21X: The European token exchange with a reassuringly German personality – Part II/III

Future of Finance interview with 21X CEO, Max Heinzle

In late January 2024, Dominic Hobson, editorial director at Future of Finance, undertook an interview with Max Heinzle. Lasting an hour, we posted it on 25th January in its entirety:

Though we recommend viewing the video, we also understand that sometimes the good ol’ fashioned way – reading it – is just as valuable. So, we have edited down the interview a little and are publishing it in three posts over three weeks, with this being the second. You can read part one here:


We have included a timestamp for each question, so you can easily go to the relevant section in the video if you wish. While the flow of the text may not be perfect, we have tried to remain as faithful as we can to the recorded interview.

Enjoy the read – and do tell us what you think of Max’s perspective on developments in 2024 and further into the future, for both 21X and digital assets in the capital markets.

22:49  Dominic Hobson: What services will 21X supply to issuers and investors?

23:52 Max Heinzle: We will not be providing structuring services because in essence, the market is not waiting for further advisors to help, really, with structuring. I think it’s more the case that when I talked about an open market infrastructure that along the value chain of security tokens and starting with deal origination and structuring, we will be working with the likes of partners that are already providing these services. And we also have what we like to call listing agents that actually help to ensure, on the market side, dealing with the likes of clients such asset managers that are looking to launch tokenised products to basically ensure that the listing requirements are met, that the criteria are met for admission to issuance and distribution – so traditionally primary market or also then [optionally] admission to trading on 21X.

But before that actually happens, we still have that important part of the tokenisation and the smart contract creation, right? And so the configuration of these smart contracts and also the implementation of product-specific corporate actions that being based on the underlying structure that is being taken care of by both partners of ours that are leading in the space of tokenisation services, but also by ourselves. So clients can choose if they just want to make use of our tokenisation capabilities. And in the next step, it is important to understand also technically that the requirements are met for these tokens then to be admitted, like I said earlier, to enable subscription and distribution and then also depending on whether it is a public or private offering to investors with everything that comes with that. So it really encompasses the process of token minting for primary issuance of these likes of tokenised financial instruments. And obviously to then also enable cross-border and cross-platform distribution through the API platform that we have.

In the next step, admission to trading for the secondary market functionality, order placement by buyers and sellers, the order matching and execution by the order book, smart contract and obviously also the atomic matching and settlement of the buy and the sell orders. Before I move on to the custody side of things, and maybe also share some insights there, again it’s important, I think to understand that in addition to that, there’s something like the asset registrar, or call them the registrar services for an on-chain digital asset registry of non-custodial and also custodial wallets. So we are allowed to provide with the DLT TSS licence, we would be allowed to provide them also for custody services, but we won’t be doing that in the first step. Within our strategy, and also our plan, is to embed that as well as part of our offering, but it won’t be in the beginning stages.

The case is actually that we are in the process of integrating like a global custodial partner that can provide for these services for the likes of our clients, whether it is on the sell- or on the buy-side. And then, like you rightly mentioned, also all the post trade servicing. So corporate actions such as dividend and coupon distributions and the facilitation of the NAV [Net Asset Value] calculation, for example, regulatory reporting, ongoing position and risk management.  Some of these services are actually conducted by the likes of some of the largest players or financial institutions in capital markets, obviously supporting there through the role of, say for example, an administrator. That would be like a summary of what it is that we are offering alongside the value chain, either ourselves or through third party providers. And yeah, hope that gives a clear idea.

29:02 Dominic Hobson: The registration function you referred to is a specifically German service, is it not? Or do you see this as being a kind of pan-European, even global, function that’s going to develop as digital assets take off?

29:18 Max Heinzle: Yeah, so you’re right, it really is. It is the case that under the Electronic Securities Act, as they call it in Germany, the registrar function is actually a requirement. Nevertheless, we are not only [meeting local needs] because 21X is operating out of Germany, facing products that will be issued and approved by the German regulator. After all, it’s called the EU DLT pilot regime. And so we actually are excited to be also working in projects that are being originated out of Luxembourg or also other countries. And here again, the registrar function, maybe also to put that in the context for the viewers, is really in essence just capturing who are the ultimate beneficial owners of each respective financial instrument. When it comes to other jurisdictions within the EU that is not, like you said, rightly so, not an obligation to have that specific. And it’s also, by the way, in Germany, a specific licence that you normally need for this registrar function. But that’s then not the case for other jurisdictions.

30:57  Dominic Hobson: Which of either the primary or the secondary market is more important to success as you get going?

31:25 Max Heinzle: Well, it really comes down to the types of products that we’re looking at, Dominic. Some of the products, if you so want, more alongside the product category of bonds, there will be a necessity for both the primary market functionality and the secondary market functionality. Some of these products, as we know, have already been in the primary market, issued and distributed, but are still lacking the critically needed infrastructure in order for secondary market functionality to be enabled, right?

I think that when we are looking at other products such as certificates, which could be in the future, maybe also a possibility to trade some form of structured products also on a market infrastructure such as 21X, then the primary market is less relevant, right? So for us, our core focus at the moment is really in driving liquidity, but it comes hand in hand, and it is also for us, if you so want, also with our history of 21 Finance and the SaaS solution that we already in the past offered, actually in line of what we have in terms of capabilities in-house to enable also initial subscription before admitting the product actually to trading.

33:06  Dominic Hobson: What is the 21X revenue model?

33:19 Max Heinzle: We traditionally have a set of different types of fees that we charge and it really comes down to what side of the market infrastructure we’re looking at. But maybe to sum it up in the most simplified form and manner, we have, like, for, example listing fees, which are on- time fees. We have listing servicing fees which are recurring fees depending on how long the products are actually listed and services required to be provided. We can in some instances for the primary market also charge issuance fees that are volume-based. That depends really on the nature of the underlying product.

There are quite substantial differences there. Some products are a lot more price-sensitive, others are less price-sensitive. And then there are obviously also trading fees, right, for buyers and sellers each that are volume-based. And what I can say is that these are going to be extraordinarily competitive just on the basis of the efficiency gains that we are realising through our highly automated set-up. So then, rounding and summing it up, given that we have a strong focus on our API landscape, we do charge an API service fee also there to the respective partners.

34:55  Dominic Hobson: How constraining – or un-constraining – has 21X found the EU Pilot Regime to be? What are the pros and the cons as you’ve experienced it?

35:39 Max Heinzle: So, to maybe start off with maybe going back to the point where we came to understand that this new regulatory framework would be coming into effect about mid-2022, as I mentioned before. We put together a team of both legal and technical experts. And we also got help from top advisory firms, both on the legal and also on the business and operational side. Because really what we did was we put together a concept. So we came up with a way, what we believed also with our background in regulated capital markets, to be a form that should be in line with the to-be-announced regulatory framework, right? And also the requirements. There was not really much guidance at that time. It was all very fresh and very new. And when we actually went and presented this to the likes of regulatory bodies within the EU, there was quite a big interest in understanding how we are going about addressing and solving certain matters and also mitigating risks and so on and so forth. So for us, in essence, the constraints were more from a point of view where you could say, as a first mover, there’s a lot of regulatory uncertainty and there’s not so much clarity, there’s not so much guidance. And still what helped was that dialogue also with the regulator. So actually, also the dialogue of our experts that are advising us, and existing relationships there, to really have a dialogue and find out what the perspective and the view of the regulator is on certain matters. But it goes without saying, when you’re doing this as one of the first players in Europe, then you don’t have much that you can take on as a benchmark and say, okay, that’s a proven model. So I think that is besides the fact that there are some thresholds. And, now talking more or less about the challenges that come with the first mover advantage, obviously there are some limitations, right?

So let’s take that example with product limitations, right? We come to understand that certain products are tokenizable and also can be admitted to issuance, distribution and trading on a market infrastructure such as 21X. But other products cannot. And where is that line of what can actually be done and what cannot be done? So those are also questions that we addressed with the regulator very clearly, where we actually went into specific examples. And in order to ensure that what we are doing, again, is in accordance with what the regulator allows to happen. We have some other constraints, right? We have constraints as to what is the market cap of these products.  They’ve put on certain thresholds. We have also, when it comes to the total market cap that is admitted to trading and listed on 21X. And we have also part of the application process and also the licence documentation is to embed strategies about what to do if we breach or exceed those thresholds. So you must actually outline a plan and have clarity as to what actions you’re going to take there. And that is in our view not so much of an issue to begin with because, I always like to say, we need to start to walk before we can actually run, before we hopefully are capable also of trialling to fly.

So hand in hand with the regulators, and obviously having to obey to market surveillance and reporting standards, I think for a new financial institution there is good reason to, also from a regulatory standpoint, say, okay, let’s see that everything is actually running smoothly, that all the measures are in place. So I can say that there is a price that comes with being the first mover. But as with almost everything in life, Dominic, there is pros and cons. And I think most of us will be aware of what the advantages are of also being the first mover.

40:33 Dominic Hobson: And I guess when you start to bump up against those market cap and other constraints, that will be a problem of success.

40:57 Max Heinzle: Just to jump in here and maybe add one last thing Dominic, and that is, I think one thing is pretty obvious from the dialogue that we’ve had with various regulators now and also the feedback that has been provided. When we file for this licence application, we go in iterations. There are in the next step feedback loops where we actually get a chance to make additions to the licence application. And I think it is pretty obvious and clear that the regulator does not only want to see that this new framework that they’ve put into place actually comes to life, that it actually starts running, but that it is also market relevant because otherwise that’s not going to be the case. And so, looking into the future, I’m actually very optimistic that with the feedback that will be provided by the likes of market participants such as ourselves, the regulator will come to also make significant findings and will there be learnings in order to make amendments and also additions to this regulatory framework. I think it’s a great start and a fantastic starting point. I just want to make that very clear.

In my personal opinion, I think what we have in the EU now is nothing less than one of the, if not the most, regulatory or revolutionary regulatory frameworks for capital market infrastructure. And it for sure it’s not done with a single release of a new pilot, but the idea surely will be to actually make this become an effective legal framework, right? So I think that’s also why this Pilot [Regime] has been launched in the first place.

42:58  Dominic Hobson: How easy has it been for 21X to navigate between the supranational and the national regulators in the EU?

43:21 Max Heinzle: We decided to do it [begin our application process] out of Germany. Maybe also there to provide a bit of colour. Why? Because Germany, by nature of being the largest country in the EU, has a very strong regulatory history. The German regulator, and also the reputation of being a regulated financial institution out of Germany, that, in our view, has a lot of benefits to it. And when we look at the fact that 21X, for that reason, was founded in Frankfurt, Germany, we have to go through the national regulator. So BaFin is our point of contact. Nevertheless, we enjoyed the pleasure of having the possibility to also present and discuss with representatives of ESMA and the EU commission. And I believe there were also participants from the European Central Bank in specific meetings and specific calls to basically elaborate on specific subjects and matters.

And what has been the case is that besides BaFin and ESMA, there have been others that also reviewed our application, right? So when it comes to the cash leg, when it comes to the fact that we are talking about the settlement currency of 21X, which is if you so want tokenised fiat, then we also have touch points, obviously, with the likes of the Bundesbank or also the European Central Bank. And so we are actually, from the feedback that we received in December of last year, having been in exchange also with BaFin, again, we are hoping to receive now formal feedback in the next couple of days and that will then also, to my current understanding, include again various opinions also from other authorities, as I outlined earlier. So that’s kind of how it works.

Watch out for the third and final part next week.

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