As many of you already know, we have been working on an exciting project involving the creation of a regulatory sandbox in Montenegro that will allow us, upon acceptance by the local regulator, to trade regulated tokenized assets under a similar structure to an MTF here in Europe. If that was not exciting enough, development has also begun on a DLT based CSD that will provide real-time post-trade settlement services to connected MTFs like CoinMetro. Together these two important pieces form a complete tokenized capital market infrastructure. Today we are going to share an in-depth overview of our progress.
Let’s start by looking at a few definitions.
CSD – Central Securities Depository
A financial organization that provides post-trade settlement of securities. The CSD guarantees that the buyer receives the purchased assets and the seller receives the promised payment.
MTF – Multilateral Trading Facility
It facilitates the matching of orders, effectively giving a platform for buyers and sellers of financial instruments to transact between themselves – it is a license that is required to offer trading in transferable securities.
STO – Security Token Offering
A process by which an investor exchanges money for tokens representing their investment. However, unlike ICOs, STO’s only distribute security tokens that represent regulated assets such as stocks, bonds, real estate investment trusts or other funds.
In order to act as a fully compliant venue of an STO sale, a marketplace first needs an MTF license. In addition, settlement needs to take place and this should be done in real-time, if not, why are we even tokenizing these assets in the first place? This is particularly important in the EU as the CSDR requires executing the settlement at a CSD.
A framework that enables experimenting with innovative financial solutions in a controlled environment. It essentially allows testing a regulated product, without being regulated.
CoinMetro’s CEO, Kevin Murcko, met with the board of Montenegro’s Capital Market Authority (CMA) in June 2019 and started discussions regarding setting up a regulatory sandbox. The partnership progressed well – the framework for the sandbox was voted into the CMA bylaws and sandbox is now live.
Setting up the sandbox enables CoinMetro to operate as an MTF and connect to the CSD. CoinMetro will be testing the entire tokenized security infrastructure from front-end (MTF) to back-end (CSD) and fill a gap in the market.
The CSD will be marketed at counterparties such as issuers of tokens (both individuals and companies), exchanges and other organizations that create or need access to liquidity in tokenized markets.
As previously mentioned, the regulatory sandbox is already live. CoinMetro will file its application into the sandbox this week. Regarding the development of the CSD, the process started one month ago and the MVP is expected to be ready in three months.
We are considering launching multiple pilots to test the solution in different scenarios. We are looking at launching in Montenegro, while shopping around for other compatible jurisdictions in South America, Asia, and the Middle East, as well as considering an additional pilot here within the EU.
We are planning on creating a central hub – a company that will handle the infrastructure and manage the regionally regulated depositories. Regional CSDs would in return connect to the central hub, giving them access to the total liquidity and assets in all regions. The central hub would also enable transferability of assets and ownership through regions in real-time.
The objective of the project is to show regulators that this new capital market infrastructure works and more importantly – that it is better than the current system used around the world. Therefore, our goal is not to overly complicate the offering. We are planning on launching 2-5 assets in the sandbox. The number of clients with access to the respective STOs will be limited to a few thousand. Each issuance will have a volume of roughly 2 to 8 million.
We are expecting a relatively low transaction volume, ranging from 25 to 50 million USD. As previously mentioned, we’re not looking for a revenue boost – our goal is to show the benefits of the infrastructure in practice.
The amount of funds we are planning to raise depends on the definite number of assets we will list. We are looking at approximately 10 million USD (if listing 2 assets) to 25 million USD (if listing 5 assets).
While the CSD project is not a CoinMetro brand, CoinMetro will see a clear and direct benefit from its inclusion into the project. How? In order to create a liquid STO market, post-trade operations are essential. Most other businesses looking to create liquidity in this non-existent market are doing so via primary offerings to a select group of investors, whom all reside in select regions of the world. They are essentially recreating the current capital market structure and limiting access even more. Helping the CSD to create the underlying post-trade infrastructure means that we can not only create and participate in a more robust primary market but that we can also create and participate in a liquid secondary market. This is key to breaking down barriers and allowing access to a far larger portion of the world’s population into what will be a massive trillion dollar market.
This means we would have access to all tokenized securities that get listed on regional CSDs. All assets would be listed on the CoinMetro exchange and CoinMetro would become one of the liquidity hubs, and initially the only hub in Europe.
CoinMetro is required to generate traction for the CSD. The two will operate in synergy and growth of the CSD also means growth for CoinMetro.
We are looking to create the world’s first complete capital market infrastructure for natively tokenized assets that is open to retail investors worldwide with real-time cross border settlement. In this scenario, CoinMetro would become the primary market in Europe – meaning that any other exchange that wants to operate in Europe (with assets issued both within and outside of Europe) and sell to European clients, would have to pull liquidity from CoinMetro.
The CSD will handle all settlement of regulated assets, thus CoinMetro will become a non-custodial exchange for tokenized securities. The CSD will accept deposits of both assets and ‘cash’, i.e. stablecoins, and based on CoinMetro’s real-time instructions, settle those assets between clients.
This is meaningful, as it enables us to offer more services and exposes CoinMetro to an enormous amount of clientele. Once the ecosystem has been established, we would become a critical player in the tokenized security world.
That’s it for this time! In case you have further questions about the CSD, we’re available to answer them on our Telegram Group 24/7. In the meantime, you can check out our platforms, complete your KYC checks and make some trades!