DigiFT, a Singapore-based fintech, has received dual licenses from the Monetary Authority of Singapore that make it the first exchange in the country adopting automated market making.

That adds up to providing a digital-asset venue for both crypto and for tokenized real-world assets that settles transactions on a public, permissionless blockchain, rather than a closed, centralized ledger.

The move puts Singapore back in the race to foster regulated crypto marketplaces, sixteen months after Hong Kong’s Securities and Futures Commission awarded its first comparable licenses.

Henry Zhang, founder and CEO of DigiFT, says, “Our marketplace is licensed and based on DeFi infrastructure.”

Versus Hong Kong peers

DigiFT is similar to Hong Kong-based counterparts such as OSL and HashKey in that it is licensed and trading digital assets, from crypto to securities tokens. But the difference is DigiFT settles using Ethereum’s mainnet, whereas the Hong Kong players must rely on centralized infrastructure. (HashKey is an investor in DigiFT.)

Hong Kong exchanges operate under existing securities laws, with an added layer under the city’s anti-money laundering ordinance compliance checks, the VASP regime (for virtual-asset service provider).

DigiFT has won two MAS licenses. The first is a Capital Market Services license, which lets it issue digital-asset tokens. The second, as a Recognized Market Operator, lets it facilitate trading of those tokens on a secondary market, as well as to accept payments in fiat money or crypto.

The company was founded in 2021 and spent eighteen months in the MAS sandbox. In that environment, it was able to list five tokens, four based on real-world assets and a fifth a crypto token for staking on Ethereum.

Hybrid model

Zhang says the condition for getting a full commercial license was to prove DigiFT could place KYC and AML checks on top, which meant putting a degree of centralized controls on top of the underlying decentralized layer-one.

Because activity on Ethereum is peer-to-peer, Zhang says the setup encourages users to either self-custody or custody with third parties. Hong Kong’s VASP regime mandates exchanges provide custody for customer assets.

It’s not clear yet how much of a difference this will make, as Hong Kong VASPs can allow third-party custody, and Zhang says DigiFT will also provide custody if customers want it to.

Zhang says the bigger efficiency gains for traditional financial institutions is eliminating other intermediaries, not the custodian. Indeed, tokenization will create more roles for custodians: one for safekeeping the original security (a stock, a bond, or a fund structure), and a second for safekeeping the tokens.

Peer-to-peer trading and settlement should, in theory, remove the need for a host of reconciliations and administrative roles that are required in TradFi. Those roles are instead upheld by a decentralized system for validating asset ownership and valuations based on the Ethereum network’s blocks, which reduces or eliminates counterparty risks.

Blockchain also enables investors to combine all of their assets and counterparties on a wallet they control, rather than rely on accounts handed to them by centralized service providers (eg by banks). This difference was the focus on DigiFT’s work on building KYC and AML controls that satisfied the MAS.

Building the ecosystem

Zhang acknowledges that today there is little in the way of an ecosystem – few issuers, and no discernable secondary market of liquidity providers or investors. But he says it will come as ‘Web3’ players converge with TradFi.

For example, TradFi investors have no trouble accessing US Treasuries, but need to be in the token world to stake on Ethereum (for example). Meanwhile tokenization allows stablecoin holders to place assets in tokenized US debt; MakerDAO, the algorithmic stablecoin operator, has become a major investor in tokenized T-bills. 

Today there’s not much in the way of liquidity, but this convergence between crypto and TradFi will continue to generate activity, Zhang says. “Twelve months ago, the people in Web3 and Web2 didn’t talk to each other. Today we’re at the beginning of a convergence.”

The blockchain world still faces enormous hurdles, including primitive user-experience interfaces, lagging efficiency, and questions about security and safety. But as regulation reshapes the space, it can bring transparency, investor protection and the best learnings from traditional finance.

And while Ethereum’s transaction speed is poor compared to a credit-card processor or an equities stock exchange’s matching engine, in terms of settlement it’s already lightyears ahead.

“We settle two or three blocks in 30 seconds, which is not efficient,” Zhang said. “But what if you compare it to T+2 [settlement two days post-trade] in traditional equities?”

One reason for Zhang’s confidence is that he’s seen this before. He’s a career banker. As a product developer at Citi in China in 2001 he oversaw the buildout of its online payments system for RMB. “We faced the same issues then as we do today: can you trust this? Is there a use case? It’s not efficient enough?”

Now that he’s got licenses in hand, Zhang says he’ll need to go back to the capital market for funding. DigiFT’s raised two rounds, led by HashKey and Shanda Group (the pioneering Chinese games company). He reckons DigiFT will look to raise a Series A round for $5 million to $10 million in 2024, to help it hire talent, build out the ecosystem, and continue promoting digital assets.

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• Source: https://www.digfingroup.com/digift/