Bitcoin, Ether, Solana – cryptocurrencies are a global phenomenon. In contrast, digital assets such as securities remain – from a regulatory perspective – a national responsibility long term. With SDX from SIX at the forefront, Switzerland set the course in 2021 for the infrastructure that will be required to handle this.
It is often said that markets for digital assets are global in nature. That would be due to Distributed Ledger Technology (DLT), on which they were built, and the smart contracts that controlled them. In practice, however, there are many regulatory challenges when it comes to issuing digital assets in one country, and offering them for sale to investors in other countries. This is especially true in the case of securities. Securities are highly regulated financial instruments overseen by national bodies. There is no such thing as an international asset. Of course, there are bilateral agreements and efforts toward harmonization, but the development of a global set of regulations would take a long time to achieve. This makes national initiatives all the more important.
From a legal and regulatory perspective, Switzerland is an excellent location for establishing infrastructure needed to handle digital assets. The government and authorities are committed to advancing corresponding laws and regulations. In mid-2021, for example, the Swiss Federal Council gave full passage to the DLT Act, amending ten existing federal laws. Furthermore, in September, the Swiss financial market supervisory authority FINMA approved the licenses required to operate SIX Digital Exchange (SDX). This allows SIX to operate its fully integrated infrastructure for trading, settlement, and custody of digital assets based on DLT in a regulated environment. The globally unique value proposition manifested itself in November 2021 with the first issue of a tokenized bond. The Swiss National Bank, too, is interested in the implications of technological change, as they depend on having financial market infrastructure that is secure, efficient, and fit for the future. Together with the Bank for International Settlement’s Innovation Hub, along with SIX, they launched Project Helvetia to research how transactions involving tokenized assets can be settled on the cash leg. Both the issuance of digital central bank money on the DLT infrastructure of SDX and, alternatively, connection of SDX to the existing Swiss interbank clearing system SIC – completely without digital central bank money – were successfully implemented experimentally in 2021.
Securities trading has long been running electronically. Back in 1996, the Swiss stock exchange was the world’s first securities exchange to switch from open-outcry floor trading to an electronic trading system with fully integrated transaction clearing and settlement. But the process behind the purchase or sale of a stock has remained the same. Trading, clearing, and settlement proceed in sequential steps. Distributed ledger technology (DLT) – also known as blockchain technology – now enables digital exchanges like SDX to simultaneously clear and settle transactions in real time. This frees up funds that today still have to be deposited as collateral with a central counterparty. The decentralized DLT architecture has the potential to replace the function of a central counterparty because it gives everyone involved in a transaction a “single view of the truth” and transactions can be executed automatically through smart contracts. On a digital exchange, assets exist in a tokenized form, i.e., in a uniform format that can be fractionalized infinitely in principle. Tokenization also makes non-bankable assets such as real estate tradable.