We sat down with Luka Gubo, CEO at Blocktrade, to find out how he combines his professional experience with technological developments to advance Blocktrade’s mission to transform the way small and medium-sized companies raise capital.
Luka, you have a background in trading, investing, and risk management. How did you become the founder and CEO of Blocktrade?
I started my career just before the great financial crisis, as a high-frequency trader at a small proprietary trading firm, where we traded mostly futures and other derivatives. Our most important strategy was macroeconomic event trading, which means that we tried to enter the market a couple of milliseconds after the release of major macroeconomic data, such as GDP growth or employment numbers. Our servers were collocated with different exchanges so that our orders arrived at the order books as soon as possible. At some point, we were executing several billion US dollars worth of futures on CME per month.
After the great recession, large competitors with better access to these markets entered the picture, and trading became less profitable, so I started focusing on more long-term investing. I developed a couple of investment strategies based on theoretical and empirical models, one of which I implemented into a first fully quantitative fund in the region. I have always been at the intersection of trading and technology, so I quickly realised – especially after reading the Ethereum white paper – the potential of blockchains on primary and secondary capital markets. I wanted to contribute to this transformation and build on my experience to develop new processes and increase access and transparency of markets. In 2018, I set the vision for Blocktrade, and our goal is to use these latest technologies to improve the inner workings of capital markets, mainly in Europe.
Blocktrade is applying for the authorization to perform investment services in the European Economic Area as per Directive 2014/65/EU (MiFID II). What is this directive, and what does it mean for investors?
MiFID II stands for Markets in Financial Instruments Directive, which is part of the broader European capital markets regulatory framework. The directive regulates all activities related to exchanges and investment firms (or broker-dealers, as they are called in the US) that provide different investment services on the primary and secondary market. MiFID II has more than 30,000 pages, including its delegated regulations and regulatory and technical standards. But there is also other relevant legislation that regulates European capital markets, such as the Central Securities Depositories Regulation (CSDR), Prospectus Regulation, Market Abuse Regulation (MAR), Settlement Finality Directive, and Anti-Money Laundering Directive (AML/CTF Directive) and many others.
The goal of these regulations is to protect investors and ensure market stability and transparency while reducing risks and enable the efficient allocation of funds in the primary and secondary markets. Although this objective is admirable, one could say that EU capital market regulations are overly complex, and they harm investors and especially issuers trying to tap the markets for funding. Furthermore, disruption is hardly possible because of the large regulatory, operational, and capital requirements to enter the industry.
By applying for such a licence, we aim to make it much more convenient and less expensive for issuers to raise capital from investors. At the same time, we want to provide large and small investors with access to previously inaccessible asset classes. The technology allows us to reach that goal, while the license will provide us with the necessary trust from investors and other financial institutions.
In October 2019, you announced that Cryptix completed the acquisition of Blocktrade. Who is Cryptix, and what does this mean for the future of Blocktrade?
Cryptix is a Swiss-based full-service provider that focuses on disrupting the finance industry with a long-term focus on combining both worlds: regulated and decentralized finance. Being part of the Cryptix Group has many benefits for Blocktrade: Cryptix shares and even expands our vision, and, together, we connect the entire financial ecosystem. As a first step towards creating the people’s financial marketplace, Cryptix is applying for an EMI licence while Blocktrade is applying for a MiFID II licence.
With a plan to combine an entire financial marketplace in one app, Cryptix aims to offer a seamless experience for users, who will be able to access different financial services and products. Blocktrade will take care of the capital market part, both on the primary and secondary market side.
The future of Blocktrade is very bright. We have broadened our mission: We not only facilitate access to the primary market but, by offering fundraising, structuring, advisory, and placement services, we also help European entrepreneurs become more competitive in the global environment. Together with our technology for the secondary market – which we will operate as an investment firm when we get the authorization – we will be able to cover the full spectrum of capital market services, including safekeeping and custody, settlement, reporting, routing, and execution.
Blocktrade will be offering the listing of security tokens for trading. When do you expect this to happen?
Listing financial instruments on our multilateral trading facility (MTF) will be possible after the licence is granted by the regulator. We are not allowed to touch securities until then. I think 2020 will be an exciting year for existing issuers of security tokens but also for new STOs.
What will the listing requirements for security tokens be?
There are various requirements that include legal, governing, technical, and financial aspects. From the legal perspective, only a legal entity can issue securities, and their statues and articles of association have to allow the transferability of these securities and have clearly defined rights for the owners of the securities. Before the listing, the securities must be entered into a book-entry form with a CSD.
The governance-related requirements include that a company has clear company governance in place – preferably with independent board members – that facilitates the primary market. Furthermore, management and board members need to pass a fit-and-proper assessment, and management must be trained on the MTF’s rules on reporting, market abuse, insider trading, transparency, and governance. On the technical side, we aim to support as many security token protocols as possible since there is no industry standard. However, there might be a need to switch to a different protocol, potentially a permissioned DLT, to enable the streamlined, straight-through processing of executed trades. When it comes to financial requirements, it is important to be aware that the minimum size to be listed on the secondary market is currently EUR 1 million in market capitalisation. Although we plan to support large and small issuers, we need to adhere to this limit. However, the requirements might change once we see what the actual liquidity of these securities will be. Finally, while we prefer established business with growing revenues and profits, we do not exclude startups that have not yet reached profitability.
Do you have any security tokens lined up for the launch?
Our strong network includes several strong issuers of security tokens, and they are eager to provide liquidity to their shareholders.
What are some of Blocktrade’s institutional services for banks and other investment firms?
We will offer trading opportunities to a range of institutions – from brokers to fintech companies to (neo)banks and investment firms – and we create new revenue streams for them through white-label solutions. They will be able to execute their clients’ trades on the secondary market (for both cryptocurrencies and security tokens) and offer direct investments in STOs to their clients. Businesses that do not have their own platform to raise capital will be able to use our white-label solution, while unlicensed entities will be able to become tied-agents, which means they will be able to act as an STO investment platform and enable routing of clients’ orders to our MTF.
What are some of the features and tools that we can expect to see on the Blocktrade platform?
Our goal is to provide a marketplace where demand and supply for digital assets meet. A primary market where companies issue securities in which investors can invest directly is one of the essential features that we are building. Of course, we are also focused on finalising the development of the secondary market, where these securities will be traded. We will offer this new digital asset class with all the necessary tools for a professional trader, investor, or any financial institution. We are entirely API driven, which enables us to integrate with existing market infrastructures while allowing other platforms, apps, and algorithms to connect with us.
Is there anything else that you would like to share about Blocktrade?
Yes, there are always some good things to share. We are very thankful for Cryptix’s warm welcome and for the opportunity to work out of the new headquarters in Vaduz, Liechtenstein.