DBS digital exchange plans stir excitement among crypto players

Singapore

DBS'S plans for a digital exchange has brought excitement to the niche crypto and digital securities world.

Most are hopeful that a reputable bank's entrance will bring credibility and more adoption of blockchain technology and cryptocurrency.

DBS Digital Exchange could be one of the world's first crypto exchanges backed by a traditional bank, observers said. A Webpage for the DBS Digital Exchange that was accidentally made public briefly in late October said the proposed platform will list the four top cryptocurrencies - Bitcoin, Ether, Ripple and Bitcoin Cash - against multiple fiats. South-east Asia's largest bank declined further comment, stressing that it's still seeking approval for these plans.

If approved, corporates will be able to raise private capital on the platform from qualified investors by digitising their securities and assets into tradeable tokens. DBS will also offer "institutional-grade" custody solution tailored for safekeeping digital assets. This means the bank will hold onto the unique cryptographic keys for users' digital wallets.

Players in the crypto and digital assets expect the DBS Digital Exchange to inject constructive competition into markets. The entrance of one of the region's largest financial names bodes well for financial innovation in the region, said Alice Chen, co-founder and chief legal officer of InvestaX, a digital securities issuance and investment platform headquartered in Singapore.

"Given that DBS has been seen as a frontrunner in digitalisation, its involvement will be regarded as quite a high form of endorsement," she added. Rather than outright competition, Ms Chen thinks this move will drive overall demand. "I don't think it's a winner-take-all kind of market."

DBS's move is a sign that digitised securities are increasingly accepted and integrated within traditional finance circles, said Choo Oi Yee, chief commercial officer of homegrown securities token platform iSTOX. "This actually opens up the investible opportunities for individuals, such as by increasing investors' ability to access hedge funds or private equity funds in a fractionalised manner with secondary market liquidity," she noted.

As far as tokenised digital securities are concerned, there is sufficient diversity for existing as well as new players to each find their niches.

"That is good because security tokens can be so diverse and are difficult to all (be) put in one basket," said Dan Liebau, who founded corporate finance boutique Lightbulb Capital. It has an innovation education arm focusing on fintech and blockchain.

Mr Liebau cited, as examples, InvestaX's focus on real estate, while HGX looks at secondaries of US tech firms.

While blockchain technology facilitates the issuance, management and trading of both cryptocurrency and tokenised digital securities, they are two distinct asset classes.

Private cryptocurrency are a form of currency that comes in the form of encrypted tokens that are bought, sold and traded independently of a central bank.

Digital securities are traditional securities that have been digitally formatted so they can be issued, traded and tracked more efficiently. Equities, debt, funds and asset-backed securities can all be digitised.

Alexandre Kech, co-founder of digital-asset custodian Onchain Custodian, said that while digital securities are becoming more widely accepted by traditional financial institutions as "the future of securities", cryptocurrencies remain controversial. "DBS becoming one of the first banks endorsing bitcoins and other crypto as legitimate assets will contribute greatly to their broader acceptance and mainstream adoption," he felt.

Banks in the crypto-play are likely to be subject to a more conservative nature of their internal compliance teams, leaving room for more agile native cryptocurrency players, Mr Kech said, adding: "The profile of customers that DBS will target will often be very different."

An archived version of the DBS Digital Exchange's Webpage states that it only accepts financial institutions and professional market makers as members. Individual investors can only access the exchange via a member, such as the banking group's securities and derivatives brokerage and its private banking arm.

But some are sceptical about a traditional bank's ability to operate in a space popularised for its ability to eliminate intermediaries such as bankers and lawyers.

Zhu Juntao, co-founder of Hodlnaut, a platform that allows users to earn interest on their cryptocurrency deposits, expressed some doubt about DBS getting demand for its custodian services, given that there already are prominent players in the space. "Banks are generally slower, less adaptable and have to comply with a lot more regulations. In this case, I also think DBS may have lost out on the first-mover advantages and does not have sufficient network effects," he said.

Andrew Leelarthaepin, vice-president for bitcoin exchange Bitstamp's Asia-Pacific operations, pointed out that DBS is proposing a crypto-exchange that operates only from Monday to Friday, according to the Webpage that has now been taken down. "That was a bit strange since cryptocurrencies trade round the clock across the globe," he noted.

Still, Mr Leelarthaepin, like many other observers, expects DBS's move to prompt other financial institutions to follow, presenting opportunities for collaboration.

Likewise, Yusho Liu, co-founder of local crypto exchange Coinhako, said: "We are likely to see some sort of FOMO ('fear of missing out') in the financial space and more 'big finance brands' releasing their versions of digital asset services in the coming months." He noted that incumbent financial businesses may have greater market presence, but fintechs in the digital assets space have the technological know-how, and "tend to be more agile" in implementing solutions.

Banks around the world have been adopting blockchain technology.

Last month, JPMorgan created a new business to house its blockchain and digital currency efforts. The bank's digital currency JPM Coin was also used commercially for the first time by a large technology client to send payments around the world.

HSBC in 2019 announced plans to shift some US$20 billion worth of assets to a new blockchain-based custody platform.

And in July, regulators in the United States began allowing any nationally chartered bank to provide custody services for cryptocurrencies, clearing the way for banks to hold digital assets for their clients.