Nearly two months ago, news outlets were abuzz with rumours that DBS Group Holdings Ltd (SGX: D05) was setting up a digital exchange.
DBS then came out to confirm that plans for a digital exchange were in progress, but that it had not received regulatory approval to proceed.
Investors were waiting with bated breath for more news following DBS’ clarification, and last week, they finally received it.
DBS announced that it will set up a full-service digital exchange that will provide tokenisation, trading and custody for digital assets.
While cryptocurrencies such as Bitcoin and Ethereum have been gaining in popularity over the years, the concept is still somewhat foreign to many investors here.
This announcement highlights the growing importance of not just cryptocurrencies, but also other digital assets, as the world transitions to a new normal post-COVID-19.
But should investors feel excited about this news?
What implications does this move have for the bank and the broader financial sector?
DBS’ digital exchange is believed to be the first of its kind announced by a local bank.
It will leverage blockchain technology to enable fundraising through asset tokenisation and the trading of digital assets, including cryptocurrencies.
In a nutshell, the regulated platform will allow for the issuance and trading of digital tokens that are backed by a wide range of financial assets such as shares in private companies and bonds.
This move makes it easier for early-stage companies to issue their digital currencies that have other financial assets as collateral, thereby providing more options for such businesses to raise funds.
Next, the exchange will also promote the conversion from digital currencies to fiat currencies (i.e. standard currencies) and vice versa.
Exchange services will be provided for the four most established cryptocurrencies – Bitcoin, Ethereum, Bitcoin Cash and XRP (Ripple), and investors can exchange them for Singapore dollars, US dollars, Hong Kong dollars or Japanese Yen.
Thirdly, DBS will provide a digital custody service for cryptographic keys that control digital assets on behalf of clients.
DBS’s latest initiative is interesting.
Not only does the bank foster a more vibrant ecosystem for companies to raise money, but it also emphasizes the growing importance of digital assets in the online world.
And with the pandemic still raging, this shift to the online world will be even more pronounced as digitalisation is accelerated for a wide range of businesses.
DBS has also received the approval from the Monetary Authority of Singapore (MAS) to be recognised as a Recognised Market Operator, which allows the bank to operate markets for assets such as equities and bonds, similar to a stock exchange.
That said, this exchange will only be open to institutional and accredited investors.
DBS will probably earn fees from a variety of methods, including listing fees for companies to list their corporate tokens, and platform fees for members to utilise its platform for transacting.
After trading commences, the bank should also earn a cut from the transactions between buyers and sellers.
Singapore Exchange Limited (SGX: S68), or SGX, will take up a 10% stake in DBS’ new digital exchange.
SGX has a long track record of operating an organised exchange, and CEO Loh Boon Chye believes that the group can apply its strengths in market infrastructure and risk management to make the planned exchange more robust.
The bourse operator’s goal is to evolve SGX into a multi-asset exchange that offers a wide variety of securities for clients to invest in.
Recall that in early September, SGX also entered into the digital asset class with a collaboration with cryptocurrency market data provider CryptoCompare to launch crypto indices.
It was estimated by Coinmarketcap that the global daily trading value of the world’s digital exchanges ranged from US$50 billion to US$100 billion.
The digital asset marketplace is also expected to grow at a compound annual growth rate of 12% from now till 2025.
It’s exciting days ahead for the bank as CEO Piyush Gupta believes that the business pipeline is “strong enough” for the exchange to break even within the first year of launch.
The digital exchange may not add much by way of profits to DBS’ total group profit.
However, it goes to show how innovative and forward-looking the bank is, and investors should appreciate that Gupta is diversifying the lender’s sources of income away from just purely net interest income.
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Disclaimer: Royston Yang owns shares in DBS Group Holdings Ltd and Singapore Exchange Limited.