Our guest for this #FintechInterview is Darius Liu, Co-Founder and Chief Operating Officer at ADDX (previously known as iSTOX), a new securities exchange based in Singapore that provides innovative investment products based on blockchain securitization.
Hello Darius, thank you for having this interview with us! Can you please give us a little background of yourself? How did you decide to start your own company?
I started my professional journey in the government field. I spent time at the Ministry of Finance, where I worked closely with GIC (Singapore’s sovereign wealth investor), Temasek and MAS (Monetary Authority of Singapore). Then, I moved to GIC working in the portfolio asset allocation and strategy team. Eventually, after six years I decided to join a startup, ADDX. The role I play in this company is to ensure that the operations run smoothly. I also oversee the risk, legal and compliance department. When I was working in asset management, I noticed that there are a lot of opportunities that are not available to common investors, but at the same time there is no particular reason to preclude these smaller investors. The problem is that technology was not developed enough to allow everyone to access these opportunities, so the market has evolved benefitting the wealthiest people and this is not fair for common investors. This was the genesis of my thinking on the democratization of finance. Today’s technology – such as blockchain, smart contracts and tokenization – allows us to do it. Regarding my decision to move to a fintech startup, my view is that among successful startups, 99% of the time the founder gets rich and that is all. But in 1% of the cases the startup really transforms the market and benefits a lot of people. I joined ADDX because I believe it belongs to the latter category.
We are witnessing an increasing ease of access to financial products and services, but what are the main risks related to the democratization of finance both in ethics and economics, and how would be possible to overcome these risks? And what about giving too much power in finance to people who don’t really understand the risks that they are facing?
In the investment and financial markets, trust is very important. ADDX strongly believes that to build trust, there must be regulations and controls. At the same time, there needs to be a balance struck by the regulator so the system is neither too conservative or too accommodative. If you are too conservative, innovation does not happen. The key is to be flexible and to find the right balance. At ADDX we also spend a lot of time educating investors so they understand the investment they are making. In addition, ADDX has a listing committee that ensures sufficient disclosure is done for each product, and that the proper documentation is in place. All investments come with a certain risk and reward, and we help investors become aware of them.
What are, in your opinion, the main differences between the European and Asian markets?
A first difference is evident if you focus on the maturity of the market: there are countries in which we can see highly efficient markets, while others are still in a developing phase. Moreover, demography is a key point of difference: in Asia there is a growing middle class and more people joining the wealthy, while in Europe the situation is more static. From a wealth management perspective, this would mean faster growth in the Asian market compared to the European one.
Can you explain us how do you link the performance of the private company to the value of its digital security? And how is the security price determined?
At the heart of any security is a bundle of rights and obligations that can exist on a piece of paper, in a scripless form or in a digital token. But the underlying principle is exactly the same: whenever you buy digital securities, you buy a fragment of ownership of the underlying company. From this perspective, there is no difference between owning digital securities and owning traditional securities. With regard to price determination, it depends on the market in which we are trading, whether it is the primary or secondary market. In primary issuances we work with the issuer to carry out a process of price discovery to determine the initial subscription price. After these tokens are sold, investors can trade them on our secondary market where the price becomes a matter of demand and supply.
How does it work if a private company on ADDX decides to go public through an IPO?
The tokens are designed in a way such that, once the IPO takes place, the tokens will be burnt, and the IPO units will be issued 1:1 and deposited within the token holders’ central depository account. All of this has been set up, and the beauty of this mechanism is that it forms a pipeline that links the private market to the public market. This synergy is one of the reasons why SGX invested in us.
How do you integrate blockchain and the process of tokenization in your business model?
One of the main advantages of our business model is that users don’t need to know anything specific about how blockchain works. It is the duty of ADDX to ensure the infrastructure is operating well and to implement the technology to make the value of tokenization available to everyone. For instance, if you subscribe to an issuance on ADDX, you will see how many tokens you receive and what they represent through the legal documentation, but you are not required to know how the technology makes it possible. It just works. For those who are interested, digital securities are issued onto a private Ethereum blockchain network, and ADDX uses the technical efficiency of the blockchain, including the smart contract technology, to administer the securities. That means we can automate processes that were traditionally manual – for example, when we make dividend or coupon payments, when we track ownership and when we match and settle trades in the secondary exchange instantly.
The role of the regulator is fundamental for innovation. In your opinion what can regulators do to improve innovation in financial products?
One of the key success factors that allowed us to come to market is the MAS (Monetary Authority of Singapore) sandbox regime which gave us the possibility to offer our innovative service to real market participants in a protected environment. From a regulator perspective, a sandbox regime is an effective tool to enable market infrastructure innovation without the introduction of unnecessary risk to the financial system. Even if something goes wrong, the risk is contained within the restricted environment before the full license is granted. The adoption of sandbox regimes could foster financial innovation around the world.
How the experience in governmental institutions such as GIC (Singaporean Sovereign Wealth Fund) and the Ministry of Finance shaped the work you have done for ADDX?
I do have government contacts from my previous roles that have been important and have brought us a long way. The most important takeaway from my past experience in government institutions is the understanding that any regulatory or legislative change takes time. Any start-up that wants to move fast has to design its structure such that it fits, as far as possible, within current regulations, instead of hoping that the regulations will catch with what you do. At ADDX, we designed our business model within existing legislation and consulted with MAS on cases in which either regulation was silent or there was some sort of grey area.
Do you face any type of competition in Singapore or abroad?
Competition exists in every arena, and that is true for the digital securities space. Recently the biggest bank in Singapore, DBS bank, launched a digital exchange for the listing and trading of security tokens. We welcome the development, since it gives us validation that we are on the right track. The market is big enough for both players, and we entered it very early. Regarding foreign markets, in Europe tokenization platforms are coming up, such as in Switzerland where the regulation is more favorable. In the US, they operate in a very different regulatory regime which is very complex, so although they have been trying to launch tokenization platforms like ours for many years, they have not taken off in a big way.
What do you see in the future of ADDX and, more generally, what are the trends that you see in fintech?
Digitalization for sure. Smart contracts and tokenization have so many use cases, so we will see new platforms and business models. Perhaps in 5-10 years’ time we will have a network of regulated issuers and exchange platforms, just as today some countries have more than one public stock exchange. Another trend is the blurring of lines between private and public market investments. When securities are tokenized, it is possible to deal with them in new ways, so portfolio construction should take that into account.
Do you plan to expand into the European and American markets?
We are able to onboard issuers and investors from around the world. Indeed, investors on the ADDX platform currently come from 24 countries, including many in Europe. There are also entities from Europe interested in listing. Fintech is borderless.
What is your target customer?
We target an underserved segment of the investor population, which we consider to be those with a $2-$20 million net worth. Many investors in this group are not well-served by existing financial institutions, even though they do have enough liquidity to be interested in alternative asset classes. With our technology we are able to serve them in a far more scalable and efficient manner. We are currently not able to serve investors below this net worth threshold, as we come under the Accredited Investor Regime. The technology does exists for us to potentially serve retail investors, and in the future it is possible for ADDX to obtain the relevant licenses to serve the retail market.
What growth strategy will be predominant in the Singaporean fintech market? Do you think we will witness an increase in M&A operations or internal growth?
The pace of change in technology is going to increase in the years to come, so the question then becomes which is the fastest way to grow or to gain market share. The M&A approach makes sense. You don’t need to build everything yourself and you can accelerate growth by strategically acquiring certain capabilities or teams. So M&A for fast-growing companies will certainly be attractive because it offers speed. In the tech sector, companies that evolve faster have a bigger advantage. For example, whether we are talking about ADDX or another company, there may well be synergies achieved through upstream or downstream integration – in other words, acquiring a company that is already collaborating with you in a certain segment of the value chain.
Given your experience and your role in ADDX, what advice would you give to students interested in fintech?
My takeaway is that your network is your net worth. You should build relationships with as many people as you can. You will be surprised by how many senior people might take time to speak with you. These connections could be extremely useful – and either way you’ll have one more friend.
Bocconi Students Fintech Society