Rising tide of digital exchanges

In addition to larger Asian exchanges capturing a slice of the volume of trades passing through the Singapore Exchange, a completely different type of exchange and asset class is grabbing the attention and pockets of young equity and derivative investors here.

These are digital exchanges that trade popular digital assets like cryptocurrencies and non-fungible tokens (NFT), which are units of data stored on a digital ledger or blockchain. Items that can be traded on these digital exchanges also include tokenised shares or currencies.

As seen in recent years, investor interest in cryptocurrencies, especially from big financial institutions, has sent prices soaring to record highs. The most popular cryptocurrency, Bitcoin, reached a peak of over US$63,000 ($70,312) per Bitcoin in April before crashing to hover around US$40,000 as of June 15.

One might think of digital exchanges as simply a virtual replica of real-world financial exchanges but this is not accurate. Unlike traditional exchanges, digital exchanges are unregulated. A digital exchange can range from well-known ones like Binance and Coinbase to a shady exchange trading digital coins no one has ever heard of.

While the exact number of exchanges is not known — given they pop up and close down just as fast — a check on coinmarketcap.com reveals that there are 382 digital exchanges in the world, trading over 10,000 types of cryptocurrencies in total. The global market cap of cryptocurrencies alone stands at US$1.6 trillion. Interestingly, this is a small value relative to the trillions traded on regulated exchanges such as NYSE, Nasdaq, Hong Kong Exchange and Clearing, and Shanghai Stock Exchange.

Despite cryptocurrencies being more volatile than traditional investment instruments like stocks and bonds as well as digital exchanges being subjected to fewer regulations than traditional exchanges, why are they still so popular? Anton Ruddenklau, who is a partner and head of financial services at KPMG, boils it down to a single word: curiosity.

“There’s a lot of interest in them because people hear about it and there is a fear of missing out. I think people are generally curious about what Bitcoin or Ethereum or some other cryptocurrencies are, as well as the new investment opportunities they offer,” he points out.

This curiosity is also fuelled by the current low interest rate environment. Ruddenklau says that since putting money into a bank account generates negligible interest, anything that can generate higher returns will interest people.

The popularity of trading digital assets can be seen in Tokenize, a Singapore-based digital exchange that was founded in 2017 by CEO Hong Qi Yu. The platform has expanded to four countries in the region, including Malaysia, Vietnam and Thailand and the user base has also hit 100,000, says Hong.

Hong reveals that Tokenize now hosts more than 40 types of coins and tokens and is looking to expand to 100 by the end of this year. The main feature of Tokenize is that the users can trade in their own fiat currencies, like the Singapore dollar (SGD), instead of going through a more complicated process, such as changing their fiat currency to the US dollar and then changing the USD to the stable coin USDT before using it to transact in the digital marketplace.

Hong says that Tokenize operates just like a real-world exchange, matching bid and ask orders. However, because the Singapore market suffered from low liquidity in the early days, Hong says Tokenize had to step in as a market maker to provide that liquidity. Now though, Hong says “there’s less need for market-making as things are more matured and we have more dynamics between the buyer and seller”.

Tokenize attracts retail investors with zero sign-up fees, zero minimum deposit and 24/7 trading availability but Hong has set his sights higher. He says that corporate and institutional interest have also increased in the past 12 months. The company is therefore putting more resources into hunting for institutional investors, family offices as well as MAS Registered Fund Management Companies (RMFC).

Just like a traditional exchange, Tokenize’s revenue model is no different. It collects a percentage of the transaction from the investor when a trade is executed. However, Hong also plans to monetise the platform by offering premium memberships to investors who want additional benefits. These include lower commission fees while trading, lower conversion fees to change their fiat currency to digital coins and dedicated customer support.

Being one of the most popular digital assets traded on digital exchanges, holders of cryptocurrencies might think they could someday be legal tender. Could cryptocurrencies really be used as digital payment when, say, buying a drink in the near future?

Yes and no. On June 14, Tesla CEO Elon Musk said that the company will accept Bitcoin for payment “when mining it gets cleaner” after announcing just a month ago that the car company will not accept it due to environmental concerns. El Salvador, on June 10, became the first country in the world to make Bitcoin legal tender.

Unfortunately, KPMG’s Ruddenklau does not think so. He says that, according to KPMG research, only 3% of Bitcoin were traded in day-to-day goods.

And although Ruddenkau observes that high net worth investors are adding cryptocurrencies to their portfolios, he believes most of them are not looking at them as a currency of the future. Instead, some of them are “looking at it as a way to make a quick buck” by riding on the volatility of the cryptocurrency market.

Other high net worth investors could have also bought into funds that include cryptocurrencies. These are a bit less risky but could provide good returns over time. “They are trying to see whether cryptocurrencies are good for whatever it might be, perhaps their family office or as part of their investment portfolio.”

In the future though, Ruddenkau thinks that there will be more to the digital market than just cryptocurrencies. For example, a private jet can be tokenised and ownership of the aircraft can be sold on the digital market, just like fractional shares now.

“As we move forward with crypto and digital assets, we’ll probably see a lot more non-traditional assets appear … You could argue that maybe your house one day could be a giant digital asset where people own fractional ownership,” he says.