FinTech solutions are disrupting and innovation many industries, and the financial markets are among the sectors that are benefiting from tech-driven advancements. According to the OECD, this has a “significant impact on consumers and on regulation.” Its whitepaper, published in February 2021, also cited benefits to market inclusion and efficiency: “The advantage held by FinTechs is that they can use state-of-the-art technology, operate a leaner business and focus on those business segments with higher returns.”
In a TechNode Global Q&A with Oi Yee Choo, Chief Commercial Officer of ADDX (formerly known as iSTOX), we learn how decentralization is enhancing access to the capital markets. In particular, the shift in capital toward private markets is driving innovation in tech, business processes, and regulation.
ADDX is a global private market exchange focused on making the capital markets more efficient for issuers and investors. The FinTech company is backed by the Singapore Exchange (SGX), Temasek Holdings subsidiary Heliconia Capital, the venture capital arm of Japan Investment Corporation (JIC), and the Development Bank of Japan (DBJ).
ADDX aims to democratize the private capital markets, putting previously out-of-reach investments in the hands of underserved investors. In February 2020, ADDX graduated from the Monetary Authority of Singapore’s (MAS) Fintech Regulatory Sandbox to become a fully regulated platform for the issuance, custody, and secondary trading of digital securities.
Using blockchain and smart contract technology, ADDX tokenizes and fractionalizes multi-asset securities such as private equity, wholesale bonds, and unicorn funds, overcoming manual processes in the traditional issuance and investment space that have previously made it impossible to serve large numbers of smaller investors.
Oi Yee has 20 years of capital raising and M&A advisory experience. Before joining ADDX, she was with UBS for 6 years and was Head of Investment Banking for UBS Singapore. She joined UBS from Morgan Stanley, where she was Head of Singapore Investment Banking. Prior to Morgan Stanley, she ran the Southeast Asia real estate investment banking franchise for Nomura Singapore.
She started her investment banking career with Citigroup, covering Singapore corporate and real estate clients. Between 2006 and 2008, Oi Yee was Senior Vice President, Strategy and Business Development, for Parkway Holdings, the largest healthcare company in Asia, and helped create the Parkway Life REIT. Oi Yee graduated from Nanyang Technological University with a Bachelor of Accountancy. She also has a Master of Business Administration from Manchester Business School.
Below is the edited interview with Oi Yee Choo, CCO of ADDX.
What are the trends driving innovation in the securities market today?
The first major trend: capital is moving into the private markets. This is true in the case of sovereign wealth funds and large pension funds, and in recent years for family offices and high-net-worth individuals as well. The share of portfolio allocation to private market assets has been rising, if you follow the numbers from data providers like Preqin. In part, investors now understand that a higher proportion of private market investments helps bring about better diversification and long-term returns. There is a low correlation between the private and public markets, which reduces your vulnerability to a dramatic event in the stock markets – like the crash of March 2020 or the financial crisis of 2008.
This shift in capital is driving innovation in many ways – in technology, in business processes, and in the way the markets are regulated. The rise of platforms like ADDX that expand access to private investments such as VC funds, pre-IPO equity, hedge funds, wholesale bonds, and private real estate, is an example of that innovation.
The second major trend is the rise of blockchain technology. Blockchain and smart contracts are a very efficient way of maintaining a ledger and programming the ledger to initiate self-executing actions. The efficiency gains are tremendous. With digital securities issued using blockchain, we are now able to automate and digitize the manual processes throughout the life cycle of a security – whether it is a coupon or dividend payment, cap table management for compliance purposes, or the secondary trading of these private market securities, which could spell an eventual end to expensive over-the-counter transactions that once characterized the private markets.
Taking advantage of this newfound efficiency, ADDX as a private market exchange is able to handle a much larger number of investors. That allows us to bring minimum investment sums down to fractional sizes. Entry to a VC fund, for example, usually requires a $5 million investment. ADDX has just launched VC funds where the minimum for investors on our platform was $20,000. This is a remarkable transformation enabled by blockchain technology. For the first time, accredited individual investors can think about their portfolio in a very similar way to institutional investors.
What are the three key challenges in the market, and how is ADDX addressing these?
The technology and the regulations have moved very quickly. That often means the level of understanding in the market, whether among investors or issuers, has a bit of catching up to do. Non-professional investors have no trouble understanding the public market – stocks, bonds, and other simple investment instruments. They are now exposed for the first time to private market products they are not so familiar with. And you should always study an investment opportunity and understand it before you take part. What is a hedge fund? How do you decide to invest in a pre-IPO company that may be growing fast, but has not yet become profitable and is therefore difficult to analyze using a PE ratio? How are private REITs different from public REITs?
Digital securities are enabling investments into these products for the first time, and the early platforms will have to do the heavy lifting in investor education. That is why we are putting a lot of resources towards producing webinars, blogs, videos, and roadshows to help investors develop a good understanding of the private markets. Our investment factsheets are also designed to be easily accessible – you can download the longer, 50-page document if you want to, but we also provide a two-page factsheet in plain language.
Market education needs to happen among issuers as well because they are more familiar with the traditional way of issuing paper-based securities. Now that a couple of players have entered the digital securities space, such as ADDX in early 2020 and DBS in late 2020 when they announced their digital exchange, boardrooms, and senior decision-makers among issuing companies are starting to get more comfortable about doing a digital security issuance alongside the traditional one. We are even starting to see a few digital-only issuances, such as the recent S$150-million [$110.908 million] digital commercial paper program that CGS-CIMB launched on ADDX.
Can you tell us more about the mechanics of ADDX? How can investors and other stakeholders benefit?
ADDX is a digital securities exchange regulated by the Monetary Authority of Singapore. Our goal is to make the private capital markets more efficient and more accessible for both issuers and investors. We do that using digital securities, which are like traditional securities except they are issued on a blockchain network and can therefore take advantage of smart contracts. The ADDX platform provides an end-to-end service. An issuer comes to us wanting to raise capital – let’s take the example of a pre-IPO company that needs funds for expansion. We would have the ability to issue securities on behalf of this company digitally, custodize the securities on our blockchain network, and distribute them to accredited investors on our platform.
There are clear benefits to both sides. Investors can take part in previously out-of-reach opportunities and diversify their portfolios. They get access at fractional sizes of $20,000, instead of $1 million to $5 million that is typical in non-digital issuances. They can also trade the securities on our secondary exchange, which gives them a liquidity option. Again, this was not previously available for non-digital issuances, and trading has historically been possible only when a company does an IPO. Issuers also benefit – from access to a larger pool of capital, lower cost, and a faster speed to issuance, which is important when market conditions are changing rapidly.
What advantages does a decentralized system provide that cannot be addressed by non-blockchain solutions?
For regulatory reasons, ADDX uses a private, permissioned blockchain network. That is not as decentralized as, say, cryptocurrencies and DeFi solutions. But it allows us to insulate our blockchain network from the Internet, which makes it more secure and provides assurances to the regulator that our investors’ assets are safe.
Even in a private blockchain network, the level of efficiency that we can benefit from is quite significant. A securities exchange built on a non-blockchain network essentially involves multiple ledgers talking to one another and reconciling or updating these ledgers each time there is a change. With a blockchain-powered network, there is a single ledger to which all nodes in the network have real-time access. The ledger is therefore always up to date, second by second. Furthermore, smart contracts, a key feature of blockchain technology, enables self-executing actions – like dividend or coupon payments.
One clear illustration of this efficiency is in the settlement period. Non-blockchain-powered exchanges still require two or more working days for trades to settle. With the blockchain-powered secondary exchange that ADDX uses, trades are settled instantly.
Are there regulatory hurdles to investing or raising capital through decentralized means? How is ADDX addressing such regulatory or compliance requirements?
The Monetary Authority of Singapore has been one of the most progressive and forward-thinking regulators globally on the issue of digital securities. They clarified early on that digital securities will be allowed and will be regulated in the same way as traditional securities, which removed uncertainty for players that wanted to enter the space to innovate. They worked to align other regulatory and governmental bodies to this view, including the tax authority and the company registration authority. They also set up a regulatory sandbox that enabled a new player like ADDX to emerge with full licenses after our systems were verified to be operating smoothly and safely.
The sandbox was important because it meant a path to obtain a license for companies without a long track record. This is a recognition that new players with innovative solutions will help the overall market make progress, by injecting new ideas into the financial ecosystem.
Tell us more about your upcoming VC fund. How is it different or unique from other VC funds (e.g., will you have specific target markets or industries or technologies)?
We are offering a couple of VC funds to investors, mainly focused on tech companies in Asia. VC funds are a very interesting proposition for individual investors, because, arguably, it has hitherto been the least accessible private market product for individuals, but it is now made possible through digital securities.
First, the minimum investment size is usually $5 million, so that excludes most individual investors. Even if you had $10 million or $20 million to invest, which makes you a high-net-worth individual, putting such a large percentage of your portfolio into one fund is not prudent from a risk perspective. The second issue is tenure – VC funds typically have a fund life of 8 to 10 years. For a pension fund, making an investment that is locked up for a decade is fine. But for an individual, that can be quite a daunting prospect.
Digital securities help resolve many of these issues. The minimum size is $20,000 for VC funds offered on ADDX. In addition, the secondary market means your investment is never locked in. You can sell it to another investor. That also means your entry point doesn’t have to be at the start of the VC fund’s life – you can enter at any point by buying the tokens from an existing investor.
Apart from your Series A in January this year, are you actively raising venture/institutional capital?
There are ongoing discussions with existing and prospective shareholders on raising funds to continue expanding ADDX. Many of them are excited about the progress we have made – in just 18 months since we received our license, we have completed more than 10 issuances, many of them with globally-renowned blue-chip issuers such as Mapletree, Azalea, and CGS-CIMB. We have also grown our customer base. Our platform currently serves accredited investors from 27 countries around the world, spanning Asia Pacific, Europe, and the Americas (excluding the US). These are all factors that position us strongly for another round of funding in the coming months or years.
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