FinClear: Putting DLT to work in clearing and settlement
Editor’s note: At the recent Hong Kong FinTech Week 2022, Max Hsu, a developer advocate at Digital Asset, sat down with David Farrell, the founder and CEO of FinClear, Australia's largest independent market access technology and infrastructure provider. They discussed FCX, FinClear’s cutting-edge distributed ledger technology (DLT) platform facilitating cap table management, capital raising, and private registry trading, and dived deeply into how FinClear is putting the Daml-based platform to work in streamlining asset execution, clearing, and settlement. The following is the transcript of their conversation, which has been lightly edited for clarity. You can also watch the interview below.
Max Hsu: Hello, everyone. My name is Max Hsu, and I’m a developer advocate at Digital Asset. Thank you for joining this master class session. Today, we have David from FinClear, a Sydney-based FinTech company that provides trading, clearing, and settlement services for listed companies. Specifically, today we're going to be exploring the private share registry space in the context of distributed ledger technology. I'll have David introduce himself and give us a little bit more detail on what FinClear does and its business vision.
David Farrell: Thanks, Max, and thanks everyone for joining us today. My name is David Farrell. I'm the founder and CEO of FinClear. FinClear is seven years old, and we're an execution, clearing, and settlement business here in Australia. We're a very broad business. We cover broad cross sections of the market from providing SaaS solutions to large banks, like CommSec CBA, through to what we call mid-tier stock brokers, the likes of Shaw and Partners, through to wealth managers and some FinTech players that use what we call our pipes and plumbing as well, the likes of Superhero and State.
We execute, clear, and settle, we think, from a retail perspective, somewhere between 15 and 50% of all retail transactions that go through the ASX on any given day. We sit on about $130 billion of client assets, all held directly, about half a million end clients, and we use a broad suite of technology to support what we call our heritage business.
Max: That's a lot of services that you guys are providing. And is it safe to say that everything that you've mentioned right now applies to mainly publicly listed companies? I'm asking this because I want to focus on the FCX platform, and I believe the FCX platform is the one that is using the tech stack that Digital Asset provides. Could you give a little bit more color on FCX?
David: Yeah, absolutely. So you're right: Our existing business is obviously very broad and caters to listed securities using current infrastructure here in Australia. We are a CHESS participant here working with the ASX. But what we saw was an opportunity to use distributed ledger technology. We have a team already looking at developing into the CHESS replacement here, ASX, that's obviously using Digital Asset for that replacement project. And because of that, some years ago, we started looking at the technology in the application of private markets.
Now, why private markets? Because it's completely divorced from what we're doing. Well, first and foremost, it's a solution to a problem. So what we're talking about here is building a platform, a capability to host and provide a more efficient ecosystem for unlisted companies here in Australia. So first and foremost, it's a registry capability or a cap-table management. Then we start to add tools like automated capital raising tools for primary and secondary events. And then ultimately we'll look to become a liquidity venue in our own right, what's called a tier-two exchange here in Australia.
It's important to note that while this is an opportunity for us to solve a known problem—and we think that we're going to be successful in this space—the actual driver was because we're a very mature market and we're a large and highly trusted counterpart underpinning large parts of the market, we wanted to use this technology in a way that we can look to develop what we call our “heritage infrastructure,” or all that listed infrastructure. So over time, although we're using the DLT today and Digital Asset to solve a particular problem, we're looking to apply that into our old-world or heritage infrastructure to make our clearing and settlement capability across all those listed market transactions more efficient.
Max: How is it for traditional users and their experience with unlisted markets, and what value does FCX provide to users in this space?
David: Yeah, look, that's really easy: The traditional user experience is pretty poor, because we've been through it ourselves a number of times through three, four, five capital raises. It's very dispersed, it's not centralized, lots of counterparts. You have a registry, you have a corporate, obviously in this case ourselves, you have an advisor, a lawyer, your company secretary, and there are pieces of paper flying around everywhere. So nothing centralized, nothing coordinated, all managed essentially via a spreadsheet, and no one really in control of that spreadsheet as a source of truth.
And so we look at what we're doing with the DLT, we're looking to centralize all that function. We're looking to streamline it, make it much more efficient, but importantly, put it on distributed ledger, an immutable source of truth, can't be tampered with, but also then have digital wallets where all the investors and the corporates can come in and see a real live implementation of their holdings and the cap table.
Max: I find it really exciting that because FinClear has gone through the experience, they're able to actually work with this problem from a firsthand point of view. It's not like you guys are solving someone else's problem: This is something that you guys have been through and have experience in knowing where the pain points are, and then being able to take that technology that you have and actually resolve these pain points. So it's a very exciting journey and I'm really looking forward to seeing at the end of this road what you can accomplish.
Now, speaking from a technological point of view, as we mentioned, we're using technology to solve the pain point that you have seen, a lot of manual processes. How did the decision to actually use a distributed ledger come to fruition, versus a centralized database?
David: Yeah, look, it was pretty straightforward from our perspective. We'd spent some time looking at the DLT through the ASX CHESS replacement project, and we looked at it from the optic of, well, how can we provide a more efficient ecosystem, particularly around the clearing and settlement capability? One of our criticisms of listed markets is that there are just way too many touch points. There are way too many service providers touching a ticket. And so we looked at it from, well, if we're using distributed ledger technology, we're tokenizing securities, we're bringing cash onto ledger as well, and hopefully we get to talk about that a bit later. Then as soon as you've got those two on ledger, you can start to automate and do some really clever things like atomic real-time settlement. And if you look at our DNA, we're a clearing and settlement business. We're always looking for efficiencies in that space. So we execute, clear, transact, I don't know, $700 billion worth of transactions on a yearly basis. We have 180 staff across three states, and we wanted to build a new capability that was scalable and wasn't as intensive from a people perspective.
Max: That completely makes sense. And I heard you mention the word tokenize, tokenize the assets. This is a word that's being used a lot in this space, and I just want to dig in a little bit deeper on this. How does tokenizing assets provide value for your stakeholders? Could you shed some light on this aspect?
David: It's an efficiency perspective first and foremost, but it also goes to direct digital ownership. So one of the things that we didn't touch on here is that our business, our heritage business, supports what we call direct ownership via quite a unique structure here in Australia called the HIN, and that's name on register. And that's different to the rest of the world, which runs an omnibus or a beneficial ownership only. Here in Australia, when you buy shares through your stock broker or advisor, you get registered with a HIN, which then puts your name onto register. And that's different, like I said, from rest of the world: Your stockbroker would buy your shares and they hold them in a beneficial capability and a custodial capability.
Here in Australia, we're very strong proponents of individuals owning or having their name on register rather than putting an intermediary between themselves and their assets, like a custodian. And so here is, to my mind, a very early form of tokenization. It's digital, it's here in Australia, and so what we wanted to do was expand that universe and provide that digital direct ownership via tokenization. And so if you think about what we're doing, we're actually building a wealth platform, or wealth infrastructure, based on direct ownership via HIN and tokenization of securities, where everything sits in an individual's digital wallet rather than being held by a custodian.
Max: That completely speaks to the real-life use cases of tokenization, right? Those are fundamental properties of tokenization, but when put into a business perspective, such as direct ownership—and you had mentioned the atomic settlements—these fundamental properties are actually providing value to the end customers, these individuals. And I guess you guys have actually found a very practical way in terms of putting tokenization in context of the space that you’re working in. I think that is a real testament to the whole process of tokenizing assets and creating digital assets. And so that's great to hear.
I'm curious, when we mentioned custodians, brokers, these are intermediaries in the space. I presume that these intermediaries will still play a role in the space in the future. Can you talk about how, or if they need to make any big technological changes on their end to participate in this network that you guys are building?
David: Yeah, look, again, it's a good question and we're not quite sure. It's an interesting one. At the moment, we're running a private implementation of the ledger. We do hope to over time look to open it up, particularly working with Digital Asset and the Canton capability. But for the moment the intermediaries, the brokers, we're hoping we'll use FCX, use this private market capability, as a more efficient way for them to raise capital for private companies. So really what we've done here is create the shell, create the registry, create the tools, the ecosystem, for a more efficient marketplace. And then we're in addition, we don't want to be the advisor. We don't want to be the corporate advisor. We don't see that as our role. We obviously see our role as being the platform in the market eventually. But we're hoping then that the brokers will come and use this capability and promote this capability to corporates and high net worths, because it is a high net worth, or a 708, platform here in Australia for them to use.
Over time, of course, there may well be opportunities for partners to take nodes, that want to share capabilities with us, but at the moment, like I said, it is a private implementation.
Max: That's great to hear. You mentioned that this is a process. It's a slow, technological process nonetheless, but at the end of it, it's to hopefully involve everybody in each of these steps to participate in a tokenized ecosystem. Now, with regards to the whole process and this technological change, how did you eventually end up deciding on using Daml for the underlying tokenization technology?
David: It was a really simple choice for us. And actually we think it's one of the big advantages in terms of why we've been able to get on so quickly and develop and get this platform to where it is today. It was a very simple decision for us. We were going to have to develop into the new CHESS environment, obviously developed on Daml by Digital Asset for the ASX. We were going to, over time, start to have our own development resources to support that, and so we really just did a quick stock take of the capability. We came to the conclusion very quickly then in terms of smart contract capability and financial markets, Digital Asset, Daml, were really at the forefront of markets. And so once we had some confidence around that, it would've been foolhardy from our perspective to split assets, so to speak, and go and develop or do something in a different application or a different language. So it might sound simplistic, but most decisions are, or should be, pretty simple to make.
Max: Right. And in hindsight, explaining things now, everything seems more simplistic than it actually is. The entire process up until arriving to this point today, always in hindsight seems quite clear. We're painting a rosy picture through all of this. Tokenization seems to be the definite answer today. Could you share with us some of the challenges that you faced when building this platform and when arriving at this conclusion?
David: Yeah, we're not concluded yet, and I'm sure there'll be challenges, but to start with, it's been a remarkably trouble-free process to date. And we've managed to get there very quickly. I think that's because of this vision we had in terms of application. We knew exactly the problem that we needed to solve, and so we knew how to apply the technology to solve that problem. And really, if you think about what we've done, we've used a distributed ledger capability to do one very simple thing, and that is tokenize security, tokenize some cash on ledger, and then start to put some smart contract capability around that for some automated functions, and move to atomic, or same day, or instant settlement capability.
Where it gets complicated are some of the functions that you wrap around that, but we've made that incredibly simple from our perspective by using much of our existing infrastructure. We're a very mature business. We run a dozen or so microservers, Java or AWS, and so what that does is support our listed transactional capability, and what we've done then is apply that, or wrap that around, this ledger capability. And so from our perspective, probably the more complicated part was how we actually did that, what technology to apply in the most efficient way, but at its core, keeping that very simple philosophy of what the ledger is best for in our view, is actually keeping it very simple and those transfers of assets.
Max: I understand that we'll be seeing some new features very soon and that the FCX platform is launching in stages—for example, the wallet and the capital raising tool. I was wondering if you could show us a quick demo on the platform.
David: Yeah, absolutely. We'd be delighted. Over to the demo.
FCX Demo:
The FCX wallet is a unique, secure, and efficient way for investors to maintain and transact on various assets from a centralized and secure location. An investor can set up a wallet for one or multiple investment entities, which could be a personal wallet or a corporate entity holding assets for an underlying beneficial holder, like a self-managed superfund or a family trust.
The process to set up a wallet takes minutes. An investor simply completes the wallet application on-platform, providing information relating to the investment entity, such as name, address, and details of any authorized persons. The wallet set-up has an integrated, know-your-customer verification. This ensures that any assets held within the wallet are securely controlled by their rightful owner.
Once the wallet has been set up and the verification has been completed, assets can be transferred into the wallet. Once assets are held within a wallet, the investor can manage those assets and participate in future events on-platform, such as a capital raising or a liquidity event.
Investors can easily manage cash via their wallet on the FCX platform. Investors simply deposit cash from their regular banking institution. There is no need for an investor to set up a new bank account. Once an investor has deposited their funds, the cash is held within a FCX trust account and a cash representation is created on the ledger via a cash token. By tokenizing cash, investors can securely and efficiently commit their funds to various opportunities available on the FCX platform, such as participating in a capital raising or purchasing shares via the FCX liquidity venue. Investors are easily able to withdraw available funds, in most circumstances instantaneously.
FCX allows companies and their advisors to easily manage the capital raising process on the platform, from setting up the key offer information and documentation, all the way through to settlement. FCX ensures the capital raising process is controlled by the company and provides the functionality to control investor access and permissions, track the status of documentation, execution, and payments, all while maintaining full transparency over the entire process.
Equally, investors can easily participate in a capital raising on the platform. Investors will have permissioned access to key information and documentation, bid and subscribe, execute documents via DocuSign, and pay for their investment, plus track and manage the entire process.
Investors also have the assurance that once complete, title to the assets will be instantaneously deposited directly into their wallet at settlement. Any documentation relevant to the raise will be securely stored and accessible during and post the capital raise.
Max: Well, thank you David, for your time. Thank you so much for providing your insights on the FCX platform. It's been a very informative discussion. And for anyone that wants to learn more about FCX, you can go to their website. Thank you.
David: Thanks Max, and thanks Digital Asset for having us along today. It's always great to talk about FinClear and FCX.