liquidity into a single portal of trading that you can have. So this is the interesting dynamic that we have around digital asset exchanges - you don't necessarily need to have it all in one place because you can move from one exchange to the other in the time that it just takes to approve a transaction on that particular blockchain. Settlement across exchanges can be very fast, as a result, you can end up and we have ended up with multiple liquidity platforms.
ED: What's happening globally, the equities market seems to be pulling up the rest of the economy? It's NASDAQ in the US, it's maybe the Hong Kong exchange, to some extent, China and that's based on the old regime. If I looked into your computer screen, what's the composition of the assets that you're trading right now? What's coming on stream? And how do you think that's going to evolve?
RB: When you say NASDAQ's flying, Hong Kong Stock exchange is flying, and why are other exchanges across the world not necessarily flying? I think we're missing the point that you're talking about a specific asset. Even within those exchanges, you're seeing a dichotomy between the larger caps and the smaller caps. That's a function of passive versus active. We're starting to see a much larger swathe of passive investing moving away from active has been a theme for many, many years. But is actually now getting to a point of being quite dangerous with what happens when you get a sell off and suddenly all of these stocks could end up just getting hit together because everybody's in the same trade because they're all in these passive funds versus active. The idea of us wanting to digitise everything, really the way that the market is focused, it's on efficiency. Everything that we deal within Diginex Capital on the securitisation side is generally coming from a place with poor transparency, a lack of visibility around documentation, and also poor pricing and poor liquidity. So if you think about securitisation, markets, securitisation banking deal will take months, if not years to put together. And so as a result, you've got a lot of inefficiency. Same with private equity, you get a lot of opacity in that market. For example, the liquidation preference of a series A versus a series D, if you're invested in the series E. You need to understand what those different liquidation preferences are, and not necessarily you'll get access to that, certainly if you know you're a smaller investor. So being able to democratise that, open that up a bit. This is where we're seeing the use case, for digital securities, digital assets at this point in time.
If you think about digital assets broken into four key areas, you've got cryptocurrencies which will blend broadly in with protocol tokens like Etherium. You've got utility tokens which is a little bit like Singapore Airlines or air miles token. You've got e-payment tokens like stable coins, US dollar coins, but built on a blockchain protocol, and then you've got the final piece security tokens. So if you look at those four, sort of areas, the main focus for me at this point in time is around the cryptocurrency space because that's what's active now. But at the other end of that spectrum, you've got the security tokens which is another big focus of our business. But still that's a maturing and very nascent industry all together. We actually spend a lot of time working with regulators in terms of helping them put together regulatory frameworks around how you would iterate your securities legislation to make them focused on digital. We've spent a lot of time with a number of global regulators around this factor.
ED: Is there a space where you add value as a service provider, as a consultant, where you help issuers design the crypto the asset and make it attractive to whichever pool of customers? If except for the large ones, a lot of markets end up being of interest to a very clear pool of customers. We're sometimes much localised such as the warrants market in Hong Kong is, in the same way that the bond market for China is actually Chinese investors again, they may look interesting. They may look like you can globalise them but actually they end up operating within specific communities or specific pools. Is the consulting and the designing element the most valuable thing that you could be doing as a business in the industry because there the number of platforms are growing?
Balance needs to be achieved among regulatory autonomy, decentralisation and investor protection
RB: I think that you raise a really important point. So, how do you deal with an asset base that is not restricted by borders in the same way that everything else was previously? If you have an account with DBS, or OCBC, you can pretty much only deal with certain selected foreign stocks and Singaporean stocks. But what happens when it's just literally a wallet that can receive any asset based on that protocol? How does that change the global economy, the global trading and global platforms? I think it really does. This is the point that we need to say and work with regulators to help them understand that we're not going to be confined by the same borders and how is that going to adapt because of the technologies sort of breaking it already. You touched on DeFi, decentralised finance, anyone can set up an ether scan wallet, and they can actually start to participate in this industry without any regulator getting involved. So how do we look at all of this from a platform perspective and help regulators work together across the world to allow for innovation, but to continue down a path where investors are protected? I think that is a very big question. I think the European Union last week actually announced that they wanted to have broad union-wide regulation for digital securities. I think that's a very important step regulators are working together to actually form the whole base. And then an exchange operator like us only needs to be licensed in one jurisdiction but then can access the world. And that's the way it's going to go.
ED: I want to challenge you a little bit here. How do you speak about DeFi which is decentralised finance, on the one hand, and then being a regulated entity, on the other hand, when all regulators want to have something that they can have control over? And where regulators are today is that they're all very bank centric, which is they're happy with a bank setting up its own crypto asset or its own digital asset, where the bank even pre-qualifies the participants (which is not what DeFi is about) and then the bank creates an ecosystem around itself and is happy and after that, even central banks, several regulators have kept talking about proof of concepts of cross border payment platforms. And they've been holding this at a test level for years. It's not moved at all. So how do you conceptually bring together the idea that DeFi is DeFi which is decentralised and regulators want control?
RB: DeFi is breaking the regulatory model. So regulators need to think differently and if they want to have regulated platforms, then they need to basically operate with each other to allow us to be able to compete against decentralised finance. I would say it's also from the customer's point of view as well. If you think about institutions starting to participate in this space, they need to make sure that they're operating within regulated platforms, regulated frameworks, and also having third party custodianship. None of that exists within DeFi. So you're very fringe at the moment with this technology and you're certainly not open to many institutions that would potentially want to participate in the asset class. Institutions today need to be able to operate on a regulated third party platform with a regulated custodian. I think DeFi is kind of breaking the model and is making regulators think but the only way that you're going be able to regulate something like that is have a global approach to regulation.
ED: Do you think that there can be a digital version of the US dollar eventually, or a currency that's global? Theoretically, I don't see why bitcoin cannot become a stable coin, hooked on to the dollar as its value, that's what happened to gold, and that effectively becomes a global currency as a result. We stopped talking about Libra and everything else and we stopped going to regulators for permission. What are your thoughts on stable coin, on the idea of a global currency? How much of what's happening that can become global needs regulation in the first place?
RB: As a very pertinent observation, we needed to choose a regulator that we felt was innovative enough and someone that we could work with to help adapt the industry. MAS in Singapore, we felt very strongly had taken an innovative approach to dealing with virtual currencies and wanted to help propagate the industry. MAS has said that while we're under exemption, we can't deal with anybody in Singapore but when we get the full licence, then we can deal with people, customers and people in Singapore.
ED: Which they have not given out at all. They're giving themselves time to respond. I guess when the time comes the structures are in place. They can make it happen, but I wouldn't call them innovative. Your job is to try to make your securities tradable as broadly as possible.
RB: There are two frameworks we're talking about here. We're talking about a virtual currency exchange, and we're talking about digital security exchange. They are two different regulatory frameworks. So the MAS has actually gone quite light on the virtual currency exchange side of things. They want to see how the industry grows and on what sort of direction working with entrepreneurs like ourselves, who obviously, are more fit and proper in terms of having come from regulatory backgrounds from investment banks and the likes. They've allowed us to be engaged on things like how do we regulate derivatives for our approved exchanges in this space. They've been really quite open in terms of seeking feedback from the industry. Actually, they're the first regular to try and at least make a step in the direction of the way that future regulation is going to look from the requirements of Financial Action Task Force (FATF). When it comes to digital securities, we are not even in process of regulation yet there for our exchange. That's something that will be coming down the road.
ED: What about the dollar being the idea of a global stable coin?
Bitcoin has emerged as a popular asset class to store wealth
RB: I think we're pretty advanced. The bitcoin exists. It has been growing as a network for 11 years now. There's more and more hash power or computing power being fired at the network to implement transactions and security than ever before. The network is extremely secure now. But it is a currency that is scarce. I think this is actually an interesting part to your framing. I think the way you're going with this conversation is around the fact that you've got irresponsible money printing coming from just about every central bank on Earth right now, against how do you have a scarce asset links to being a global currency? For example, backing the US dollar with bitcoin as opposed to gold as it was prior to 1971. I think it's a very interesting angle you're coming from. I'm obviously a big believer in bitcoin as a store of wealth against what is a massive inflation of the monetary supply, which is seeing the debasement of the US dollar, but the debasement of pretty much every major currency across the world. We've already started to see central banks come out with their own digital currency that can jump over the banks that are put in the middle and go direct to consumer. China's obviously done it first. They did that airdrop of tokens to 50,000 wallets in Shenzhen. That suddenly woke up the rest of the world that obviously see China always being very strategic in the way that they move throughout the world and long term. The US has had to wake up and say, we’ve got to think about digital dollar and how the Fed manages that. The IMF came out with the paper in the presentation earlier this week about how we should expect to see central banks operating in unison around policy. What does that mean for money printing?
ED: I see lots of opportunity, for example, in utility coins if everything can be digitised and utility coins may well be one of the ingredients for rebuilding economies after the pandemic is over. Because it's not just a matter of pumping more liquidity into the marketplace or increasing credit but recognising value that already exists in communities, regulators are not about to, firstly, move out of their bank centric systems. They want to keep a watching brief on digital assets. At the same time, digital assets are growing in ecosystems that are outside the control of regulation. You said that the idea of digital assets is that anyone can issue digital assets and that's the promise of it but your business itself is focused and limited on what's tradable at the moment.
RB: I think that the point that I've tried to make is that you can't just throw someone in the deep end and say this new technology has arrived. We've got frameworks in place, you need a centralised, regulated third party custodian and exchange that can actually provide the services that investors today in the way they construct it need to be able to invest and allocate. I sat at Davos and spoke about capital markets. I was on a panel with a number of extremely intelligent people in the blockchain community. We're sitting there talking to a group of 50 investors, and the guy to my left starts talking about cross chain swaps and multiple protocols and immediately you just see everybody in the audience just face glaze over. It's like, what are you talking about? So you've got this huge divide from where we are today, in terms of our institutions, and where technology is taking us. You need companies like Diginex to be able to provide the stepping stones to get that within a regulatory construct because that's what they need. So I would say it's just about a stepping stone and obviously, we will evolve our business as institutions evolve.
ED: The question related to that is interoperability. So is that the next thing for you? Building platforms which interoperate, operate between assets and asset classes?
RB: We already have it I mean, Diginex Access, that's exactly what it is. It is liquidity aggregator between platforms.
ED: A quick point on central bank digital assets. Where do you think that's going? Is there a role for a company like yours eventually if it is internationalised? Everyone seems to think that the Chinese are going to internationalise their digital currency but I don't think so. I think that it's created to solve a domestic problem. What's interesting is that the technology around digital currency seems to be simpler than most people think. The Swedish just outsourced it to one of the accounting firms and they were using very basic technology. So it's just electronification of fiat currency at the moment, but do you think that will take a life of its own?
Digital currencies and wallets correct payment transfer inefficiencies
RB: What it does is it expands the freedom of what these central banks can do. So you think about the issue that we've had in the United States around COVID. And a lot of working class people losing their jobs, having whole families to feed, and not being able to get the benefits that were being handed out by the government because of inefficiencies in the process. What you have with the creation of a digital dollar is everybody has a wallet like they did in China and you can immediately start to allocate income to people that need it. So you've got this universal basic income that sort of starts to propagate, you then also got on the IMF made it clear in their paper that you've got much better control over interest rates for the entire currency, the entire monetary supply, because you can't control because you have a wallet where you've got the digital Singapore dollar sitting in it. You can't control what happens with the interest rate on that. Either you're getting a negative interest rate or a positive interest rate, but actually, if they start to try and move towards a much more egregious negative interest rate, again, what you can do about it, this is taking cash out of the system. So it comes back to bitcoin. When you need to be storing your assets in something that is scarce to protect your wealth against both a hugely increasing monetary supply, but also negative interest rates, they can start to spiral as another form of taxation.
ED: Two questions to finish this off. One is do you see financial institutions of the likes of JP Morgan, Goldman Sachs issuing their own digital assets coming to exchanges like yourselves to create markets for them? The last question really is your stock price. What are the trigger points that seem to be responding to right now and how do you think it'll work through?
RB: I think that JP Morgan and Goldman Sachs and those sorts of players definitely need a company like ourselves. We like to build a company like ours within an institution will take years. So Goldman is really already advanced in terms of what they've been studying in digital assets quite for some time. We've got a bitcoin trading desk. JP Morgan has actually already introduced their own JP Morgan coin for settlement within their ecosystem. But other banks that have been left behind, they're actually going to need to move into the space very quickly. So I think that most likely what will happen is either we see those banks on board with us, they sort of white label our services, or one bank just comes along and just fully acquires us, which I think will end up possibly being a likelihood as this technology increases. To your point around the stock price, it’s very early days. We entered the market back so you don't get the same normal publicity that you get with an IPO. I think that not many people know about Diginex. We bottomed out a couple of weeks ago. Stocks up about 80% since then. I think slowly we're starting to get people pay attention. Obviously with bitcoin’s continued meteoric rise, I think people will look to us as a competitive player in the sector. And then they'll probably start to continue by.
ED: Richard, thank you for this conversation.