London Stock Exchange Leads $20 Million Bet On Blockchain To Cut Out Custody Middlemen

London Stock Exchange Leads $20 Million Bet On Blockchain To Cut Out Custody Middlemen

Outside the London Stock Exchange, which has invested in a blockchain platform aimed at turning the capital markets into a blockchain-powered vending machine.AFP/GETTY IMAGES

If Nivaura gets its way, the world’s capital markets will run like vending machines. Instead of a complex web of depositors holding stock certificates and investment banks holding cold, hard cash, while counterparties frantically move around virtual representations of their assets, investors will deal directly with each other and hold their own assets, using the blockchain technology made famous by bitcoin.

After three years of making occasional but notable appearances in the press, Nivaura has harnessed the attention of some of the largest financial players in the world and turned it into $20 million in seed funding to make its founders’ vision a reality. Closed on Tuesday and announced today, the unusually large seed funding round is being led by the London Stock Exchange, the sixth-largest exchange in the world by volume, and stands to change the way investors and companies connect.

If Nivaura achieves its goals though, it’s not just the companies that survive the simplified transaction flow that stand to benefit. By changing the role these traditional middlemen play, Nivaura CEO Avtar Sehra estimates that the time to market for issuing bonds, loans and equity will be cut by at least 60%, time that he expects will result in savings for investors as well.

“In the traditional world, you have this complex and paid chain of custody that can be eliminated using a blockchain,” says Sehra, who previously worked as an astro-physicist and applies his experience conducting scientific experiments to simplifying capital markets. “But also the cost of custody potentially goes down for the investors as well.”

In addition to the London Stock Exchange, the $20 million seed round is being joined by the venture capital arm of Santander bank, law firm Allen & Overy, blockchain venture capital firm Digital Currency Group and several others.

Nivaura currently employs about 30 people, dispersed throughout England and Italy, where the company’s chief technical officer and chief information officer live, and plans to expand its team to the United States and Asia using the new funding. In addition to the new hires, who will help scale the platform, called Nivaura Connect, into different regulatory jurisdictions, the company plans to invest the funds in research and development efforts aimed at using artificial intelligence to tailor services for customers based on past usage patterns.

As part of the investment, Nivaura’s board of directors will add two new members, Spencer Lake, the former head of global markets for HSBC, who is also joining as an investor and commercial advisor on business development, and Nikhil Rathi, the CEO of London Stock Exchange plc and director of international development for the London Stock Exchange Group.

Current board members are Sehra; cofounder Marcello Fiori, who is the head of the company’s blockchain development; Alan Morgan, the former head of financial services for McKinsey, Europe-Middle East, who serves as chairman; Peter Walker, from Link Asset Services and Simon Hill, a senior partner at Allen & Overy.

“We look forward to working with Nivaura to drive further innovation along the capital markets value chain,” said Rathi in a statement, “to benefit both companies, their advisors and investors.” As part of the investment, LSEG is partnering with Nivaura to explore new business opportunities.

Nivaura makes money by charging for its white label services, which allow intermediaries like investing banks and exchanges to issue their own financial instruments. While many early-stage blockchain startups have yet to start generating revenue, Nivaura chief financial officer Gavin Youll says the company already has ten active commercial deals and has been generating more than $1 million of revenue annually since April 2018.

It was at that time that the Financial Conduct Authority (FCA), the U.K financial regulator, granted Nivaura full regulatory permission to do business. The company wouldn’t reveal who those customers are, but Youll says they include broker dealers, banks, exchanges, and even law firms, all vying for a piece of a new crypto-asset issuance paradigm.

“At the moment, if I settle and hold securities to a traditional chain of custody, I’m going to pay a basis-point fee,” says Sehra. “That means if I’m holding $10 billion I might be paying like .5 basis points. However, in the blockchain world,” where customers can create and custody their own assets, “I think it’s going go down to a volume-based fee rather than value-based.”

Competitors in the push to issue assets on a blockchain include Mercedes parent company Daimler, corporate analyst Fisco and even online retailer Overstock, which have each issued crypto bonds. Even central securities depositories are exploring the space. Since June 2017 a group including the DTCC, Canada’s CDS, the Moscow Exchange Group and South Africa’s Strate, have been working to explore how using a shared ledger of transactions could help and harm their current business model.

In a series of experiments Nivaura ran to help it learn how its issuances compared with traditional capital markets workflows—and with each other—the company previously issued securities using the bitcoin and ethereum blockchain, and even denominated one bond in ethereum’s native cryptocurrency, ether. While Nivaura describes itself as platform-agnostic, most of its blockchain services rely on the ethereum blockchain, and only about a third use blockchain at all, with the majority of customers still opting to use traditional technology interfaced with the Nivaura platform.

“We’re happy to deploy connections to the old world, if you like, traditional clearing and settling infrastructure,” says Youll. “But we are very happy to provide connections to blockchain as well.”

[“source=forbes”]