21X: Tokenizing securities, bonds and funds for a regulated future
Hello everyone, and welcome back to this new installment to my series of articles showcasing different ecosystem projects building on Aleph Zero. In this article, I’ll be covering 21X (formerly EDX), a digital asset exchange that is founded by ‘21finance’ and is under the ‘EU DLT Pilot Regime’. It that plans to be the ‘1st regulated European DLT Exchange’, is utilizing Aleph Zero’s technology, and is currently filing to be regulated by BaFin, ESMA and the German Federal Bank. From start to finish, I’ll be going over the problems with unregulated exchanges in crypto today, what is 21X’s solution to this going forward, the team behind the project, and so on.
This article will divided into 5parts: The Problem, The Solution, The Team, The Partnerships & Roadmap, and The Conclusion, so make sure to begin from the start (The Problem) before moving onto the other parts.
The Problem:
For us all in crypto, I think we can agree that, without a doubt, the problems with most exchanges today seem to mostly be around the risk of hacks and security, lack of liquidity, regulation, and so on.
Ever since the collapse of Terra (LUNA) back in May 2022, crypto exchanges were collapsing, here and there, like BlockFi, 3AC, Celsius, and more due to the fact that these exchanges were not regulated and secure enough to protect customers assets and were never held accountable for anything going wrong, and even worse, they were caught using customers funds to withdraw these assets for themselves and squeeze the liquidity from the exchanges dry.
Below is the list of problems that most crypto exchanges face today:
- Issues with Security and Hacks - Every security hacks and breaches are frequent in the crypto industry and, in all honestly, is very frightening for any user joining a new exchange. This is most concerning for every crypto exchange because it implies that any users personal information may and can be stolen or compromised for the hackers personal benefit.
- In addition to this, any kind of fraud and scams that cause users to lose life-changing money must be addressed to safeguard those who invest in coins. The solutions to this can be 2FA and cold storage, but the mitigation of hacks and stronger security need to first be addressed and solved if any exchange wants to attract any retail or institutional customers.
- The Slow Process of Regulation - As we’ve all seen with the debacle with the SEC and the regulation of crypto, applying existing regulatory frameworks to digital assets, or developing new ones, is challenging for several reasons. First and foremost, the crypto industry is evolving at a rapid movement, meaning that regulators are now struggling to acquire any new talents and learn the skills of every aspect in the crypto space in order to keep pace, given the stretched resources and many other priorities.
- Also, the process of monitoring the crypto markets is difficult because the data is always fluctuating, and regulators find it a little tricky to keep any tabs on thousands of actors / users who may not be subject to typical disclosure or reporting requirements.
- The Issues with Liquidity - Lastly, market liquidity is crucial and is upmost important for several reasons, as it affects how quickly investors can initiate and close their positions. Since there is always a user that’s prepared to take the opposing side of a particular position, a liquid market is often linked with lower risk. Thus, this might draw in speculators and investors, enhancing the market’s favorable conditions.
- The issue with centralized exchanges (CEX’s) is that they enable more than 90% of all transactions in crypto, further suggesting that they are solely responsible for the vast majority of trading activity. However, on the other hand, decentralized exchanges (DEX’s) sometimes lack the proper liquidity due to a lack of volume, thereby making it challenging to locate buyers and sellers when trading volumes are low.
- There’s also the problem with server lag times at exchanges and the other technical issues / concerns are worsening. As a result, these issues threaten the continued operation of exchanges with a decreasing user base.
With all of these issues in mind, it is certain that regulation and stricter rulings need to be in place in order for these exchanges to run legitimately, offer digital assets to customers to retail and institutions legally, and can be held accountable for anything that can go wrong.
The Solution:
In simple terms, 21X is building a DLT-based exchange on a public permissionless blockchain (Aleph Zero and soon other chains), allowing for highly efficient disintermediated and secure trading of financial instruments. So, what’s their solution to building a regulatory-driven exchange on a fast, permissionless blockchain?
Below, you’ll find what they want to achieve when solving secondary markets for blockchain-based financial instruments:
- All Asset Types - 21X will allow access and trading of all DLT financial instruments such as stock, bond and fund tokens.
- Multilateral Trade - The exchange gives the market direct access for everyone, which enables regulated multilateral trade between investors, institutions and market makers.
- Unlocked Liquidity - Since 21X gives open access for any onboarded user, this will enable deep liquidity for all assets on a public permissionless blockchain infrastructure.
- Smart Contract Based - For counterparty / credit risk to be non-existent and 24/7 trading to be enabled, 21X deploys smart contract-enabled matching and settlement.
- EU Regulated - 21X’s primary goal is to get licensed under the EU DLT Pilot Regime for their future DLT trading and settlement system, allowing 21X to become an end-to-end service provider reaching from asset tokenization, issuance and distribution to listing and trading.
- Institutional Grade - In order to be an institutional-grade level exchange, 21X has enabled tokenization, registry and reporting without enabling trading and without further intermediaries.
This all sounds good, right? But what about the technology that 21X is utilizing on their exchange? At 21X, they will be building a DLT market infrastructure that is to be the first of its kind - leveraging peer-to-peer settlement and atomic matching of financial instruments natively on the blockchain. Below is a list of the technological solutions that 21X is bringing to their exchange:
- Fast & Seamless - 21X’s exchange will have a built-in central-limit orderbook that applies atomic matching and settlement between E-Money (EUR) and asset tokens.
- Smart Contract Based - 21X will make both cash and securities settlement smart contract-based, and any whitelisted wallet can trade in real-time using their built-in central-limit orderbook.
- Interoperable - To fulfill their multi-blockchain approach, they will need to admit any regulatory compliant token to trading that’s independent from blockchain and token standards.
- White-label frontend - Since 21finance is the subsidiary of 21X, they will offer white-labelled digital asset platforms that will be seamlessly integrated with 21X’s trading functionality.
- End-to-End processes - Because of the fact that 21X lives and breathes process excellence, they will be applying a high level of test automation, regular penetration tests and relying on audited smart contracts.
- API Functionality - Finally, for the enterprises that want to integrate 21X’s exchange to their digital asset front-end solution, 21X will allow market participants and financial institutions to trade on 21X by integrating their REST API.
Finally, 21X’s exchange seeks to benefit both CeFi and DeFi in a regulatory-driven market. For traditional stock exchanges, there’s a big no. of intermediaries out there, and they’re involved between a retail or institutional investor and the exchange. In order to route transactions between buyers and sellers in a regulated and compliant way, intermediaries, like custodians, CSDs, transfer agents or clearing houses, are needed to go through this process, and to be honest, this process is slow, complex and costly.
However, with the rise of DeFi, disintermediation is finally possible! Under the EU DLT Pilot Regime, it’s possible for 21X to enable peer-to-peer trading between buyers and sellers without the need for further intermediaries. With this feature being possible on the exchange, retail and institutional investors will be able to trade directly on 21X after running through their onboarding process to be compliant.
The Team:
As previously stated before, 21X is founded by 21finance, a company that offers innovative, decentralized software solutions for banks, financial intermediaries, and companies outside the financial sector that want the opportunity to maintain digital marketplaces for the distribution of financial products.
With an exchange that wants to be the 1st regulated European DLT Exchange, its a no brainer to say that the team at 21X will be made up of individuals and experts that excel in various sectors, like banking, finance, cryptocurrency & blockchain, marketing, software development, etc. Below here is a list of some of those individuals:
Francesco Adiliberti (CEO):
Francesco is the CEO at 21X and has been previously successful in being a former Managing Director at Goldman Sachs International, HSBC, and Amber Group. Francesco has also successfully operated and exited Nomisma, the first company in Europe that was granted a license by the Liechtenstein Financial Market Authority to allow trading of tokenized financial instruments, in particular derivatives, on a blockchain. Francesco holds a PhD in finance from the University of Zurich.
Max Heinzle (Board of Directors):
Max is one of the three board of directors at 21X and the Founder & CEO at 21finance. In his past careers, Max co-founded Mezzany back in 2015, a pioneer in crowd investing in Germany with a transaction volume of more than 100M EUR and had 90K+ registered users. He has personally worked as an Investment Analyst, Executive Board Director & Head of Investor Relations, Head of Capital Market, and much more. He’s been in the crypto / blockchain space for 6 years now, with him founding 21 Finance back in 2017 to help streamline the process of digitizing assets for traditional banks. He graduated with a Master of Science (MSc) for Global Baking & Finance from the European Business School in London back in 2011.
Ulf Medek (COO):
Ulf serves as the COO at 21X (joined back in October 2021). Professionally, he is known as a lawyer and has experience in the financial industry for more than 25 years. In addition to working in various legal departments (banks, insurance companies, pension funds, investment firms, etc.), he has been a managing director, board member and supervisory board member of various financial intermediaries and service companies in the financial industry. Notably, he served as Administrative Director for an AIF in Luxembourg and his activities focused in particular on regulatory challenges, AML/KYC topics and organizational issues, capital markets law, company pension law and AIFMG.
Marc Hegen (CTO):
Mark is the CTO at 21X (joined back in June 2021) and has worked several years in the area of SW and product development for an automotive Tier1 and engineering suppliers. He built up cross-national development teams and headed a development division with more than 200 employees. As a former IT auditor, he has experience in IT Security and process development and during his career, he always worked with spearhead technologies and has successfully lead projects in automated driving, AI and IoT.
If you like to see the rest of the amazing team working on 21X, here’s the link to their About page - https://www.21x.eu/about.
The Partnerships & Roadmap:
By now, the partnership between 21X and Aleph Zero is nothing new to us, and if anything, this can help push and drive the next bull run when it comes to regulated digital assets such as securities, bonds and funds. The partnership between the two details as follows:
- 1st Objective - Bring 21X to Aleph Zero, so they can explore the network’s capabilities in a regulatory-driven market, all while boosting the overall privacy features of 21X across multiple networks.
- 2nd Objective - The next step after the 1st objective is to deploy a regulatory-driven token standard to the Aleph Zero ecosystem, so they can support the process of stimulating the regulated DeFi ecosystem of the network.
21X wants to meet the security and regulatory requirements of the EU DLT Pilot Regime for their exchange, so why have they chosen Aleph Zero to do this exactly? Well, the primary reason as to why 21X has chosen Aleph Zero to deploy their exchange on there as well as utilize their technology is because, to quote Max Heinzle, founder & CEO at 21finance:
“The specific features of Aleph Zero, such as privacy, security, and instant finality, make the network an ideal DLT for what we’re looking to accomplish. We’ll be working together to provide necessary building blocks for a privacy-preserving, regulated DeFi ecosystem on Aleph Zero in general.”
For the most recent developments, here’s what they’ve got to say:
- 21X has stated that while their partnership with Aleph Zero was announced already in April this year, they’re happy to share that the first milestones of bringing 21X to AZERO have been successfully completed. On top of that, since they also want a multi-chain approach, they’ve also shared that an official partnership with the Polygon Network is on its way and plan to deploy their exchange on Polygon as well. Finally, they have secured further collaborations and backings with projects such as IDNow, SanctionScanner, Coinfirm and more.
- The project had just rebranded from EDX to 21X back in August 21st, 2023 due to the fact they’ve further clarified on several legal aspects that they plan to roll out their product offering globally and has decided for a clearer branding that reflects the origins of 21finance.
- To the best of their knowledge, 21X has handed in their license application as the first DLT Trading and Settlement System (DLT-TSS) with the German financial regulatory ‘BaFin’ back on March 23rd, 2023. Additionally, they are close to the finish line of answering the detailed questions from BaFin, ESMA and the German Federal Bank that they received as feedback on their application, meaning that they are one step closer to obtaining their full license in the beginning of September.
- Finally, they have been heads down focusing to get their market infrastructure to go-live, with the first prototypes of their Smart Contracts already completed. They are expecting to launch their first demo version of the exchange in Q4 2023 and plan the exchange to go live in early 2024.
21X’s primary goal is to become a licensed DLT Trading and Settlement System under the EU DLT Pilot Regime, but what does the EU DLT Pilot Regime ask from them exactly?
Well, the EU DLT Pilot Regime has entered into force on June 23rd, 2022, and the program proposes three categories of DLT market infrastructures:
- DLT Multilateral Trading Facilities (DLT MTF)
- DLT Trading and Settlement Systems (DLT TSS)
- DLT Settlement Systems (DLT SS)
Out of the three categories listed above, 21X applied for DLT TSS and will combine the regulatory frameworks of both a DLT MTF and a DLT SS. Moreover, part of the requirements proposed by the European Securities and Markets Authority is for the projects under this regime to have the total market value of DLT-transferrable securities recorded at any market infrastructure to not exceed 6,000,000,000 EUR at any moment of admission to trading or initial recording.
The Conclusion:
In conclusion, 21X is a enterprise-grade, digital asset exchange that aims to become the 1st regulated European DLT Exchange under the ‘EU Pilot DLT Regime’ and hopes to utilize Aleph Zero’s blockchain and privacy-enhancing technology for fast and cheap transactions, all whilst embracing a multi-chain approach. If done right and once their license is approved, they will position themselves to become the very 1st regulated DLT exchange ever in Europe (and globally) for tokenized financial instruments (bonds, funds, shares) and will be able to utilize the best technology possible that can lead them to see large amounts of transactions and liquidity on the exchange.
You’ve now reached the end of this article (hooray!). If you guys enjoyed reading this, share it with anyone that might be interested about 21X and what they’re doing. Don’t forget to give me a follow on Twitter (https://twitter.com/Ethan_H343) if you haven’t already, let me know what you think of this article if you have anything to say about it in the comments, and thanks for reading :)
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