T-Instant - Nick Cowan - GSX Group

About this episode

Nick Cowan, head of GSX group joins the podcast to discuss the evolution of crypto-securities in Gibraltar and how the island is adapting to 2020 and Brexit.

Nick Cowan is the CEO and founder of the Global Blockchain Exchange and the Gibraltar Stock Exchange Group. He has 34 years of experience in capital markets, serving as Head of Equities and Board Member at ING Barings, managing up to 2,500 employees in 43 countries, including 40 stock exchange memberships.

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What to listen forWhy GSX originally wanted to create an institutional-grade digital asset exchange and ended up building a digital securities exchange in Estonia.Why a digital securities market in Europe would address the liquidity challenges in smaller securities markets like SMEs and private equity offerings to accredited investors.Why regulators are only just catching up to the digital asset revolution and how innovation could make T-instant settlement a reality.Why Nick thinks that there will be several parallel universes between the world of DeFi, decentralized exchanges and the traditional T-plus-two day traditional settlement networks in banking today.How regulators looking at digital assets in Gibraltar, across Europe and in Asia encourage innovation through principle-based regulation that works.Why GSX is building a European securities exchange in Estonia and why this is not because of ‘Brexit’ but an opportunity to build on it.Why regulations within jurisdictions can either promote innovation in digital assets or stifle it and why this matter post-Brexit and passporting.SUPPORT THE SHOW

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SHOW NOTES

Samuel: Today, I'm joined by Nick Cowan from the GSX group. He's the Head of the GSX Group. And Nick, welcome to the podcast first and foremost.

Nick: Thank you very much for having me. It's an absolute pleasure.

Samuel: I've been thoroughly interested in what GSX has been doing since really 2017. When you guys kicked everything off, it's been a journey for you guys to see the development of your group, the GSX, and then also the GBX as well too which has gone under significant changes since it started.

Nick: Yes, it has. I think we probably around the back end of 2017, we made a couple of decisions and I think number one was really to try to focus on digital securities in Gibraltar as a jurisdiction was, you know, we got involved back in 2015 and structuring an asset-backed security backed by Bitcoin.

That was opened our eyes and then Gibraltar, the government regulators started to focus on a framework for legislation for distributed ledger technology, which came into law in 2018. We were at the point as an exchange where we were thinking, okay, we need to spend a lot of money on traditional matching engine technology from a licensing from another exchange, et cetera, for a lot of money, I call it T plus two-day settlement, traditional architecture and, you know, a small exchange in a small jurisdiction. Is that really going to change the world? Probably not.

Maybe we should try and do something quite interesting and look at laying out really a roadmap for digital securities to understand if there are inefficiencies, what those inefficiencies are? Can we look at technology to find solutions to those problems? So that was really the journey went on. We also raised funding through the issue of our own token in February 2018, and that was to also create a GPX. I'd like to talk a little bit about that later, but the idea very much was to have an institutional-grade digital asset exchange as well as then getting on the road to building a digital securities exchange.

We felt that there'd be convergence over three to five years between, number one, I guess investors. Institutions are perhaps becoming more minded to invest in digital assets, digital asset investors becoming more minded to invest in digital securities. If they get access with them without having to go through, for example, the banking network, and I think thirdly, which is where we've really tried to drive and focus on is, you know, issuers slash corporates, trying to really embrace both sectors because when you think about an issuer today or just any corporate that has customers and shareholders, and you can think of numerous issues, any supermarket normally has reward points or airlines, et cetera.

There's actually not much connectivity between a customer and a shareholder. Actually, if you think about the rebel programs, they're not much more than a utility token. You know, we really believe that the investment concept, if you can turn a customer into a shareholder, you've really created brand loyalty and stickiness, and therefore, you know, if you can converge the ability for a token holder to be able to redeem into securities legally and regulatory and compliantly, then that has to be just a fantastic development. That was really always part of our vision was to say, look, we see the convergence between issue as investors. We see the convergence between crypto and securities.

If we can create a framework and a marketplace, I can capture those different stakeholders. Then you know, something that GSX can explore and hopefully add value to people that want to play in that marketplace. That was really the thinking behind it.

Samuel: So if you could go back three years and kind of look back upon yourself, what would you think of your idea looking back today? Would it be something that is like fully formed back then?

Nick: Yeah. You're absolutely right. No, it was not fully formed. I think you're absolutely right. It's been totally a journey of learning. People tend to look at technology first, and then they suddenly realize that perhaps the legal framework or the law doesn't necessarily support the technology.

We had our ambition, we knew what we wanted to do, but we obviously had to really understand the legislative framework that would allow you to number one issue digital securities, but number two, the key is to try to build a framework that allows you to address a lot of those inefficiencies.

I was from a traditional investment banking background, and I was a global head of trading and the head of equities for a large investment bank. We had numerous stock exchange memberships globally about 40 plus and some of the challenges we had at that time, which were still very much is unchanged is (number one) the cost of the lifecycle of a trade which never seems to go down because of the regulatory reporting, the endless reconciliation. It's quite an expensive proposition. Secondly, you obviously have to post capital with a central counterparty, which is always a fight when you're an investment bank because capital is king and you have what's called risk-weighted assets where the more counterparty risk you have, the more assets you have to post.

Fails are pretty big; you have about 6% of nominal equities fail in European equities, with 3% of debt and that's all set the change this September with new laws coming in where the margins which are always being squeezed up are going to get squeezed further.

We kind of knew the inefficiencies of cost of capital, perhaps interoperability between jurisdictions and fails, but we also recognized and this is where probably we had to really get stuck into a understand our model is when we talk about inefficiencies and capital markets, you know, in a T-plus-two model, the count that the stakeholders, the financial markets, infrastructure players, they have an incredibly important role. It's vital to make that T -plus-two world go round, particularly when you've got fails, et cetera, that are happening. However, if you move to what we call T-instant, then you can address the enormous amount of inefficiencies. That's been absolutely our goal go because whether you're T-plus-two days or T-plus-two minutes, as long as there is anything above T-naught, you have to have, in my view, stakeholders because you have that momentary window where you have counterparty risk, and therefore you have the ability to fail. If you have T-instance in a pre-funded environment, then a lot of those issues fall away. A lot of those efficiencies can be extrapolated.

A lot of the technology that we were looking at wasn't necessarily compatible with T-instance because a lot of technologies, you know, it's consensus-driven. To actually try to do stuff physically on the blockchain, where you make a trade and then seven seconds later, it's verified, you've missed the ability to do T-instant.

We had to kind of play around with those things and said, okay, we actually have learned a huge amount from the digital asset environment. If you look at what crypto exchanges are brought to the market, it's actually been hugely innovative in terms of capital usage really instantaneous trading, and position keeping in your wallet and all sorts of really cool things, which is available in the regulated market world.

But a lot of this stuff in the digital asset, well, there's actually not regulatory compliance. We took what we thought was the best of both worlds and combine that into what we call our end-to-end exchange. We really started to form that strong model last year. It took us really a couple of years to get to the point where we understood that actually we really wanted to be not just an exchange, but also a central securities depository, and if we could be a central securities depository and an exchange, then half within that, our collateral management platform for borrowing and lending and that's blockchain, then you start to create a vertical stack that can start to tick a lot of those boxes. I always say to people, and there is a reason why there isn't a trading venue for digital securities in Europe yet because it's not easy and it takes time. It's not something because you have to go back to legislation to make sure that you can achieve what you want to achieve in a compliant way.

Samuel: Part of the thing that I saw was that most of the work that's done on the security side is having to go through legal. If the technology works, that's half the battle, right or it may not even be the battle itself. The battle may be figuring out how to simplify your description of the technology in the first place, to be able to present it to the regulators because Gibraltar is a small place and you guys have a close relationship with the regulators, but still, these guys are working with large capital markets and the regulatory systems, which they have designed over hundreds of years and they work.

When you're coming with new technology and new innovations, I would say the hardest part is being able to put it into structured words and phrases and diagrams or whatever, to be able to take that idea of what T-instant actually means and give it to the regulators and have them understand it within a couple of minutes of them looking at a few pages of documents.

Nick: I think you're absolutely right. I think, you know, when you think of regulators, obligations tend to be when they go to work in the morning:  investor protection is number one, reputation wherever the regulator is based, but also competition. They want to encourage competition.

The first thing you got to understand is, you know, we all dealing with that as the backdrop. You have to demonstrate the number one. You're right, and the legal framework will not be compromised. First of all, you cannot have a security entry trading venue without a central securities depository, maintaining the registry book entry for what does that mean?

It means you need a CSD to maintain the shareholder register effectively. We see exchanges out there who say they're trading digital securities, but they don't have a CSD. So actually they're not trading digital securities cause you're not compliant with the legislation.

You have to look at number one, can this jurisdiction, is there anything to stop in companies law, an issuer issuing securities and maintain that registry effectively in digital form? Is that illegal? If that isn't illegal, then you can say, okay, is there anything to stop that security being admitted to a trading venue?

Whether that's an offer to the public or a professional admission, and then is there a CSD which can maintain that book of members and with all of that legal framework you think, or say, well, actually is tokenization actually adding anything? Or is it just another layer of cost?

If there's an additional layer of cost when actually it's achieving nothing, I'll kind of take on it as to say, okay, well, we understand the legislative framework. You've got to operate within the law, as you said, there's a reason why this has been around for a couple of hundred years because it works.

It achieves the objectives of the regulators and effectively keeps investors protected. Therefore we have to make sure that we comply with that legislation. The technology supports safe custody of the assets and all those good things. You then have to design the technology to enable all of the above, not take your technology and say, The regulations are wrong, or the regulations need to change because that's never going to happen. That's a policy approach from whether it's the SEC, the European Union or the Bank of England and the FCA, the government, you have to have an overarching aim to say, we're going to change the regulatory legislation accordingly, but you can actually stay within that framework in our view and be compliant, but apply digital digitalization to securities, whether that is in brand new issues of securities, what we call them natives, or whether you are taking traditional securities and applying digital to it, or all of those things that are possible, all of those efficiencies can be achieved.

Samuel: When you were designing the technology, were you looking at the regulatory framework first and then figuring out how to design the technology behind it, or was it that you had the idea to use a blockchain to manage these securities, let's figure out how to explain it to the regulators so that we can become compliant?

Nick: Yeah, I think at the time we looked at the technologies that were available out there, and we just felt that for securities, for digital securities, bear in mind, we're going back a while now. There have been changes since, but one of the challenges with decentralized networks and this is when you get to securities, you know, it's not just securities, it's also about anonymity, you know? The big broker-dealers don't necessarily, or big investment banks, they don't necessarily want other investment banks to know the trades that they're doing at any point in time. Do you know? The problem with a decentralized network apart from potentially the governance of a decentralized network is the anonymity/transparency.

If you have decentralized nodes and you need say 51% to approve a transaction, that information is relatively public to those nodes, so that immediately becomes an issue. I think for anonymity in securities markets which is one of the challenges I think that decentralized networks may have.

I think number one is we have to think of it as a private permission network and then number two, we then had a number of issues that we wanted to be clear on, which was they're registered securities. You have to have transferability control. You have to have eligibility control. You potentially have the ability for a regulator to step in. You've always got the potential of. What we call, you know, digital divorces, forks. You can't really have a fork in a securities market if you're open and trading, you know, hundreds of thousands of trades a day, and then suddenly there's some type of fork, and an upgrade, who actually runs the exchange or the protocol which runs the network. Is the information secure? Is that governance questionable?

There is nothing bad about it. It's just when in our view coming from a capital markets background, when you apply those question marks to a securities business, we didn't feel entirely comfortable. Our view was okay, we need to design something which meets our requirements, and that effectively is a private mission network that allows members to join our network via API and join our native but at the same time, you know, we effectively control that network. We have a phased approach to the technology where we want to start off with our CSD running in parallel program testing with our stacks blockchain, and we'll migrate the CSD then onto the blockchain. Ultimately we will converge in time the matching engine and the CSD into a single entity, but you know, that could be two/three years away. Once you get there and you've achieved absolute, pure T instant. Then you can start to at least look at bringing in external nodes because your anonymity has been protected. But until then we just could not see a way that you're going to get, if you're interested in getting the financial institutions on board and we are by the way because we see that they have an enormous role to play, whether it's buy-side, sell-side or HFTs and by the way, legislation means my mum can open an account at Binance and buy Bitcoin, but she can't open an account at a stock exchange and buy Apple because that's risky. It's just completely dumb, but that's the law. Unfortunately, you need to have intermediaries on the legislation between a retail investor and directly the exchange.

So exchanges, that's why they always have a member of firms, we want to keep all that privacy and anonymity stuff. We just couldn't get with the protocols we looked at, so we just said, okay, we need to solve design something from the bottom up, and that led to us building the company that starts to develop that technology as well and, you know, the group is a shareholder in Hashtags, and they're starting now to do wonderful things, engaging with other exchanges, financial institutions. Globally, we're providing all sorts of different solutions using that technology. But within the GSX group, we've got our native, and we're developing that internally as part of our growing IP for our exchange network.

Samuel: So, what do you think of the future of these securities that exist on a public blockchain then?

Nick: I can't see them getting adoption any time soon, and I'm sure there'll be evangelists out there who will, you know, be shouting their laptop screens, as I say these words, but I just look at it from a practical perspective in terms of what institutions require from investing in securities.

If you think about actually what we're doing, you've got your pre-trade stuff as we call it. What we're doing is we're actually changing the post-trade, what we call financial markets infrastructure. We're changing the plumbing. So how does a share settle? So at the moment, you know, a buyer and a seller on an exchange that cross the order. The seller sells, and the buyer buys, the central counterparty then gets reported that they then start to take both legs of it. They say, okay, we will make sure that even if you don't have your Apple shares, the buyer will get Apple shares. Then they basically clear that trade the broker who has to post their capital with the CCP, which is the five to 10%, the CCP then reports down to central securities depository.

The CSD has the registry, the CSD then works with the banks, and then you have securities change that whole financial markets infrastructure that post-trade environment. Is there to capture who legally has titled to their securities at that point in time? Now, if you have securities trading on decentralized public exchanges or public networks, I can't see necessarily how that works to the standards and level that a financial institution needs to have.

You know, fingers crossed. We will get there. But as of today, I just don't think that it can get the adoption that's required. They know they're safe, they know they're protected. They know they can't be, moved without their permission, that the corporate actions of being captured when there was a dividend, there was a dividend.  I think it's a way away yet.

Samuel: Okay. You know, but one of the things that about Ethereum just in general is that it allows for huge retail interest to come on board. So maybe if there's not even, maybe if it's not institutional securities or it's something is designed for retail, maybe that would work a little bit better, or it would be more desirable to a retail trader who doesn't mind having their public securities being transparently shown and is able to make some compromises that a financial institution might not.

Nick: Yes, I think potentially not. That's correct. I think they, I think one of the issues though, certainly over here in Europe is legislation dictates that, as I said earlier, you know, retail clients have to be onboarded by an investment company. Broker-dealers who are licensed and regulated onboard these retail clients.  You look at Merrill Lynch or whoever these guys have huge retail operations where people are buying and selling securities. You can have what's called sponsored access into exchanges.  I think you're absolutely right. That's where it becomes really interesting, but at the moment legislatively, it's impossible here to not have that intermediary between the exchange and the retail client.

Samuel: If I'm a private company, can I issue private securities to retail investors?

Nick: Yes, you can. Yeah, you can. Actually primary isn't actually technically governed by a lot of the legislation if you're not making an offer to the public, we have a tokenization venue called the Grid that we did our first security two weeks ago, Canadian security, which was really cool. We're very excited by that first tokenization. You're absolutely right. We see the private sector as being an enormous market. Yes, a private company can tokenize their securities, and they can seek to raise capital from properly categorized investors who are eligible to buy their securities.

Yeah, absolutely wrong. When those securities enter a trading venue, that's when that legislation kicks in, where you need to have certainly in Europe, an intermediary and investment company, providing this services to investors and those responsibilities include checking the KYC and eligibility of the investor and making sure that the investor has the information they need to make an informed decision and all those good things.

Samuel: Well, it isn't the primary issue. I have to check KYC and maintain a whitelist, too.

Nick: They do, but you know, it depends where you're coming to market or not. So for example, you know, we have a private company called GSX group. We have shareholders, we have obviously done our due diligence on our shareholders, and we've done our KYC and AML, but I'm not making an offer to the public.

I didn't have to issue a perspective. It's a private company with private investors. Instead of my shareholders which actually they have a physical certificate saying, well done, you own shares in GSX group, actually. This is the process we're going through at the moment. There was no reason why they just can't have a digital representation of that shared certificate, which is a token NGSX group.  If you're making an offer to the public, that is different because then you have to be a PLC. You have to obviously go through the whole perspective stuff, and again, you would have to offer it to the public. You would need intermediaries who have to make sure that your clients cleared KYC and AML.  Absolutely no dispute with your comment that at all.

Samuel: I mean, it sounds, so a lot of this is reminiscent of the Spotify story, where you have a private company that takes on private investors, and then at some point, they do a direct listing into an exchange. There is no IPO. There are no investment banks that are brought on to handle all the typical actions that they perform during an IPO. Essentially the token is just floated and then listed on a securities exchange. I mean, it seems that there's a lot of commonalities between what is happening with the primary issuance of securities.

Nick: Yeah. If you draw a line down the middle of the page and you have primary on the left and then secondary on the right. A lot of the legislation that kicks in is on the right-hand side. That's when you basically, if you're going to be admitted to trading on a secondary venue, that's when a lot of that, for example, markets in financial instruments directive kicks in.

If you are primary and you're doing a primary deal, you're completely correct. What you have to do is to make sure, particularly doing a Spotify. You can go directly to exchange. You don't have to have an investment bank. What an investment bank potentially can do for an issuer, because they can bring investors.  They can guarantee you that you'll get your funds and investment bank invested some capital to underwrite deals. If you're Spotify, you can just say, you know what? We want it to be different. We don't want to pay X per cent to an investment bank. We will go directly to the exchange. It's incumbent on us to make sure that under the right legal advice, we make sure that we're not financing terrorism or whatever. We've done our KYC and AML. We've outsourced that to a supplier, and we've ticked all the boxes. You don't have to go through an investment bank to bring a deal to market. Well, the challenges are when you go secondary, securities are traded on an exchange, and that's when you have the member network of the exchange bias of the securities involved their retail investors. If you look at IPOs, they've been in decline, they've declined 70% in 20 years is not a growing business because the cost of capital has become so expensive. If you look at the private markets, private companies, particularly the way we've tried to develop our technology is you can help private companies get ready for the day they go public because a lot of the costs is the independent verification of the data that a company has. Do you really have those factories? Do you really make those products? Do you really have that cash in your balance sheet? You have unfortunately huge fees incurred, particularly low lawyers having to independently verify all the information that's in their perspective.

If you go through pre-IPO capital raising as a private company, tokenize your securities, get access to capital to the correctly categorized investors, you can put your resolutions, your company information, you can store all of that on the blockchain and effectively build an immutable data room that, that is specific to you as the issuer and in theory, pull out a lot of that cost when you decide that you wanted to go to the market and then if you wish to not appointed investment bank and go directly to the listing. If you've achieved enough of a following and people, know who you are, and when you look at something that Spotify, they were the original disruptor because they took the record industry and basically turned it on its head as a huge disruptor, you know, 20 plus years ago. They develop that following, which meant that actually, they didn't need an investment bank to bring the buyers because they already had them.

Samuel: Yeah. Spotify was already an established company when they went to go do their direct listing. For them, they had established their business, and they didn't need to raise any more money when they did their listing. A different company that may need to raise money may think to do an IPO instead, is what I would see the split going towards in the future.

I think it's really interesting that you talk about how a primary issuer could keep their record, their primary issuance on a blockchain to streamline the auditing process in the future. When they head towards that, it's just like a secondary listing.

So if they already have that information and it can be easily analyzed, or more easily analyzed than non-blockchain issued, primary securities. I mean, that probably could help more companies go to market faster or to the secondary markets.

Nick: Yeah, I think it helps private companies get access to capital in the first place. Secondly, you know, it's a stepping stone to prepare them for, if they want to, why do companies go public? It's either because the founders want to cash out or they want more capital to expand. If those two things are required, if you've done a lot of the heavy lifting, you've basically just stored a lot of your information, that, that you've collected over the three to five years. For example, that cost to market goes down considerably in our view. And, and then if you ended up if you can get access to then a, a network of exchanges that are.

Yeah, train digital securities. Do you call price discovery? You've got access to global liquidity pools because again, assuming the boxes can be ticked. Why shouldn't you try and distribute your securities in Asia and Europe and other continents, if legally you're able to?

Part of our vision is not just to have GSX exchanges on our network and sat on top of our CSD, but also any other digital exchange. We can provide that CSD to that exchange. And that's why, you know, we're in application to be a central securities depository.

I'm running a blockchain CSD, ultimately, because again, we want to be able to say to an issuer. You know, we've got a bunch of exchanges here, please feel free to talk to any of them. They're all part of the network and your securities can be on any of those exchanges, all of those exchanges if you choose to.

So, you know, where do we want to get to an investor with a smartphone? An app can put in a buy order, and the best offer gets lifted on whichever exchange has the best offer at that time. And that doesn't have to be a GSX exchange, and you get an instant supplement. And that ultimately becomes groundbreaking disruptive and cuts out just that sort of time delay that ultimately in a pre-funded world, you just don't need to have. It's what a lot of the digital asset technology has brought to us where I want to buy one Bitcoin, I press buy, and it's in my account immediately.

And then I can withdraw it straight away. I don't have to wait two days it's, you know, and if you're going, if you can take that approach and apply that to registered securities. Then, and then democratize that is starting to really have, I think some, some impact.

Samuel: You know, it's interesting to hear you talk about the. The backend side of what a blockchain or securities on a blockchain can do, because I'm not somebody who's worked with regulators closely, but I have seen what on-chain securities can do for retail and for me, it's three or four things. Firstly transparency; if you're a primary issuer and you issue a securities token on Ethereum, and you have a dividend, your token holders can see exactly how many tokens are issued and then they can also see the dividends issued as well, too. They can be 100% sure that everyone is getting paid the correct dividend for the number of tokens that are being held. I also think that digital securities allow for micropayments when it comes to dividends. Again, this opens up like huge retail doors where somebody may not be able to buy a $500 or $5,000 of securities in the private markets, but maybe they can afford like five bucks or even like 50 bucks. But if you're paying out like a 10% dividend, you're paying what on $50, you're paying like $5 a year, but with blockchain, you can do micropayments to pay them every day where you're paying them like a 10th of a cent or a thousandth of a cent, and that adds up over time. I think people see that coming into their wallets every day, and it's really cool for them and then lastly, which has really been quite surprising for me, it has been the growth of Defi and just this huge unconquered land where you haven't really seen any major company go in and be able to integrate into DeFi. It's really cool to think about the companies that are working towards having full integration with like the maker contract, where if you own securities, you could borrow against them and generate DAI and then, you know, provided it into a lending pool to create this decentralized digital dollars and then also work within the existing DeFi products to create all sorts of different new services that haven't been able to be offered before in this kind of setting. I guess, my question is if primary issues can issue on Ethereum without too many issues, but the secondary issuers need to move to a private permission blockchain like stacks. How does that get reconciled with DeFi and you know, where do you see both the primary and secondary fitting into it?

Nick: Yeah. You're right on point. Let's take an example you were just talking about. At the moment, I think something like 2% of securities are loaned, so you have this enormous untapped market. Take my mum. She subscribed for British Telecomm shares in 1984 when the British government was privatizing huge amounts of industry, and she still holds those shares. She's done absolutely nothing with those shares. A cheque falls through her letterbox once every year with probably £4.72 on it as her dividend, and the whole thing is just completely barking mad. Actually what you should be able to do is to try to bring all of that together to number one, allow retail investors to do something with securities, to put those up for a loan and start to earn extra interest on terms that she can specify through her sponsored access to the exchange.

Secondly, to be able to have, for example, high-frequency trading companies be able to preload in that if they want to short British telecom, our algorithm will sweep and search for any BT shares on loan as long as it meets the criteria of the HFC. Then they can automatically shortlist security, so you have an instantaneous pool of liquidity. When you look at it, you've got the matching engine which is off-chain, so you do a million trades a second off-chain.  What you've then got is a borrowing, lending and collateral management algorithm and platform and technology. If you have assets, you should be able to post those, take a haircut and get access to funding. You should also be able to borrow shares.

You should be able to search automatically to enable you to eat a short or basically a loan, and then you've got the CSD, which is reconciling our central scripts depository, which is reconciling all the time that data to make sure that legal, financial title, beneficial title is transferred at the point of trade.

When I sell my securities to you, you are now not the owner of those securities, and I am not, but equally, I have received your digital fiat instantaneously into my wallet. If Lehman's goes bust, it does not matter, because the title was transferred T-instantly. Also, we cannot fail because I cannot sell my securities to you unless my wallet has my securities in them all.

I have preloaded in my search criteria to be able to borrow and short to you because I've decided that actually I believe the security is going down and I want to short. I think you're right that is absolutely in our design specification because we see that again, it's just a major untapped market where security is just at the moment, tend to sit there and really just did nothing. Where in fact they can be, they can be used to add liquidity to the market, which ultimately is one of the biggest challenges you've got, particularly in the smaller sectors are liquidity or illiquidity where these things trade, you know, once every three or four days.

Samuel: Do you think that with the digital securities they'll exist within these walled gardens where they'll have all the same access to similar products that look like what exists on Ethereum? But there'll just be similar ones that would exist on a private permission blockchain, or how do you see that working?

Nick: Yeah, I do. I think what will happen is that you're going to have several parallel universes if that makes sense? You're going to have the traditional T-plus-two system, and that is an enormous, huge machine that actually works well in a T plus two models.  But equally, you know, it does have its challenges. There is a relatively high failure rate and also COVID-19 you saw the central counterparties start to request more capital from the investment banks who guess what don't really want to post any more capital because capital is king right now. So there's tension there.

CCP does an amazing job, but you know it's a risk-on, risk-off business in many ways. I think the CSD starting to do buy-ins from September is gonna twist the machinery even further. I think there's, first of all, T plus two is going to continue to be around for some time yet.

I think what will happen is you will have a number of exchanges start to roll out the technology, and whether they're decentralized exchanges. I will be happy to be proved wrong, but you're going to have, I think these private mission networks start to kick off where then I think over time you will see a gradual migration and it's driven by, in my view, economics, because if the economy of automation and digital securities is such that you can reduce costs by circa 70%, half-complete reduction in regulatory capital and risk-weighted assets being posted for CCPs and, you know, completely eradicate fails and counterparty risk and get country into operability. Those things start to become really compelling. I think you'll just have this evolution over a decade where, you know, you used to get paid in cash on a Friday when you finished work and then it became a check and then it became direct transfer into your bank account. That evolution, I think, will be the same with securities markets. It won't happen tomorrow. It's going to take time, but it's absolutely guaranteed to materialize.

Samuel: So, where is the biggest impact going to be felt by all of this regulatory expansion and movement towards digital securities? Which type of companies performing securities issuance will be able to benefit the most?

Nick: I think the private sector stands to gain a lot. I do. You've got about $6 trillion. I think it is in private company assets, which I'm getting access to capital is pretty difficult.

Samuel: This is for the primary market, right?

Nick: Exactly. Private companies not wanting to go public. They want to get access to capital so they can tap into the capital to sophisticated or categorized investors in digital form. Their registries can be run really efficiently and actually do something which actually is relatively low cost.

I think that is a major area. I think, secondly, the impact will be felt. I do believe in terms of public listings, and I'm talking about, your big securities trading on exchanges that backend financial markets infrastructure, you can start to see some major cost savings and efficiency.

So I think what ultimately they'll pass on hopefully to the end investor, but, you know, market participants, investment firms, I think will stand to benefit and that ultimately should overall lower the cost of capital to companies wanting to go public because I think, if you're truly just trying to sum up what we're trying to do for a living here, we're trying to get issuers and investors to meet each other. That's what we're trying to do. If you can do that cheaply efficiently and automatically, and get really smart in terms of what we're talking about with things like borrowing and lending, then everyone stands to benefit.

Samuel: Yeah, are there issues with the corporate debt markets in Gibraltar at the moment?

Nick: No, I mean, there's a very small market here. I mean, we've got about one and a half billion dollars on our exchange.

Samuel: Pretty small. Yeah.

Nick: It's not a big business. I think what's interesting are corporate bonds and government bonds, and there's about 3% in Europe that fail to settle on time. Again, that really should be nought. Now whether the debt will move on exchange remains to be seen because I think, you know, it's primarily an OTC business, but again, if you can build a marketplace where the costs are minimal, but the risk of failure and therefore, you know, capital being posted is the zero.

It becomes a very attractive proposition. So, I think that the fact that there's still a relatively high failure rate and that's set to change in December, September with legislation coming out here. Then I think that that's also something which I think can be tapped into.

Samuel: I mean, it's really interesting that your corporate debt markets are so small. I was expecting it to be like an order of magnitude or two bigger

Nick: Yeah, Gibraltar is a small jurisdiction, and the capital market here is evolving. You know, we have Brexit coming, at the end of this year, there's still, obviously some question marks over exactly how the landscape will look, but we're taking the view that it will be a relatively hard Brexit.

As Gibraltar leaves with the UK, we set up a presence now in Estonia, for our pro-post Brexit world, where we will have our central securities depository and our exchange we're in licensed for both and, we will be able to, you know, I think because it's a European single marketplace, be able to hopefully build a much bigger market there, but Gibraltar is a small jurisdiction.

To be honest, the capital market is obviously not very old because, you know, we're the only securities exchange here and we've only been here a few years, and Gibraltar does not do equities. Cause that circles right back to what we were thinking a couple of years ago when we said, okay if we're going to do equities, how does it look if we're just going to do traditional securities trading and it just didn't stack up.

That's why we said, okay, let's, let's build a digital securities venue and let's start with the European market, equal access to 30 odd countries. That's a great opportunity for us to be able to bring issues to the market. Also, we're applying in Asia, we've put a license application last December into open an exchange in Asia, and we hope to fund enough. We hope to hear that this week for about six months. So, if we get that permission, it will be another exchange on our stacks network. We can open our trading venue in Q3 in Asia, which be really, really exciting.

Samuel: Yeah. Has it been difficult to navigate the coming Brexit or at least there's a ton of uncertainty that exists in how markets are gonna operate and how the changeover is going to take place? I mean, you just mentioned that you guys have to move the GBX over to Estonia in preparation for Brexit.

Has it just caused business operations To become more expensive as you guys try to figure out the regulatory changes and how the business model needs to adapt? And you know, what have been some of the bigger problems running into this Brexit?

Nick: Yeah, I think for us, I mean, so first of all, we saw the European securities markets as a big opportunity. Therefore we wanted to get our GSX Estonia open because we wanted to have our trading venue in Estonia because we don't have a trading venue yet here in Toronto, we decided to move GBX to Estonia to basically centralize our trading venue, technology, and basically our risk capital.

Samuel: It wasn't a Brexit decision.

Nick: It's nothing to do with Brexit. Obviously being a crypto or digital assets exchange, it's actually Brexit proof, so that was never the agenda for us. It was a case of we're actually going to build a vertical stack in Estonia, to begin with, and therefore to have our training venues in one location, it just makes sense from a commercial perspective in terms of the landscape. What's going to happen in terms of access to the single market, but all the indicators are there that that access to the single market will not be there after December 31st.

Now what that does is it opens up challenges, but also an opportunity. So Gibraltar is the only country that actually can passport into the UK after Brexit. Now that's pretty interesting because you can either as an issuer goes to the UK regulator, I guess, you know, the London stock exchange or get permission to passport in, specifically issue by issue, or you could come to Gibraltar you can get your perspectives approved here by our regulator, list on our exchange, and you can basically go straight into the UK. Gibraltar I think actually has a unique position as a portal. It's opened up a unique opportunity.

Samuel: Is that passporting clause a grandfather only? Or is it something that if I open up a company in 2021, I'll be able to use that passport?

Nick: You can use that yet. You can use that possible. That was part of leaving Europe with the UK that our government here were very quick to get on to clarify that because it's an interesting situation because we have about 60 insurance companies in Gibraltar.

I think one in four cars in the UK are actually insured out of Gibraltar. I think 97% of our services are actually possible in the UK and only 3% of passport into Europe. So actually it was vital. If you came and set up a company financial services company, for example, in Gibraltar, and we're seeing post-Brexit law companies moving abroad from Europe because of that possibility where they can get the licensed tab and get access straight into the UK, which obviously is a massive market. I think what's it going the other way is, we don't anticipate a huge amount of change actually because the legislation is what we already comply with because we are an EU regulated exchange, in Gibraltar already. Opening a European exchange in Estonia, we understand the legislation already. It's actually been a pretty painless process so far in terms of us submitting our application.

Samuel: Yeah. I mean, it should be somewhat similar across European jurisdictions.

Nick: 100%. I think the only nuance across Europe is an innovation for regulators. We've found certainly so far the Estonian regulator to be very welcoming with innovation because they can see the benefits. As we spoke earlier, as long as investor protection, reputational risk, are in place, but equally it improves competition, then that could be a pretty exciting development.

Samuel: Are there any other issues with Gibraltar leaving the EU that are still outstanding? I mean, in kind of a general sense or is everything already taken care of between the EU and Gibraltar?

Nick: I think that the government where they've been working really closely with the UK government and, I think there's been progress as well with Spain, which obviously has been historically a point of tension. Spain, the UK and Gibraltar have signed a tax transparency act.  I think Spain's always taken a slightly dim view of Gibraltar, in terms of wrongly tax transparency. I say wrongly because Gibraltar has been complying with EU transparency legislation for decades. In fact, it was ranked alongside, Germany in terms of transparency by the OACD. There was a bit of politics at play there.

Now they signed a tax transparency act. That's transparency between three countries, and so I think that will help, a lot in terms of the smooth transition, but I think otherwise, no, the government here has been spending a huge amount of time in the UK working with treasury and the UK government to basically ensure that Gibraltar's future is as bright as it can be. It's a pretty good place to be biased because of that post-Brexit opportunity.

Samuel: And how do you think you guys are positioned against some of the other smaller jurisdictions in what you're offering for both digital assets and the other issues that we talked about beforehand?

Nick: Yeah, I think the approach has always been proactive in trying to be in front and, you know, they've got their distributed ledger technology regulations in place. They're looking to as a nine-principle regime, and they're looking to add another principle, I think pretty soon, which has to do with market abuse, which I think is sensible.

They've been practical in terms of look, we can't regulate the technology, and we can't regulate decentralized currencies. What we can do is regulate the actors. I think that's been a pretty small way to move forward. I think we have to be realistic about Gibraltar as a financial capital market.

It's always going to be a small jurisdiction and, and that's just that the nature of the jurisdiction. For distributed ledger players, particularly in terms of crypto, I think it's a great jurisdiction to be based in due to the framework they've got in place compared to other jurisdictions.  I think when you look across Europe in terms of crypto, you know, I think historically I think Malta has been, relatively ambitious, Cyprus has made noises. Lichtenstein's made noises, the Channel Islands have made noises. I think France has started to really become a lot more forward-thinking and Germany have just approved a couple of issues recently.

They're right at the front of innovation. The government's view from what they've said the more players that join the digital revolution, the better, you know, because I think that leads to more adoption and everybody that can then can they get more access to things. I think Singapore is really, you know, making, I think a lot of ground there, which I think is really exciting.

I think the Monetary Authority of Singapore is really forward-thinking as well. Our technology partner, hashtags, which we own a shareholding in, they've been working with the monetary authority of Singapore on that digital payment currency, which is project urban. Different jurisdictions are doing some really cool things.

It's a great time, you know, these next two to four years are going to be awesome in terms of seeing different jurisdictions, you know, take the lead. We've been particularly impressed with Estonia. You know, we engage with a number of different European jurisdictions, and they came across as just really forward-thinking and obviously a very large population of FinTech, FinTech talent pool, because you've got Estonia, you've got Finland, you've got Latvia, you've got Ukraine, you've got Lithuania. These countries are just packed with really smart, smart people, blockchain-enabled and, I'm very forward-thinking people. There's a good talent pool up there.