What trends have you seen in the digital asset space since launching in May?
The financial markets are rife with too many intermediaries — I am not saying intermediaries are bad, but we need less of them that are more efficient to reduce frictional costs — and even those ventures embracing blockchain in terms of permissioned ledgers primarily are doing so just using the old centralised model they have been accustomed to for decades. On the other hand, the decentralised exchanges and broader decentralised finance (DeFI) plays struggle to match liquidity flow.
Beyond this we are beginning to see the convergence of B2C and B2B beyond the C2B2B constructs we have seen over the last few years and as such the challenge is to optimise retail and wholesale activity in capital markets using the best facets of both centralised and decentralised technology and services. The old and the new world will have to coexist for the foreseeable future and with multiple blockchains and legacy networks, the gap has to be bridged between both worlds. Solutions that address this not just with technology, but also at a transactional business flow level as well as addressing the cross border regulatory requirements, are the ones which will then lead to a fundamental change in the capital markets space.
Participants in financial markets run their own services, including custody in silos and moving assets between these participants is cumbersome, slow and expensive resulting in inefficiencies. As institutional players increasingly come into the market there is a need to make this interconnection more efficient. The solution is to link digital exchanges and digital banking with new product creation across nodes (jurisdictions) aligned with traditional and fintech services.
Why did you select Seychelles to license your digital custody business?
As Seychelles seeks to establish itself as a global financial technology hub, with the aim of becoming a financial centre that can truly differentiate itself from the rest and become a gateway to Africa, GMEX Group is already leading numerous initiatives in Seychelles, with one of those being the SECDEX Digital Custodian.
We chose Seychelles to be regulated because the Financial Services Authority (FSA) has implemented a fintech regulatory sandbox which provides a regulated environment within which companies can carry out fintech-related financial services. This combines well with existing capital markets licences such as the securities exchange licence which SECDEX Exchange has in place.
Looking ahead at how this is further enhanced, the Central Bank of Seychelles (CBS) is supportive of fintech and is leading efforts to formulate a National FinTech Strategy for Seychelles, in collaboration with the Ministry of Finance, Trade, Investment and Economic Planning and the Financial Services Authority.
As part of its mandate to regulate and oversee, as well as modernise the National Payment System, the CBS aims to embrace the rapid pace of fintech, while ensuring it is properly regulated and subsequently help payment service providers to leverage technological innovations in the financial sector to maximise economic growth.
Seychelles has made significant progress since 2008 to actively reform its National Payment System to include automation of systems. As part of the Seychelles National Payment System vision and strategy (2016 to 2020), one of the strategic focus areas include the issue of regulations to provide guidance for electronic money and to promote, encourage and provide opportunities for the use of affordable electronic means of making payment.
In addition, there is substance in terms of crypto activity in Seychelles and while most is unregulated, we saw this as an opportunity to harness business based on a proper regulatory framework. The Crystal Blockchain released a report in July 2020, which categorises cross-border transactions of bitcoin (BTC) based on their ‘country of origin’.
Due to Binance and Huobi, a vast majority of the 33 billion worth of bitcoin is sent via exchanges Seychelles. According to the same report, about 45 per cent of bitcoin transfer volume originated from the G-20 countries, which include the world’s 20 biggest economies. By contrast, tiny Seychelles covered 31 per cent of the global volume in the first half of 2020.
The most active international trade routes are Seychelles — EU, Seychelles — US, Seychelles — South Korea, with each connection producing volumes in excess of $2 billion.
SECDEX Digital Custodian (SDC) has gone live under this regime as Africa’s only regulated digital custodian and the only operational multi-token custodian operational in the Middle East.
This underlying conducive environment combined with our business strategy means that in a short space of time it is signing up deals as per below and there is news in the public domain that it already has over half a billion USD of assets in custody.
How do you ensure the safekeeping of digital assets?
Most crypto ventures in this space are unregulated and are run by start-up firms with little or no track record and questionable balance sheets. We are not. We also within the group have a comprehensive set of services with full offshore capabilities.
Coming from a regulatory background as a senior management team and by virtue of the parent company, GMEX Group, we are accustomed to running a robust and secure market infrastructure.
As part of our regulatory approval process, we undertook a full institutional risk assessment and came up with a robust risk management policy and framework. Risks addressed include reputational risk, operational risk, market risk, regulatory compliance risk, credit risk, technical risks and force majeure with risk mitigation actions defined.
We made a full assessment of the attack vectors for cryptocurrencies and a wide range of digital assets and how to address this based on our own knowledge of best practice and the knowledge of crypto hacks that had arisen over the last few years.
SDC caters for a broad range of digital assets, including security tokens and cryptocurrencies such as Bitcoin for customers choosing to put their digital assets in its safe custody, with robust layers of security to prevent fraud and misappropriation. Wallet keys and key backups are stored with strong encryption. SDC services the digital custody needs of both private and institutional clients (including third party exchanges, marketplaces and financial institutions), by handling custody, escrow services, automated transfers, balance confirmations and account related requests.
To reduce the risk of intrusion, SDC has implemented wallet clusters. A cryptocurrency wallet is a collection of private keys, acting as digital addresses, used to store cryptocurrency or move it from one wallet to another. A wallet cluster consists of several wallets. SDC is using three types of wallets, which include:
Hot wallet: This is for one-time use to transfer digital assets in/out of SDC
Warm wallet: This is used to hold the operational level of digital assets, needed to give the user a good response time should they request a withdrawal
Cold wallet: This is for holding the majority of the digital assets, and whose private keys will be mainly in an offline state so that the risk of unauthorised is reduced
The solution uses multi-tiered hardware secured module (HSM) wallets and is deployed at fully redundant secure well established London data centres. This is a standalone Wallet Subsystem accessed only via the Wallet Manager API.
What does your partnership with Distichain provide?
Partnerships are going to be increasingly important in the blockchain space and the technology lends itself to achieve that. One plus one really can make eleven to create a network of network effects. Each organisation can play on its strengths and leverage the strengths of the other to minimise investment and time to market and provide better services to its client base and a better return to investors.
The pandemic has created some real opportunities in certain sectors. Trade finance is one such opportunity and I know banks have various initiatives, but there really is an opportunity to reinvent the existing model as opposed to replicate on blockchain what they already do with a little more efficiency. Add to this automation of manual processes and the ability for sellers to then easily launch multiple marketplaces and link to buyers as a B2B play, as part of a GUI and API based model integrating into multiple services at the back end, will be game changing.
Distichain addresses this and integrates with SECDEX Digital Custodian so we can run secure distributed ledgers for such marketplace activity to ensure that the settlement between buyers and sellers is optimised.
The partnership has gone live with an integrated Distichain B2B trading engine and SECDEX services solution set, enabled by the GMEX Fusion hybrid centralised and blockchain distributed ledger technology suite. The ecommerce platform and secured digital wallet technology stack also includes digital custody and escrow financial institute licenses, as well as secure banking.
Currently, traders are limited by traditional payment methods such as low credit card limits, wire transfers, and lengthy and complex letter of credit solutions. Delivering advanced blockchain-based payment technologies, the SECDEX, GMEX and Distichain combination is aiming to provide secure, swift, and seamless global trading with reduced risks.
The wallet integration creates a unique experience in the digital B2B trading journey, as buyers and sellers connected to Distichain’s trade engine have the capability to transact large amounts securely. Verified buyers, upon receipt of the purchase order and generation of the smart contract, will be able to pay for the goods purchased instantly by payment transfers on the agreed due dates.
What are the biggest opportunities in the digital assets space?
The time for unregulated digital exchanges is limited. We are already seeing that on the crypto derivatives side, and even crypto itself, more regulation with the EU, Abu Dhabi Global Market (ADGM) in the United Arab Emirates, Bahrain, Malaysia and other jurisdictions working on frameworks. I know the decentralised purists cite that this goes against the ethos of crypto being democratised, however, the way that institutional markets, work, a regulated approach is expected by investors and both centralised finance and DeFI will combine to create some great opportunities and innovation.
We are beginning to see real innovation in the creation of regulated structured products in the digital assets space, with a trusted underlying set of assets, in a way that is attractive to investors as a diversified portfolio wealth management play. It is also attractive for market making as there is an ability to arbitrage and hedge the underlying. As an example, we are using our affiliate Digital Investment Fund PCC to back digital bonds on a fund cell with diversified assets under management from real estate on the one hand and mega exchange-traded funds (ETFs) on the other hand. Such instruments, beyond being vehicles for a capital raise, can then be traded on digital exchanges such as SECDEX Exchange and held in digital custody in custodians such as SECDEX Digital Custodian.
We are seeing a trend to create value out of immobile assets, such as art, so that by being tokenised they can be used as collateral and as tradable instruments fostering opportunity for new financial asset classes. We also see more innovative derivatives coming into play, such as Hash rate derivatives, allowing miners to hedge exposure, much like it exists for other commodities.
We are also seeing and very much involved in creating hybrid instruments that are both traditional and digital. Many investors are more conventional and also have systems and processes that take time to change.
Providing digital products with a traditional wrapper around them, so that such investors get exposure to digital assets without the need for knowledge and systems relating to them, is going to be a major trend in the more immediate term.
Other macro trends are banks increasingly going into digital assets, both on the wholesale and retail side, as well as into digital custodial services with cryptocurrencies gaining the most traction and security tokens predicted to follow.
Another macro trend is traditional exchanges wanting to go into digital assets and, beyond the technology, need to seek regulatory, operational and business level guidance and have the ability to integrate external digital processes into their current non-digital activities. Such exchanges have their own central securities depositories to hold assets on behalf of clients.
This presents a big opportunity to tokenise and package existing assets whilst integrating the new digital/crypto rails with traditional payments rails to facilitate effective settlement.
Looking ahead, how do you see the digital asset space expanding in the next five years?
The advent of new technologies is greater than ever before, such as blockchain, artificial intelligence (AI), internet of things (IoT) and Quantum computing enabled by an increase in cloud computing. We will see greater convergence of these technologies (for example, blockchain smart contracts are driven by data and AI) to foster a fourth industrial revolution but how does one transition to Society 5.0 from this?
“Society 5.0” refers to the fifth stride in human civilisation evolution to create a ‘super-smart’ future society which leverages the technological innovations of the current fourth industrial revolution to achieve economic advancement and embed these in society to solve people’s problems so that they can live better lives.
Society 5.0 addresses a number of key pillars: infrastructure, fintech (including blockchain), healthcare, logistics and AI.
Nations which harness this effectively will become the super societies of the future. Taking fintech to the next level will be essential for such enablement to reinvent the way financial services are conducted.
Digital asset fintech hubs can play a key part in that enabled by policy and regulation as such hubs will increasingly interconnect with each other to become ‘smart digital fintech hubs’.
This new-age digital infrastructure will have the power to assist in the economic recovery as it will bring hundreds of millions of the most underprivileged and displaced members of society into a new digital financial system.
Domestically this will facilitate the development of local expertise in digital assets and related services as well as attracting the most innovative international fintech companies and greater foreign investment into countries which embrace this construct.
The positive effects of this will be job creation, associated GDP growth and export of this knowledge to interconnect and enhance other similar hubs.
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