Nick Cowan on distributed ledger technology at Gibraltar Stock Exchange

0:00i'm ashlyn Addison from event chain for investmentpitch media and FinTech news network and today on blockchain interviews we have Nick Cowen the CEO of the Gibraltar Stock Exchange Nick welcome to the show it's a pleasure to have you here today and thanks for hanging it's it's trying times we're in early April and obviously I think a lot of us are in some form of

0:22lockdown so it's been certainly a challenging time and this is a this is a great way to start a Friday to have a it's your Thursday evening but to have a have a chat with you about the future of digital securities is a great is a great opportunity for me so thank you definitely and I'm very excited as well Nick for this discussion and it would be great if you could kick off the

0:42interview by giving a little bit of your background in the capital markets and finance and how that experience has aided in growing the Gibraltar stock exchange yes sure thank you um so even though I look pretty young life unfortunate been doing this for nearly thirty six years so when I started out in in 84 I've always been in capital markets and spent time in London and

1:05Japan I was the global head of equities for one of the largest investment banks in the world and what that did was it gave me I oversaw 43 stock exchange and futures exchanges so you really had a good handle on some of the efficiencies and inefficiencies of securities I then left the industry preed Lehman's to run my own money and then we started this

1:31business here Gibraltar was the last jurisdiction in the EU is with just about still in the EU at the time without an exchange so I was invited to to consult and help her small team get going and that actually led to me getting more and more involved and and I said to my wife as a three-month project and that was eight years ago so well so that's a that's

1:53that's where we are today so and I think just by way of background here I think Gibraltar as a jurisdiction was looking at FinTech and how it can perhaps position itself you know future proofing particularly with BRICS it possibly happening or not happening and I think for us we just we've just looked at that as a great opportunity to say yo we're um we're in the right

2:16jurisdiction there's a fin tech community here and if you ask yourself is there a role for a small traditional t-plus to exchange in a small jurisdiction and can that be relevant globally the answer is not really so actually why don't we do something completely non restricted by legacy technology non-restricted by legacy interest let's just absolutely just go

2:41down the digital securities route and that decision was made the beginning end of seventeen beginning of eighteen so we've been two years really in terms of heads down really driving through that digital security strategy and you know for us 2020 is the year but the execution which I can sort of give them more detail about later so it's been an amazing journey so far and I think we're

3:02on the brink of just you know we talked about a paradigm shift I think markets like we're looking at right now just totally underline the need to move to a frictionless economy in in our view definitely and that's a great interim Nick thank you and coming from the traditional finance space did you see it as a giant leap to move into a new decentralized technology ledger

3:28integrating it into regulated exchanges when traditionally they've been against that kind of technology is it going against the grain or is it really just looking forward to the future and seeing that this is how the industry is going to be moving yeah I think what we try to look at is you know I think they you've got to look at first of all as inefficiency okay so the common view is

3:54that the T plus two model right so when I sell my securities to you two days later you get your securities and I get your money and in theory it works but you know I guess one of our insights from being for doing this so long is that you have a number of challenges which I think we want if you like the problem that we want to solve I think number one is cost the cost of a life

4:20cycle of a trade is something like 5 to 15 basis points now when we talk about the life cycle of a trade we're talking about my mum placing an order a broker placing that order on exchange the transactions basically going through central counterparty CSD the banking network and you have this whole machinery financial market infrastructure atomize they're called

4:44which basically ensure that the T plus 2 model works now what you have therefore is you have unnecessary friction and cost basically five to 15 basis points if you look at the entire cycle you have capital so if you're looking at the way a trade basically moves if you place an order with your broker I don't know whether you know but your broker is basically having to post capital to make

5:08sure that two days later the trade basically settles so capital is a big big issue the other thing is counterparty risk counterparty risk people think well counterparty risk is that actually important and for us you know you look at what happened with Lehman's when you have a two day window if something happens in that two day window you might think well that doesn't

5:27affect me it does because actually you could end up with systemic risk so we believe counterparty risk is completely unresolved from the Lehman's event nothing has actually changed about nothing's really changed in my 36 years we might have gone from T plus 3 to T plus 2 but that's really and maybe we've gone from paper to electronic settlement and the third thing is country

5:49interoperability if you look at exchanges generally they're governed by geography they don't really interoperate so you've got the New York Stock Exchange you've got a London Stock Exchange you got the Japan Stock Exchange that Singapore exchange and you tend to have issuers go to that market and they're kind of restricted by the size of that market so

6:04we see if you imagine those issues being listed out what we've been working on is can we solve the cost problem okay and basically look for 70 to 80 percent efficiency by removing the friction can we resolve the capital problem by having absolutely no capital being posted at all because it's tea instant can we resolve the counterparty risk when I trade I settle so if I sell my shares to

6:26you your wallet is populated and my ones populated instantaneously and the fourth thing is can we build an interoperable universe where issuers get access to investors investor pools outside the country where perhaps they're coming to an exchange can also investors like you and me get access to some pretty cool stuff that might be on another exchange that we can

6:48face to get access to because we're part of the same network and dashboard so we absolutely looked at the problem as we see it is there a solution and if we're going to find that solution we have to comply with the regulations we have to compile the directive so we came in it very much for me we know the directives we know what the regulations look like

7:09we understand how the markets work the plumbing let's basically look at the technology required to move to that T instant model and that journey started for us a couple of years ago and in fact when we looked at the technology that was out there we couldn't really reconcile the technology was out there to meet our objectives I'll explain a little bit

7:31about later so we actually ended up designing and building our own protocol because we couldn't we couldn't see any of the existing protocols really fulfilling the primarily the directives that's the key you know technology can normally solve most problems but unless you're going to achieve T instant and T instant is the key that you're going to struggle to achieve those those

7:54efficiencies so when you look at the journey that we've been on we actually said you know what there is a huge amount from the crypto universe that we've learned because they're effectively at T instant model right so when you buy or sold BTC or ether or anything else there are no financial market infrastructure guys in the way you open an account with an exchange you

8:15can trade so you don't have to go through a broker you don't have to go through anything you can basically have this really a really quite efficient model but it doesn't comply with all the regulations then you get the regulated world which is a little bit legacy and archaic and a lot of friction so we've said okay let's wash those together and create this new smart securities

8:37end-to-end product which we believe will on unleash just or awesome efficiency and at the end the day you know we just want more choice we want to lower price and we want to make things you basically you know the the capital world to move more freely mm-hmm thank you Nick that's a great overview of the inefficiencies as well as the solutions that we will be

8:57seeing and to touch on that a little further I'd love to know you know you've been working on this for more than a few years already you know at what state are you guys in in terms of solving all of these problems and is this already a reality do do we have instantaneous settlement and if not what are the timelines looking like for at least four GSX

9:19yeah so what what we looked at I mean if you there's a lot of frustration out there as to why why isn't there a trading venue yet that actually provides digital securities in a liquid form and my short answer is it's not technologies it's the regulatory framework that when you try to put the two together it's really complicated so one of the challenges that we were all facing is

9:43you know I love you rightly or wrongly is if you're going to achieve tea instant it's actually incompatible with a consensus model does that make sense because if you do a trade that provides legal and beneficial title transfer from me to you at that point zero zero one of a second you can't then have seven seconds later notes saying do we approve the trade or do we not approve the trade

10:07because it's already happened so I think that's been one of the challenges that the blockchain and regulatory markets have tried to overcome and that's one of the reasons why you haven't seen your trading venue yet and so for us we we are so we didn't solve that because we spent two years trying to fix it so we are we're at the moment in application

10:28as I said with an exchange we're opening a trading venue in Estonia we're in application right now there we're actually already also applying for a CSD license because the CSD and the trading venue have to integrate into a vertical stack and we're also an application at a an exchange for an exchange license in Asia because our our vision is we want to have a number of

10:50exchanges that you can as an issuer have your token trading 24/5 around the world in securities format and and also being a being a central securities depository so digital CSD the legislation states that you can't have a security trading on trading venue unless there is a CSD providing the record of basically the book of members of the shareholders

11:16that's basically the law as dumb as that is so you you there's no way around and so you've got to basically have a CSD that is unable to work in a digital way a lot of the CSD sit alone either aren't there or guess what they might not want to get there too quickly because it's gonna is gonna eat into their business model so you have this really interesting time where there's a lot of

11:37protect protection I think attitude or migration attitude going on and we don't something from that legacy so for us in terms of timeline you know we are hoping end of q2 q3 this year to turn on our first trading venue which which will be just a you know an awesome breakthrough for us so that's really where we're at that's great Nick and you touched on

12:00regulation and the importance of it if you could give a brief overview of the progressiveness of the regulation in Gibraltar and what do you see in the European Union and across Europe for introducing similar regulation that will allow this kind of technology to spread across all continents yeah I think we have to be realistic but you know regulations particularly from a from a

12:27European perspective or even from a u.s. perspective or wherever they move pretty slowly if you look at what happened post Lehman's we have this big directive here called method markets in financial instruments they then worked on method two it took them ten years to get NIF it to roll down so nothing really happens very quickly I think the but you are

12:49seeing now noise from the European Union that they are really keen on innovation I mean I think everybody can see the efficiencies that we can basically achieve and Gibraltar is part of that blanket of regulation because we're we're still in the EU and even if we leave the EU with the UK this December we'll probably have an equivalence regime that start standing really

13:13wherever you go whether it's the states Tayside Asia the regulations tend to be the same and they're there effectively to make sure that you know we've got investor protection in place mark abuse that transparency all that all those good things so that I don't see any of that changing what we have and I've often been up conferences where I listen to panels and they're basically

13:34complaining that the regulator's either don't understand or regulations have to change my view on that is look all you have to do is you have to get the technology to comply the directives and the regulations not the other way around because it could take ten years so so don't you sleep over that if there's a if there's a way through the minefield to navigate that is incumbent on us to

13:55see if we can do that and that's basically what we spend a lot of our time working on to to make sure that we comply with wonderful directives like settlement finality which is if you do a trade you're guaranteed that you will basically get those securities in two days time in the current model so and you've got certain finality you've got myth food you've got a transparency

14:15directive you've got market abuse you've got all these things that you basically have to comply with which which you know you've got to get the tech to effectively fit in with that and not the other way around you know in all of you very interesting and besides regulation do you see other necessary steps for the cryptocurrency industry that they need

14:36to take to help drive more institutional adoption and vice-versa between these two industries I think so yeah I think so I think I've been look I was wrong I said in 2018 this would be the year of regulation for crypto exchanges and I was clearly completely on the wrong foot because generally regulators I think have been quite slow in terms of putting

15:02regulatory frameworks around digital exchanges you know regulations are there primarily to protect people like you and me so that when we place an order we know that we know who the exchanges that we're dealing with we know that our assets are safe etc at all with good things and so you're not going to have your yeah well is there a cold wallet if there isn't a

15:23cold wallet who owns the keys the hot wallet can't the Hat is the hot wallet in short and all those good things so so I think I was surprised by that I think what will happen is if you're going to first of all institutions have to normally deal with regulated six right so if you're going to get institutional adoption you're going to need to have exchanges regulated in the

15:43digital world so you look up exchanges like your coin basis cetera liquid us basically there's a there's that line set in place are the other exchanges which are particularly more retail focused as opposed to institutional focused they really haven't gone down the regulated route as as fast as perhaps other exchanges because there's there's a lot of protection and you know

16:07regulatory bureaucracy and all that good stuff which comes with you know anti-money laundering directive number five but I've talked about that all day if you have if you have no life you know they're there they're there for a really good reason and that's to make sure that you know money is money isn't being put through exchanges that can be put to bad

16:23use right so so yeah I definitely went too early I think in terms of my view on on printer exchange being regulated I don't think you'll see whole selling institutional adoption until those boxes are ticked in my view but I do believe as regulators catch up and our view is you'll get this convergence between the digital community in the securities community where you can basically from

16:45your phone say I want to buy Apple in digital form and I want to use the dollars where I want to use BTC it doesn't matter you've got something in your wallet and you can basically as press by and in fact we go a step further you don't necessarily have to just buy from our exchange well because we've got a CSD our vision is we can have lots of digital exchanges and you

17:01basically get the best price on Apple but to name an issuer so so that's what we see is a really exciting development but I do believe that regulations have to catch up the digital lab the digital currency exchanges well it's very cool and I'm very much looking forward to being able to purchase stocks with BTC and vice versa and that's something that

17:23we're looking forward to and we're running out of time Nick but how can the viewers follow along with the updates of the Gibraltar stock exchange as they move towards integrating this distributed ledger technology yeah I think you can't I mean you can go to GS x GS x dot G I you can go to GS x group global which is our parent company and under the group we've basically got you

17:49know this this series of basically exchanges that we're starting to roll out this year we're looking to open our primary launch pad in two weeks time called the grid which again is an sto platforms there's a number of number of things what we look into program this year but yeah gsx dot GI is a pretty good place to start and we've you know we will be keeping our

18:10community up to speed with everything that we're doing basically over the next two or three quarters so I think it's going to be a really cool year and as as terrible terrible genuinely as the environment we're living in right now it kind of drives home that you know effectively a digital world with you know as little friction as possible is is for our view in our view you know the

18:35natural next step in terms of the evolution of capital markets so I think you know auto automation will be their way forward and and so we're you know we we hope to be in front of them well said well I'll leave those links to your website and those other links in the description box below for the viewers thank you so much for the time today Nick it's been a pleasure

18:56learning about gsx and let's follow up in the near future fantastic I appreciate you having making all the best keep safe thank you you