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The end-to-end digital assets value chain network that will disrupt the financial services industry

Nicole Lim
Nicole Lim • 8 min read
The end-to-end digital assets value chain network that will disrupt the financial services industry
At SBI DAH, we understand what it takes to provide solutions... We are incumbents who have been crazy enough to keep disrupting ourselves, and we have what it takes to scale, says CEO Vázquez Cao. Photo: SBI DAH
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The financial services world has reached a crucial point. With disruption from the rise of fintech players, increased regulations, and acceleration in digital innovation from changing customer behaviours, players now find themselves at the crossroads of digital transformation. In order to stay at the forefront of relevancy, banks and financial institutions need to embrace innovation at lightning pace.

But since the rise of the industry in the 1960s, digital transformation has largely stalled, says Fernando Luis Vázquez Cao, CEO of SBI Digital Asset Holdings (SBI DAH). With established roles and responsibilities in the entire value chain of public markets, there has been little to no incentive to change. As robust as the existing systems may be, there has also been resistance to digitalise elements of the ecosystem that may well bring about more efficiencies.

However, in this radically changing environment, embracing innovation at pace and scale is crucial in order to thrive.

“The pace of digital transformation that started in 1960s with mainframes has slowed down dramatically in the last few decades. Financial infrastructure technology is essentially stuck in the late 1990s,” says Vázquez Cao. “Matching engines and algorithmic trading were introduced back then for the front-office but not much has happened since then. On the post-trade side, there has hardly been any major development to make the processes more efficient.”

Vázquez Cao is a 20-year veteran in the technology and financial services sector, and a key player in making democratic software mainstream in the industry. Together with fellow believers of code, he spent almost two decades collaborating with regulators, business leaders, and public and private markets to fully adopt this innovation into their systems.

Today, the code has given rise to some of the most ubiquitous technologies, including cloud computing and Android phone developments, something Vázquez Cao says was extremely satisfying on a personal level to have contributed to.

See also: SFF 2023 spurs discussion on generative AI and the future of finance

Then, a chance meeting with Yoshitaka Kitao, CEO and founder of SBI Holdings, led to Vázquez Cao’s next leg in making new technology mainstream. Kitao, who was an early believer that the Internet was the future of finance, saw blockchain as the next transformer of the industry.

As the biggest retail financial conglomerate in Japan with offices in over 25 countries and 42 million accounts for various financial services, SBI Holdings created SBI DAH, an end-to-end ecosystem for the issuance, distribution, advisory, custody, listing, and liquidity of digital assets. Vázquez Cao says that as CEO, he has a clear mandate — to make digital assets a primary form of technology used in public and private markets.

“We’re trying to encourage people to leapfrog from legacy technology and go directly to something that’s more native-digital,” says Vázquez Cao. “Then you can become more efficient, and differentiate yourself from all your competitors.”

See also: MAS launches blueprint outlining technology infrastructure required to facilitate digital money transactions

Creating an end-to-end digital asset ecosystem 

As it stands, SBI DAH has four key entities: SBI Digital Markets, AsiaNext, SBI Zodia Custody and SBI Security Solutions. All four work together in synergy to provide a regulatory-compliant, scalable, secure, and robust digital asset value chain for financial institutions.

Under SBI Security Solutions, the group builds wallets and banking technology solutions including back-office systems for banks and securities companies. SBI Digital Market then serves as a hub in Singapore to operationalise global origination and distribution corridors of securities.

Quek: SBI Digital Market provides comprehensive digital capital markets and wealth management solutions for institutional clients. Photo: SBI DAH

SBI Digital Market’s CEO Winston Quek says that the purpose of the entity is to provide comprehensive digital capital markets and wealth management solutions for institutional clients while aligning with governance, policies and regulatory frameworks for a compliant institutional-grade offering.

“As a blockchain-agnostic digital hub, we aim to transform and facilitate the end-to-end digital assets journey for our clients as we connect them to our broader network,” says Quek.

Then, AsiaNext, a joint venture via the SIX Group in Switzerland, comes in to provide a secondary market. Created in 2021 to meet the increasing institutional appetite for access to digital assets through a safe and secure venue, AsiaNext’s CEO, Chong Kok Kee, says that AsiaNext will stand as a crucial nexus within the global digital asset ecosystem, offering institutional insights and digital foresight.

“Our aim is to provide institutions with a complete platform for the tokenisation and trading of a variety of securities and non-bankable assets, and we are strongly backed by our shareholders SBI DAH and SIX Swiss exchange,” says Chong.
Chong: AsiaNext will stand as a crucial nexus within the global digital asset ecosystem, offering institutional insights and digital foresight. Photo: SBI DAH

In future, Vázquez Cao believes that acquiring liquidity will be key, which will see AsiaNext connecting with sister exchanges from both groups in Europe and Japan, and potentially others.

The holy grail of digitalisation is to have global markets that are frictionless. This means that if an asset is to be listed in Japan, it should be available in Singapore or Switzerland immediately, says Vázquez Cao.

Finally, SBI Zodia Custody provides custody services for both crypto and tokenised securities.

Using a “hub and spoke approach” in which the means of distribution relies on a central location and the number of spokes leading out from that hub, SBI DAH operationalises its “corridors” to connect various jurisdictions to one another.

Taking the asset management spaceas an example, in which different intermediaries are involved from the collection of fees to the distribution of assets, it often takes months for a fund to be set up. But players who utilise one of the four entities under SBI DAH, should it be a custodian service under SBI Zodia Custody or others, can bypass intermediaries therefore trimming costs.

This allows the fund manager direct access to investors, and investors can keep track of ownership all the way through.

In building this bespoke network, SBI DAH had carefully chosen different jurisdictions to operate each of their entities. SBI Zodia Custody was chosen to operate in Japan as the regulatory framework for crypto in custody was by far the clearest, says Vázquez Cao.

He recounts that following the crash of cryptocurrency exchange FTX, only the Japanese unit of FTX was able to return money to its investors due to its clear regulatory framework. “We really have to focus on creating a risk framework that just makes sense, and Japan is the most sophisticated jurisdiction to offer that kind of service,” says Vázquez Cao.

More broadly, Singapore remains one of SBI DAH’s main global hubs. The Monetary Authority of Singapore (MAS) has been equally “bullish” on tokenisation just as it has been strict in enforcing a robust and safe environment for digital innovation, according to Vázquez Cao.

Building a safe and regulatory compliant environment 

At present, there is no uniform regulatory alignment across jurisdictions in how digital assets should be managed. In some cases, SBI DAH is able to manage the whole end-to-end of the value chain of an asset, but in other instances, they merely provide one infrastructure to players.

“We are realistic; we need partners and we cannot do all these things ourselves,” Vázquez Cao says, explaining the complexity in existing regulatory wrappers of the distribution of digital assets. But the technology veteran is certain digital transformation should not come at the expense of compliance and safety.

“Digital transformations do not happen overnight,” he says. “And things need to be done in a compliant manner that protects all stakeholders.”

Just last November, SBI DAH carried out a live transaction involving tokenised deposits as part of the MAS’s industry pilot under Project Guardian. SBI DAH was involved in the buying and selling of tokenised Singapore government securities, Singapore dollars, Japanese government bonds and Japanese yen, which was carried out in collaboration with a financial institution.

In what Vázquez Cao describes as the first time a Tier One financial institution has utilised blockchain technology meaningfully, and in fact took over nine months of work in the background.

“We carried out the development work in two weeks, but we spent nine months and more working with lawyers to come up with risk controls to address hypothetical risks that we were bringing to the table,” he says.

As an industry first, SBI DAH underscores the importance of putting in place legislation to safeguard the interest of all stakeholders. This year, the group has embarked on a similar project with a Tier One financial institution where native tokenised securities and tokenised payments are done for a repurchase agreement for the first time.

Meanwhile, Vázquez Cao teases that the team is presently working with four global banks on commercialisation, a signal that public markets are increasingly excited about the adoption of new technologies.

With over 13 million retail customers under the group, the acquisition cost for players is virtually zero, says Vázquez Cao.

“2023 is like the year 2000 of the Internet; we’re at the initial phase, and the industry is looking for partners,” says Vázquez Cao. “At SBI DAH, we understand what it takes to provide solutions. Some of us have done it before, and while it is more challenging to disrupt public markets, we are not giving up. We are incumbents who have been crazy enough to keep disrupting ourselves, and we have what it takes to scale.”

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