London Stock Exchange bets on finance tokenization startup

February 28, 2019 14:32
London Stock Exchange leads a US$20 million bet on fintech startup Nivaura, which lets companies issue debt on an ethereum blockchain platform. Photo: Reuters

London Stock Exchange Group (LSEG) led a US$20 million funding round for a financial technology startup that enables companies to issue financial instruments on the blockchain, a move that shows growing interest among mainstream finance players in the technology that underpins bitcoin and other cryptocurrencies.

Positioning itself as a capital markets technology firm, Nivaura aims to build a new way for the automated issuance and administration of financial products such as loans, bonds, and structured notes.

For now, issuing financial instruments requires multiple steps and the involvement of multiple parties, making it an expensive and tedious process.

However, Nivaura’s system is capable of settling financial instruments on an existing clearing infrastructure while allowing tokenized asset registration and clearing on the blockchain infrastructure.

Under such a system, investors can deal directly with each other and hold their own assets without the need for custody middlemen.

Nivaura was behind the world’s first automated cryptocurrency-denominated bond issuance in November 2017.

In April 2018, the Financial Conduct Authority (FCA), the United Kingdom's financial regulator, granted the startup full regulatory approval to do business in the country.

This January, Nivaura teamed up with UK-based platform Fineqia to issue tokenized bonds on a public ethereum blockchain.

Asset tokenization has been the strongest trend in the cryptocurrency and blockchain space. Real-world, tradable assets such as equities, fixed income and real estate, are divvied up into fractional equity ownership and transformed into instantly tradable, digital assets that use blockchain technology.

Estonia-based DX.Exchange launched in January a trading platform allowing investors to buy shares of popular Nasdaq-listed companies indirectly through security tokens, each of which is backed by one share of the company and entitles holders to the same cash dividends.

A key difference setting “security tokens” apart from other cryptocurrencies is that they are asset-backed and fall within regulatory parameters.

In an interview with Forbes, Nivaura chief executive Avtar Sehra describes how the firm’s technology solution will result in benefits for investors: “At the moment, if I settle and hold securities to a traditional chain of custody, I'm going to pay a basis-point fee. That means if I'm holding US$10 billion, I might be paying like 0.5 basis point.”

But with the blockchain-powered platform, 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,” he said.

LSEG is paying an undisclosed sum for a minority stake in the London-based startup.

With the fresh capital, Nivaura plans to expand its team, which currently operates in the UK and Italy, to the United States and Asia, while investing in developing artificial intelligence (AI) technology to tailor services for clients, the two companies said in a statement.

Nikhil Rathi, LSEG’s head of international development, said the firm looking forward to working with Nivaura to drive further innovation along the capital markets value chain and explore new business opportunities.

As part of the investment, Rathi will become a new member of Nivaura’s board of directors, joining Spencer Lake, former head of global markets for banking giant HSBC.

Nivaura's second seed extension round, which raised a total of US$20 million, also saw the participation of Spanish bank Santander’s venture capital arm InnoVentures, blockchain venture capital firm Digital Currency Group, law firms Linklaters and Orrick, and Transamerica Ventures, among others.

London Stock Exchange, the world's sixth-largest exchange by volume, joins multiple major financial firms in warming to blockchain-related technologies in asset issuance, settlement and trading processes.

In January, it said a Hong Kong-based cryptocurrency exchange would use its matching system for trading digital coins.

Last October, the Hong Kong Exchanges and Clearing Limited (HKEx, 00388.HK) announced a partnership with distributed ledger startup Digital Asset to develop a blockchain platform for post-trade processing.

US investment bank JP Morgan said this month it would launch its own digital token, pegged to the dollar, that clients can use for instant transfer of payments over a blockchain network.

Recently, HSBC told Reuters in an interview that it has been using a blockchain-based system for settling foreign exchange transactions, as a result of which it has cut the cost of settling some transactions on the platform by a quarter.

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