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In late January 2024, Dominic Hobson, editorial director at Future of Finance, undertook an interview with Max Heinzle. Lasting an hour, we originally posted it in its entirety:
https://futureoffinance.biz/21x-the-european-token-exchange-with-a-reassuringly-german-personality/
Though we highly recommend viewing the video, we also understand that sometimes the good ol’ fashioned way – reading it – is just as valuable. So, we have edited down the interview a little and have published it in three posts, with this being the final part. You can read part one and two here:
Part I: https://www.21x.eu/post/21x-the-european-token-exchange-with-a-reassuringly-german-personality
Part II: https://www.21x.eu/post/21x-the-european-token-exchange-with-a-reassuringly-german-personality---part-ii-iii
We have included a timestamp for each question, so you can easily go to the relevant section in the video if you wish. While the flow of the text may not be perfect, we have tried to remain as faithful as we can to the recorded interview.
Enjoy the read – and do tell us what you think of Max’s perspective on developments in 2024 and further into the future, for both 21X and digital assets in the capital markets.
46:02 Dominic Hobson: What type of issuers is 21X aiming to attract?
46:41 Max Heinzle: In the first place [we are looking at] issuers that are predominantly asset managers that already have products, that want to start trialling and take advantage of this new technology. So launching alternative investment funds or also the likes of issuers for bonds. I think these are a variety of different types of companies. We also know that there are some limitations again in the DLT Pilot Regime as to how big those companies can be, in particular when looking at equity offerings, for example. But we’re going to see products being launched that are rather also traditional products as we know them. Like for example, electronically traded- sorry, exchange traded – notes or exchange traded funds that in the next step will be made available in tokenised form or to fractionalise. Also the likes of private equity, private debt instruments, that normally would have a much higher threshold or minimum investment or subscription amount. These are certainly products that are in the pipeline. And that we will also see real estate, tokenised real estate, as part of financial instruments being wrapped into baskets. These are some of the examples.
48:27 Dominic Hobson: What type of investors is 21X aiming to attract - mainly institutional, mainly retail, or a mixture of both?
48:40 Max Heinzle: We’re going to have both institutional and retail investors connected through the likes of brokers, financial institutions that are connecting to our regulated market. So the nature is really going to be both retail and professional, respectively institutional investors. Getting back to the question that you asked earlier: Who else is going to be a participant on that market infrastructure? Very traditionally we also have liquidity providers that we have entered into partnerships and projects with, that we are connecting either through API or even smart contract based. And then already, like I mentioned before, we have a set of listing agents that we will be working with that facilitate driving products also to 21X. On the buy side, more along the lines of, the likes of, brokers, neo brokers, banks, neo banks, and maybe also one or the other crypto exchange that wants to expand their product and service offering.
49:52 Dominic Hobson: If 21X is focusing on the funds business, what about fund administrators and custodians?
49:57 Max Heinzle: Obviously custodians, like I did mention before, are an integral part of our market infrastructure. Moving forward some of the, and just given the market stage and development where we are, development stage that we are at, some of the partners that we are looking to integrate already have their own custody set-up implemented. Others will make use of our integrated global custodial services. So that’s certainly another important part that you need in such a market infrastructure. And then rightly so, as you said, also fund administrators. So we are very pleased to be also working together with, for example, Apex Group. They are taking on, for example, also specific services in that field.
50:57 Dominic Hobson: Does the fact 21X aims to embed its technology into customer systems - whether it’s an exchange or something else - mean 21X is also a technology business, or is it really about creating an ecosystem?
51:36 Max Heinzle: Yeah, I think that is right. I mean, the ecosystem that we’re trying to build will be critical for the success of a working, newly functioning market infrastructure layer where we need for certain roles to be taken care of. That in essence takes quite a lot, as we all know, and it depends on bringing various parties also to the table. I think that will be critical for our success. The fact of the matter is that things are running on blockchain, but I think we all know that most of us, we are using the Internet, but not many of us really know what is happening in the back and how the Internet functions. I think the kind of same thing goes also for blockchain technology. In the end it will be the low hanging fruits; it will be the efficiency and cost cutting; the efficiency gains and also the potentials for cutting costs that will supersede there and actually drive adoption. And for that purpose, we need to start with the underlying required infrastructure for that to happen.
And does it need to be regulatorily compliant? I think, that being said, we see that many financial institutions or also intermediaries are delving into this subject. Some of them have been already early to adopt, others are still in the process of making decisions or are in the process already of implementation. So, it’s going to take some time. I’m positive to say that we see that what this trend that has been kicked off now and that development. As also Larry Fink said a few days ago, this is surely one of the new trends for this to actually come to life.
53:49 Dominic Hobson: Success will take time. So, What is your shareholders’ view of how quickly you can turn what you’ve built into revenue? how you can scale it up and start actually to change the capital markets of Europe?
54:46 Max Heinzle: Lately, and just given that we already started our journey, like a good six and a half years ago, or almost, you could say seven years ago, our shareholders were always convinced and have a strong background also in blockchain technology. They were early adopters themselves as well. The conviction that the technology is here to stay and that it is going to have a big impact on capital markets as we know them today, referring to TradFi, I think that is an integral part, to actually have the means and the backing and also the conviction to enter such an innovative project and go down a route that obviously will lag in showing returns. But after all, it’s highly scalable and I think the potential that derives from it is enormous. So with the likes of some of the newly engaging strategic, more strategic, partners, I think there is a much more long-term perception of what it is that we are doing here.
Actually, I catch myself sometimes, Dominic, being overly optimistic and wanting to see that things happen much faster. I’m a very impatient guy. I hear that from my employees and colleagues all the time. But, after all, anybody that has worked in capital markets and has dealt with change in banking and finance, knows that things do take time, and we’re, after all, talking about also systematic change. So I’m pleased and I’m happy to, on the one hand side, see that we have this backing. I mean, some of the shareholders of 21 Finance are family offices that have not only trusted us and followed our journey over the last couple of years very closely,but are obviously tremendously excited that we are in a position to become one of the first, if not the first, company in Europe to provide such an infrastructure. And what reconfirms it is that we see through the various conversations that have now started to really significantly increase, that there is a strong shift in sentiment and conviction. I mean, one thing that just goes to show is that most of the world leading banks have implemented and set up departments specifically addressing digital assets and have also launched or are engaging in such projects. And so it will take time. But nevertheless, we see that to get the ball rolling, we are getting all the ducks in a row, if you so want, with the respective partners. And the team and myself are very excited to finally start operating this new market infrastructure.
58:11 Dominic Hobson: What are the main obstacles to adoption of token technologies by incumbent financial institutions?
58:59 Max Heinzle: For sure [is] the fact that it has a new underlying technological stack. So, we’re talking about a new system, if you so want, and it needs to be connected, often, to old systems still, because a lot of those systems are just the underlying running systems. So there’s basically that part which is slowing things down. I think it’s also a question of education, understanding, regulation. It does take some time. After all, it is a new material and it does just take time for things to be reaching a point of understanding. And also, obviously, risks that derive from this new field of operating with digital securities, right? I mean, there’s a variety of liability and other risks that come alongside this subject that slows things down, right? We all know that, for example, receiving licences and receiving approval, just take us as an example, is a process that itself will take about a year’s time to be done. And if one considers all the preparation that went into it before you could even say it’s more along the lines of one and a half years to almost two years. So that, in itself, I think are a couple of good reasons why it will just take time. But nevertheless, for me personally, there is no question about whether it will happen or not. So that’s also the reason why we are thinking a bit more long-term.
We want to really try and now shift and be a driving force for projects to not so much be any more pilots, but actually really be real world use-cases, real world asset tokenisation, like they say, and then scale up our operation. And also the amount of products that we are issuing alongside with our partners.
01:01:25 Dominic Hobson: How important to the lack of progress is the lack of inter-operability between blockchain protocols and blockchain protocols and traditional systems?
01:01:58 Max Heinzle: I think that it is a reason why maybe things are moving [slowly]. I mean, if we had more standardisation already, that would certainly accelerate also the development of this new market. But it is, after all, still a race that is to be won. And I think that there are some aspects and also some clear benefits of certain infrastructure layers, which is also why certain market participants are going to probably have to come to a consensus on what underlying technology is being used. And nevertheless, at the same time, interoperability is making advances. There are big advancements that we are seeing also in the space of interoperability. But yeah, I would agree. I think that interoperability as a topic for itself is another reason why things are not developing as fast as they could. If we had, say, an underlying standardised infrastructure layer.
01:03:14 Dominic Hobson: Does 21X encounter resistance from organisations that fear they will be disintermediated?
01:03:51 Max Heinzle: Funnily enough, not so much, Dominic. I think that there is still a lot of confidence in traditional capital markets and I think that, at the same time, it’s more the case that most of those large financial institutional players that we are dealing with, they see tremendous potential for themselves also moving forward: the cost cutting potentials for their current operations, being able to tap also into a new client base, reaching out to new customer segment. I think that’s definitely overweighing the sentiment and the feedback that we are getting.
And I must say I think that it’s also pretty obvious that some of the traditional financial institutional players are also making moves themselves. I mean, they see this themselves also as an opportunity for them to maybe make shifts or amendments to the way they are set up in the future and also to the services and products they can provide in the future to their clients. But I think that, like I said earlier, Dominic, it will become very important for us to actually build an ecosystem and get market participants convinced that enabling tradability and trading and settlement and driving liquidity into tokenised securities is not a one-man job.
01:05:32 Dominic Hobson: When will the founders of 21X know that they have succeeded in transforming the capital markets?
01:06:04 Max Heinzle: So first and foremost, maybe to take first the short-term perspective, I think for this year in particular. For us, the big milestones and our core objectives surely are that we obtain the licence, that we take 21Xx live, that we see the listings of the first products, and that actually the magic starts happening so that we actually see that operations are running and that this is also being done in accordance with regulatory requirements. I think that in itself is surely [enough] for this year on our plate. And then if we look ahead and you mentioned like a five-year time span, and probably you’re talking about five years, because the DLT Pilot Regime is supposed to run now for three years, and then they’ve already talked about a possible extension of another three years. So that would make it, given that the DLT regime started last year in March, pretty much that five years.
Moving forward, and what I think is going to happen, and also maybe to address specifically your question on the threshold. I hope not to get into any troubles for saying this but let me take an optimistic standpoint here. And that is, I think that what’s likely to happen is that the EU DLT Pilot Regime will become effective, hopefully already before the five years’ time have passed. But possibly then, right, because it is supposed to, like I said, run for three years and then extend it possibly for another three years. So that’s my one hope. And the other hope is that the regulator comes to understand that the thresholds, if we put them into perspective and if we see that institutional adoption is actually happening from the likes of regulated financial institutions and that we can prove to the regulator that things are running the way they are supposed to, that we can then also hope for the release of certain thresholds. I remain very optimistic there because, after all, when we are looking at market relevancy, that’s surely the direction that it will have to go towards. By the way, having said that, that would also be my hope for the product restrictions that we still have, right? Excluding structured products as an example. I think I’m very optimistic there. I think that what we will be seeing is that the regulator will start to walk and run together also with the market providers and this market will actually become a much less … There will be much less restrictions than there are still today.
01:09:07 Dominic Hobson: Max Heinzle of 21 X, thank you very much for taking the time to share what you’re doing with the members of Future of Finance.
01:09:15 Max Heinzle: Thank you, Dominic. It was a great pleasure. Thank you for giving me the possibility to talk about what we are doing today.