SINGAPORE -- A digital exchange, which is being touted as the first for trading fiat money and cryptocurrencies with backing from a traditional bank in Singapore, was launched on Friday.
The full-service platform uses blockchain, or distributed ledger technology, to allow traders to exchange four currencies -- Singapore, U.S. and Hong Kong dollars, and the Japanese yen -- for four cryptocurrencies: Bitcoin, Ether, Bitcoin Cash and XRP.
Hosted by Southeast Asia's largest lender, DBS Group Holdings, the DBS Digital Exchange will also function as a regulated platform for the issuance and trading of digital tokens backed by financial assets, such as shares in unlisted companies, bonds and private equity funds.
DBS has received approval in principle from the Monetary Authority of Singapore to operate organized markets for assets such as shares, bonds and private equity funds. It is also allowed to operate the platform for the exchange, according to the bank.
The Singapore Exchange has taken a 10% stake in the DBS Digital Exchange, and the two will explore opportunities to deepen the liquidity, scale and growth of the city-state's capital markets for digital assets and currencies.
There are many companies around the world that operate exchanges for digital and conventional currencies, but a platform backed by a bank is seen as rare.
"The exponential pace of asset digitalization provides immense opportunities to reshape capital markets," said the lender's chief executive, Piyush Gupta, when DBS revealed it was going ahead with the exchange in early December. That was shortly after Singapore's central bank announced the winners of licenses to operate the city-state's first digital-only banks.
"For Singapore to become even more competitive as a global financial hub, we have to prepare ourselves to welcome the mainstream adoption of digital assets and currency trading," Gupta said.
For the moment, the platform is only open to professional investors -- an exclusive club for the likes of corporate fund managers who are clients of DBS, rather than ordinary retail customers.
"DBS will be offering a range of services that will help garner the adoption of the asset class," Matthew Dibb, chief executive of cryptocurrency index fund provider Stack Funds, told Nikkei Asia. "Their launch of direct trading in select currencies will further give confidence to investors, now that a large local player is putting their name to the cause."
Singapore's digital banking license winners -- which include a consortium of super app provider Grab and Singapore Telecommunications, China's Ant Group and Southeast Asia's most valuable company Sea -- can offer services like those of traditional financial institutions such as DBS, but cryptocurrency trading was not on the agenda for the central bank in offering the permits.
The DBS Digital Exchange for cryptocurrencies as well as other financial products is a way for the lender to stand out from the pack as digital disrupters threaten to chip away at its market share, noted Tay Wee Kuang, an analyst at Phillip Securities Research.
"I would say it is more about diversifying their own business," he told Nikkei Asia, noting that the COVID-19 pandemic had weighed on the earnings of DBS and its two local rivals Oversea-Chinese Banking Corp. and United Overseas Bank.
The three banks saw their net profits for the three months ended September fall between 12% and 40% on the year due to continuing pressures from the health crisis and reserves set aside for bad debts as companies ran into difficulty repaying their debts.
The new exchange is the latest in a series of efforts by DBS to keep up with digital trends. The bank spent 4.4 billion Singapore dollars ($3.3 billion) over the past four years on technology and has, in recent months, publicized its investments to the media.
DBS is using artificial intelligence and big data to enhance its digital services, using predictive technology to offer investment suggestions to customers, for example.
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In September, DBS said it was tapping artificial intelligence and big data to beef up its virtual offerings, where predictive technology will be able to offer suggestions to customers on how to more effectively manage their money or cut losses on investments.
Phillip Securities' Kuang, however, said it was unclear how much the lender's new digital exchange platform would contribute to earnings. That skepticism was echoed by Jefferies' Singapore-based analyst Krishna Guha: "There are other exchanges out there ... so I am not sure. Is it unique?"
Guha told Nikkei Asia it was unclear how DBS would generate revenue from its platform, given that the bank has not revealed in detail how the digital exchange will provide a steady stream of income. Whether trading commissions on the new platform will differ from those on existing trading platforms has not been disclosed, either, leaving open the question of how popular it will be with investors.
DBS, meanwhile, says its initiative has huge potential. Market tracker CoinMarketCap estimates that last year, global daily trading on the world's digital exchanges ranged from $50 billion to $100 billion.
Elsewhere in Asia, others are attempting to ride the digital wave. Unocoin, a technology startup based in Bangalore, operates a trading platform that allows for the exchange of the Indian rupee and Bitcoin in India.
In October, it announced a $5 million series A funding round with investors Draper Associates, XBTO Ventures and 2020 Ventures, which put Unocoin's valuation at $20 million.
In Singapore, securities trading platform iSTOX, backed by the Singapore Exchange and state investor Temasek Holdings' subsidiary Heliconia Capital Management, enables multiasset issuance of fractionalized securities, such as stocks and bonds, and makes them accessible to investors. DBS is thus following up on what iSTOX began in February.
"ISTOX welcomes the entry of DBS into the digitized securities space. The move enhances the ecosystem for security tokens and positions Singapore as the premier global hub for digitized securities," said Choo Oi Yee, chief commercial officer at iSTOX, after DBS announced plans for its exchange.
Bobby Ong, co-founder of cryptocurrency market overview provider CoinGecko, also lauded the the DBS initiative.
"It shows that large banks such as DBS are now looking at cryptocurrencies as a legitimate asset class and are seeking opportunities to offer this asset class as an investment to their customers," he said.
"This move by DBS will most likely be emulated by other banks all across the world soon. I believe that banks will treat the purchase and sale of Bitcoin similar to how banks are already offering gold for purchase to their customers."
The value of major cryptocurrency Bitcoin has risen rapidly over the past several days, exceeding $20,000 on Wednesday during U.S. hours and briefly entering the $23,700 range Thursday, as heavy liquidity created by prolonged monetary easing flowed into the cryptocurrency.
Bitcoin prices began gathering steam at the end of October, more than doubling over two months as the virtual currency's market capitalization has reached $430 billion. Other cryptocurrencies such as Ethereum have seen similar rises.
To solidify its position as a financial hub, Singapore has been keen to deal in cryptocurrencies. In May, state investment fund Temasek revealed it had joined a nonprofit organization formed to facilitate the development of Facebook's Libra cryptocurrency to explore its use.
