SDX: Finger on the Pulse of Digital Assets
SIX Digital Exchange (SDX) forms the infrastructure for an ecosystem that comprises more than digital securities. In 2022, SIX extended the field of activity of SDX to digital assets that are traded outside the regulated framework.
In 2018, SIX recognized the revolutionary nature of distributed ledger technology (DLT)1 and started its journey with SIX Digital Exchange (SDX). As the name suggests, the goal was to build a fully integrated platform for the issuance, trading, settlement, and custody of digital assets – and to do so in a secure, regulated environment. It turned out to be a success. Since 2021, SIX has had equivalent licenses for SDX as a trading platform and central security depository as it has for its traditional infrastructure. But today SDX is far more than a digital exchange. SDX is an infrastructure that forms the foundation of an entire ecosystem for digital assets.
Digital Securities and Private Blockchains
Digital asset classes are based on DLT, also known as blockchain.2 Implemented as a private blockchain3 on SDX, it serves to settle digital securities efficiently. Among other things, DLT allows for the “atomic settlement”4 of existing asset classes. After issuing the world’s first digital bond on a regulated infrastructure in 2021, the first digital share, F10, followed in mid-2022. Berner Kantonalbank joined SDX in the fall. It uses the new infrastructure to enable SMEs to digitally issue private participation certificates.
And 2022 also brought the next digital bond on SDX, the first in the world to be issued by a bank. In that instance, UBS took advantage of the fact that there was a connection between SDX and SIX SIS, the traditional central securities depository system of SIX. As the issuer of a digital bond, UBS can thus reach the investor community in both worlds and receive full liquidity. The bond can be traded both on SDX and on SIX Swiss Exchange, with settlement either on SDX – as atomic settlement – or via SIX SIS (with T+2). Over-the-counter trading outside the stock exchange is also possible.
Over the course of 2023, it will also become possible the other way around: Securities traded on SIX Swiss Exchange will then be able to be traded and settled on SDX, too – with all of its benefits.
Cryptocurrencies and Public Blockchains
In 2022 we also saw the launch of SDX Web3 services. The term Web35 describes the next generation of the Internet that is based on the decentralized nature of the blockchain technology. Typically Web3 relies on unregulated public blockchains.6 Behind this is the same idea that underlies decentralized finance, or DeFi7 for short.
SDX Web3 services are aimed at institutional clients and initially focus on the key applications in Web3, which include cryptocurrencies. The first offers therefore include a corresponding custody service for the two most important cryptocurrencies. Since October 2022, this has guaranteed secure, cost-effective storage and transfer of Bitcoin and Ether. If requested by clients, further crytpocurrencies may be added.
It has been possible for institutional clients to stake Ether on SDX since back in May 2022. Staking means that an owner of cryptocurrencies makes them available for a certain period of time in exchange for a reward to support the operation of a blockchain.
Additional Types of Assets Becoming Tradable
Both the digital securities in the fully regulated offering from SDX and the cryptocurrencies as they appear in connection with the SDX Web3 services can be described as tokens.8 The latter are a form of payment token. In the case of the digital securities, they are asset tokens. DLT will in future make it possible to create asset tokens based on assets that previously could not be traded on a stock exchange, or only with great difficulty, such as real estate, carbon offsets, and art. SDX is also well positioned for the category of such non-traditional assets, regardless of whether these are established in a regulated or an unregulated environment.
Glossary
1. Distributed ledger technology (DLT) uses independently operating computers (nodes) to save, share, and synchronize information on a decentralized basis. This is a fundamental difference from traditional databases that keep information in a central location.
2. The blockchain is a type of DLT. However, the two terms are often used synonymously. The “chain” arises from an encrypted sequence of data blocks that have been verified and validated by a decentralized network.
3. A private blockchain is a network that is closed to the external world. This means that exclusively previously activated participants can perform actions.
4. With DLT, the trading and settlement of tokenized assets are no longer separate steps. This is known as atomic settlement. Settlement takes place immediately, not with a two-day interval (T+2) like on conventional stock exchanges.
5. Web3 refers to the latest iteration of the internet, which is generally based on open public blockchains, and where control of the data remains with the users. Security and trust in the transactions are not guaranteed centrally, but instead by the DLT. DeFi describes the form of Web3 for finance.
6. A public blockchain is the opposite of a private blockchain. Anyone can participate in the open network and access data without restrictions.
7. DeFi stands for decentralized finance, in which – typically for Web3 – participants interact with smart contracts to execute transactions. Smart contracts run on the blockchain and can perform similar functions to banks and exchanges, such as lending or trading.
8. It is not just cryptocurrencies that are referred to as tokens (payment tokens), but also digital securities (asset tokens), among other things. These tokens document ownership based on the DLT property rights in the digital world. Tokenization makes everything tradable, including real estate, carbon offsets, and art.