Tatiyana Emylia, DigitalCFO Asia | 6 September 2021
In the rising age of blockchain, why CFOs—especially small to midsize firms—may want to start paying attention.
Oi Yee Choo, Chief Commercial Officer (CCO) of ADDX
When one falls into routine, it becomes easy to assume their way is best. Why bother reinventing the wheel? Looking for alternative methods always involves some type of risk, and they may not even pay off in the end. ADDX (formerly iSTOX) challenges this notion. The global private market exchange consistently endeavours to make capital markets more efficient for both issuers and investors using blockchain and smart contract technology. Oi Yee Choo, CCO of ADDX, spoke with DigitalCFO Asia on how taking one leap of faith—digitising with blockchain technology—could streamline capital funding like never before.
What exactly is blockchain?
This was what a traditional exchange looks like: there’s a matching engine that processes the trade, brokers to execute it, and the depository. As three separate bodies, they always need intermediaries to reconcile between them. The central depository has up to 400 employees managing this.
“Why have we not evolved in any significant way since the day that we went electronic trading?” Oi Yee asked.
Blockchain answered. Birthed from Bitcoin, its evolution into Ethereum enabled smart contracts to be placed on top of blockchain which transformed it into a very powerful tool. It is an immutable, unhackable ledger that can also automate a variety of transactions, reducing the need from 400 managers in a central depository to five, which is how ADDX operates.
The hype around blockchain technology
Three words: efficiency, efficacy, (and) cost. Blockchain can directly translate to raising more capital for companies, especially for those looking to announce an initial public offering (IPO)—a trend Oi Yee noted has been picking up in recent years. Where companies traditionally have to be considerably big to achieve this, blockchain presents more options for companies too small for the bond market to explore smaller capital raises. For instance, CGS-CIMB worked with ADDX to raise a first tranche of 10 million SGD from investors with an interest rate of 1% p.a. over three months to fund CGS-CIMB’s operating expenses and near-term obligations. The paper has since been rolled over in a second tranche, which raised 30 million SGD with an interest rate of 1.1% p.a. over three months. Beyond more growth avenues for companies, CFOs can embark on fundraisers at a lower cost (with reduced use of bank credit lines for operational capital), and lower risk, since funding is derived from a wider and more stable base of both individual and corporate investors.
Benefits are not limited to corporations, either. Where banks increasingly face regulatory and cost pressures, any solution that enhances tracking or lowers cost is desired. Distributed ledger technology is a current hot topic within finance institutions, as it digitises a lot of activity often required to service a financial product, like bonds. ADDX uses smart contracts that automatically calculate who are bond holders, how much they are owed and pays them accordingly. Even commercial paper, when digitised, takes half the time when it comes to speed to issuance than traditional.
Where an increasing number of companies, including the likes of UOB and Singtel, have embarked on digital bonds, more may follow suit.
Resistance to change
Despite promising big wins, not all are eager to commit. Oi Yee recalled instances where companies were unable to adapt to ADDX’s digital investment processes and acknowledged that for some, acceptance may take time due to the need to readdress internal controls and management to adjust. Larger companies may also be more cautious as they have more layers of risk to work through where some may only have started considering capitalising on blockchain last year. Unravelling traditional systems, and especially talent pools and hierarchy built for decades around them will be difficult, Oi Yee said, but nonetheless, should ultimately be built where the world is heading.
There aren’t enough competent blockchain workers to keep up with the industry’s enormous intentions to spread it out across all sectors of business, just as there aren’t enough AI professionals. As additional blockchain initiatives prove their worth in 2021 and beyond, the number of projects in development will rapidly grow, putting individuals who have been wise enough to upskill themselves in command of a sellers’ market.