Tokenized Securities: Why Cash on-Chain Matters [EN]

00:00:00: Lidia Kurt: Welcome to Inside Digital Assets, the podcast about the future of capital markets tokenization, digital assets, and the technologies that power them. We talk to people driving this transformation about real world projects, digital innovation, and one big question: what will the capital markets of tomorrow look like?

00:00:27: Lidia Kurt: Hi Markus, it's a pleasure to have you here today.

00:00:29: Markus Fehn: Hello, Lidia. My pleasure.

00:00:31: Lidia Kurt: So I have here today, in today’s podcast, Markus Fehn. Markus is Head of Strategy and Innovation at Chartered Investment. We recently announced a partnership on our Swiss entity BX Digital, so I’m very happy to deep dive there today.

00:00:45: Lidia Kurt: I’m also interested in hearing what you are doing in general, so we can talk about how you came from a really traditional background at Chartered Investment to now doing tokenized topics. I’m looking forward to today’s chat with you.

00:01:02: Markus Fehn: Thank you so much. Thank you for having me. It’s a great pleasure, and thank you so much for the great collaboration and our partnership. I’m happy to elaborate more on our goals later. Let me first quickly explain what Chartered Investment is doing.

00:01:17: Markus Fehn: With Chartered Investment, we enable investment products through our platform. Professional clients, family offices, asset managers, and other financial institutions can create investment products. These can be created via the traditional world, but also in a tokenized manner. We allow clients to choose whatever they prefer or what makes most sense for them. We structured our offering into three boxes. Box one is actively managed products. Box two is real world asset products, meaning assets that are not so liquid. Box three is classical structured notes where you combine a bond and an option.

00:02:07: Lidia Kurt: Can you make a concrete example of a potential client you have, and at which point they come to Chartered Investment for doing what?

00:02:14: Markus Fehn: Usually our clients have an idea on what could be sold to investors, what could be made bankable, or what could be made investable for clients. They come to us and bring up this idea. We have two main things. First, a strong structuring capability. We have people who can evaluate what’s possible in regulatory terms, especially regarding who should buy the investment product. It’s a real difference if it should be available for professional clients or if it should go retail. Some things work with retail, some don’t. They come to us, and we discuss the idea on the structuring side. Second, we have a platform approach. We built technology that can handle issuance and lifecycle management. For lifecycle management, you need trading capabilities, middle office, accounting, and the things people know from more banking setups.

00:03:19: Lidia Kurt: Is it always an external client that comes to you and says, “I want to do something,” or do you have your own products that you create?

00:03:26: Markus Fehn: At the moment, we don’t create our own products which we distribute. It’s the approach that somebody comes to us with an idea, and we develop the setup together.

00:03:37: Lidia Kurt: Understood. You are in a very traditional setting in the sense of products that existed already for quite some time. You have been creating those. Your company exists for quite some time, a bit over 10 years.

00:03:50: Markus Fehn: Exactly, more than 10 years.

00:03:52: Lidia Kurt: You’re not coming from a tokenized blockchain world, but from a traditional side of things. How did you add tokenization to your portfolio, and how does that play a role in your world?

00:04:01: Markus Fehn: That fits into my story at Chartered Investment. When I started, my title was Head of Business Development and Product Innovation. That was in 2017. In 2018, I led a project about a blockchain note. Together with partners in the UK, we did, under the FCA sandbox, an issuance of a structured note on a public blockchain. That was the first of its kind in 2018. We did this together. The result was: the concept is great, but if you don’t have cash on chain, many things don’t work. We found that out the hard way. Nevertheless, we strongly believe this technology has huge advantages, which is why we continue to look into it. That’s why we also applied for the crypto registrar license in Germany in 2021, which we now have, because we believe the technology is superior and people will move on chain. We see this already in the markets. We did an analysis and checked how many users the top 20 crypto exchanges have today. If you round it up, you are almost at 1 billion users on the top 20 crypto exchanges in the world. That means there’s strong growth on that side, and when you add up the technology, it’s something nobody should ignore. The question is: how do you deal with that, and what do you make out of it?

00:05:40: Lidia Kurt: Creating products you have been creating in the traditional way, now in a tokenized form: does that mainly make sense to get to those 1 billion customers on crypto exchanges, or do you see other reasons why clients come to you and say they want the product in tokenized form?

00:06:01: Markus Fehn: There are two main reasons. One is operational efficiency. Via the SPVs we manage, and with our fund license nowadays, there are more than a couple of thousand products issued. We see in our daily business what works and where things are efficient, and where they are not. We know where things can be more efficient because of tokenization. We want to bring our service to the next level and offer higher quality technology. That’s one box: lifecycle management. The second thing is accessibility. When it’s tokenized, can we access more markets, widen the investment space, and make it available in other jurisdictions or across the world? We want to help clients use tokenization to enlarge where the product can be available. DLT or crypto exchanges are one way to do so; others may emerge in the future in certain jurisdictions.

00:07:38: Lidia Kurt: In terms of the projects you did and the products you created on tokenized rails: can you elaborate on what you did, what worked, and what didn’t?

00:07:49: Markus Fehn: One product we like most internally is the Gold Note, which we plan to list with BS quite soon. It’s a physically backed gold product. The story fits well with what we do. This product exists in the traditional world already and has interesting volume. The gold is physically stored in Switzerland. It’s a certain category of gold called “green gold,” so there are ESG characteristics around it. The buy and the hedge when the investor buys the note, and the operational setup, we built in the traditional world, and we also issued it in a tokenized manner. Clients can choose what they prefer. There might be clients who are on chain and only have the possibility to buy the tokenized version.

00:08:50: Lidia Kurt: So on the ETP gold product, it’s also about broader distribution and tapping into markets that might not yet have gold products.

00:09:02: Markus Fehn: Absolutely. The gold example fits nicely because you have larger players with physically backed gold trackers, but those exist in the typical MiFID II world, so nothing is tokenized. Then you have other players who do an ART under MiCA, which also have a gold tracker, but you don’t have a tokenized MiFID II instrument. This sits in between. That’s why we think it’s interesting: a tokenized version that is fully backed, but as a MiFID II instrument.

00:09:43: Lidia Kurt: For listeners: the ART token under MiCA refers to asset referenced tokens under MiCA, which is more comparable to stablecoin regulation than to a securities regulation like MiFID II.

00:10:03: Lidia Kurt: In terms of other products: the gold token is one we are looking at with you together to bring to Switzerland. I know you have done other projects as well. Can you talk about projects outside of gold?

00:10:19: Markus Fehn: Two more things. One: demand from the real estate side. We are in various talks and have done issuances mainly in a debt format, tokenized debt with regard to real estate. This is done already today. The question now is: can we do more, can we make processes even easier, and how seamless can we make them for the end investor? Even though interest rates are still high and real estate is not where it was 10 or five years ago, there is clear demand. The third case is the idea to tokenize investment funds. There are lots of tokenized money market funds out there, but we see clear demand from asset managers: money market is fine, but how about another strategy on chain; can you bring my fund on chain? That goes hand in hand with enlarging the investor base and making it accessible to a wider audience.

00:11:46: Lidia Kurt: Which blockchain technology did you select?

00:11:54: Markus Fehn: We are currently based on Ethereum and Avalanche. We are open to whatever brings the future, but we are conservative. Some players want to be on 10 chains at the same time. We don’t want to be present just for the sake of it. We’d rather find common ground with other players and have one, two, or three chains as a level playing field, and then concentrate on creating nice products rather than thinking about chain number 250.

00:12:44: Lidia Kurt: We think alike. We also try to limit it to as few chains as possible to avoid fragmenting liquidity. If you distribute an asset across many chains, that becomes an issue in the mid to long term.

00:13:00: Markus Fehn: We come from the traditional world. In the end, there are investors, professional or retail, who buy a product. There needs to be a benefit, and they need to be able to participate in an investment strategy. If there’s a reason to be on various chains and it helps, then we discuss it. If not, we discuss something else.

00:13:31: Lidia Kurt: The traditional world still makes up most of your activities. Do you see a proportional increase of the tokenized world, and does it merge at some point? How do you see the development there?

00:13:49: Markus Fehn: The large part is still traditional, but there is momentum. The large volume is on the traditional side everywhere. The question is where the growth is, in the next months and years. How do you capture growth? That matters especially for our clients. We see it as our obligation to outline where growth could be, and that is clearly in the on chain world. On chain, there’s growth. These 1 billion users are just the beginning.

00:14:55: Lidia Kurt: Tokenization has been a buzzword for some time. Do you see a change in traction over recent months and years, or do you still feel it takes time until it’s fully developed?

00:15:08: Markus Fehn: Especially last year was very interesting with announcements coming out from Nasdaq. This year, New York Stock Exchange Seturion was founded. Mentioning our issuance in 2018: eight years have passed. There were not many years where so many things happened as last year. This is gaining traction. Our main issue was cash on chain. There are now solutions for cash on chain. The question is what the solution will be, either a private stablecoin or a central bank digital currency, to demonstrate the advantages of the technology. There is a shift, while financial markets are not flipping overnight.

00:16:09: Lidia Kurt: Do you have an estimate how long it could take until we have a maturity where the majority of markets are tokenized?

00:16:15: Markus Fehn: Everything tokenized will not be done in the next two or three years. What’s interesting: you have two boxes. Traditional instruments like stocks and bonds, are they getting tokenized? And real world assets that are not existent in any format yet. In the early days there was a tendency to say: real world assets get quickly on chain. Coming from the traditional world, we say: you still have regulatory questions, you still need to be compliant, you still have 200 pages of subscription documents. Disclosure will remain, but friction doesn’t have to, because tokenization solves operational burden. Nowadays, tokenized stocks gain traction. At the moment, momentum is more on that frontier. It fits to what we do because we are active in notes, debt instruments, and fund instruments, and we see more coming up there.

00:17:46: Lidia Kurt: Stablecoins were an issue in the beginning. Now we have stablecoins that can be readily used. Can you explain how that changes internal processes, also with respect to the lifecycle?

00:18:01: Markus Fehn: What’s important is that whatever stablecoin it is, it’s an acceptable and authorized way of payment. That’s what I like about MiCA: it has electronic money token regulation. An EMT is basically a regulated stablecoin because you need to fulfill certain obligations. That’s why we are looking into the EMT topic. If you have a regulated stablecoin, payments are connected to an instrument: buy and sell, settlement, and throughout the lifecycle lots of things happen: coupon payments, dividend payments, secondary market buy and sell. Whenever there’s a payment flow, things are automated to a certain degree, but cash on chain brings it to the next level because it can be made programmable. The story is about coding and enforcing logic.

00:19:36: Lidia Kurt: Looking at your journey: how did you get into the topic?

00:19:51: Markus Fehn: I spent the first half of my career in consulting. Then I found Chartered Investment. We have clients coming to us with ideas, and somebody brought up the idea: should we do a structured note on chain? That was my starting point. I remember running around in 2018 asking for an ISIN for the note we do on chain. People were hesitant: what is this, is it real, how does it work? It’s a sign the market develops.

00:20:49: Lidia Kurt: We got a long way since then. Still, there are steps to take. Do you see current roadblockers that still need to be solved?

00:21:08: Markus Fehn: Two main things. One is for politics: legal fragmentation. In Germany, the Electronic Securities Act is a great idea because it creates real legal ownership and allows scaling tokenized products reasonably. But it’s German law, not European law. We have the DLT Act in Switzerland, which is also great, but if everybody does something great on their own, that’s an issue. We need help from legislative actors to solve that.

00:22:09: Lidia Kurt: Especially harmonization on the issuance level: how tokenized products can be issued and how regulation around issuance is structured. That’s currently national law in Europe, and it would help if harmonized.

00:22:25: Markus Fehn: You need parity to other instruments. It’s an issue long term if tokenized instruments have issues getting listed everywhere quickly because of certain rules and regulations. Second: technology standards. We need standards and harmonization on the technology level. If one does it like this and another like that, it won’t work out. Let’s agree on standards. That’s for market players to solve: common ground in terms of chains and how things are written into the blockchain. Pragmatically: if we write an instrument into the chain, how do we define fields, do we call it ISIN, identifier, or something else? Simple things, but they should be aligned.

00:23:40: Lidia Kurt: Standards are not only technical. There are blockchain standards like ERC 20, but also legal standards. Across Europe, you often need to prove the asset was created correctly in legal form, so legal opinions are written for each asset. In Switzerland, there is a standard setting body expanding internationally called CMTA, combining technical and legal standards. With CMTA certification, an infrastructure provider can be sure an asset was created correctly technically and legally.

00:24:46: Markus Fehn: I fully agree. It’s a great initiative and helps drive development in Switzerland. At the same time, we need to think about the next step: how to do this in a scalable manner. Clients say: today you can issue a product in three days and scale it quickly; why is it more complicated on tokenization? They want progress and a credible way to the future, but without making things weaker than before.

00:25:31: Lidia Kurt: Knowing the difficulties and challenges, you’re still enthusiastic and see tokenization as the next step in the technological evolution of securities. What drives you, and why do you believe this is the future?

00:25:54: Markus Fehn: We see room for improvement in daily business. Take fund onboardings: the process is not as straightforward as it might look from the outside, and there’s a lot of effort behind it. It’s operational. Nobody likes the word reconciliation. Today, reconciliation teams work with Excel spreadsheets and do reconciliation. I’m convinced we can spend our time differently. The work won’t disappear; it shifts to a different technology level and can be done more efficiently. As a platform through which you can create investment products, we want to help clients create growth by making products more accessible. The technology allows making it accessible everywhere because it’s on chain. We still need to solve the regulatory layer, which is unchanged, but the technology enables a completely different level. That’s exciting because we want to enable growth.

00:27:44: Lidia Kurt: For Chartered Investment, what are your key priorities going forward to bring that future to life?

00:27:52: Markus Fehn: You need to invest into organization and new technology. We are also looking into investing into AI. There will be broken glasses, meaning you invest money and not everything works perfectly from the start. That’s part of investment. That goes for tokenization and AI. There’s no way not to do it because opportunities are huge. We will invest further into our platform to make issuance and lifecycle management as easy and seamless for clients.

00:28:56: Lidia Kurt: If you imagine the future of capital markets, instead of today’s Excel spreadsheet reconciliation topics, how would you envision it?

00:29:13: Markus Fehn: Investors will have access to a wide universe of investment products. Blockchain technology will be almost invisible. The moment it becomes invisible and nobody talks about it, it will be clear it’s the standard. We won’t need to talk about advantages anymore; it will be implemented almost everywhere, and everyone will understand why it’s useful.

00:29:50: Lidia Kurt: Let’s hope we soon don’t need that podcast anymore, and blockchain is in everyday life. It was a real pleasure to have you here today. Looking forward to onboard you with BX Digital and go live with the products we have in the pipeline. Thank you for being here and being our partner.

00:30:11: Markus Fehn: Thank you so much for having me. It was great fun, and I’m looking forward to the project.

00:30:16: Lidia Kurt: Thank you.

00:30:17: Lidia Kurt: This was Inside Digital Assets, a joint project by BX Digital and Seturion. If you enjoyed this episode, subscribe to our podcast and feel free to share with others.