The world’s first blockchain-based investment product has been launched using Microsoft’s cloud technology.
Nivaura, a UK financial technology firm that uses Azure, successfully registered, cleared and settled two Principal Protected Notes (PPN) linked to the FTSE 100 – one through the traditional clearing infrastructure and a second using an open public blockchain.
PPNs are an investment that guarantees the amount you invest but can also provide a profit if the value of the underlying asset rises. The issued instruments were two-month pound-denominated notes paying a coupon of up to 13% per year based on the performance of the FTSE 100 index.
Avtar Sehra, Chief Executive and Chief Product Architect at Nivaura, said that using the Ethereum blockchain will be cheaper for companies launching investment products as it reduces the need for middlemen and costs associated with post-trade registration, clearing and settlement. He pointed out that a retail firm in the UK used the technology to issue a bond last year and slashed the post trade administration costs, paid by issuers and investors, over the life of the instrument from £30,000 to just £50.
“Very little automation takes place in the financial industry and it’s hard to create something that’s automated but flexible,” Sehra said. “Our system is completely automated, end-to-end. We track all the data, and the money flows in a compliant manner, executing the deal in a legal way and aligning with all regulations. It makes sense for issuers and investors.”
Nivaura chose to use Microsoft Azure because the platform complies with guidance released by the Financial Conduct Authority (FCA), the UK’s financial regulator. The FCA released guidance aimed at aiding firms from the financial services sector as they move workloads online – from deciding to outsource and selecting a provider, to monitoring how their data is handled. Nivaura has received full regulatory approval from the FCA, which saw the removal of some restrictions and allows the company to operate commercially as a MiFID (arranger) and CASS (custody) firm.
The issuer of the PPNs was Chartered Opus, with the instrument structuring/hedging performed by Marex Solutions. The notes were structured, marketed and executed using the investment platform ResonanceX, which is built using Nivaura’s software as a solution offering, running on Azure. The issued tokens representing sterling were sent to investors with the cash stored at Bank of New York Mellon and Metro Bank.
Nivaura’s platform enabled the settlement of one note through Clearstream and an economically equivalent note to be registered, cleared and settled on the public Ethereum blockchain.
While the note was executed using the public Ethereum blockchain, Nivaura has also previously executed bond instruments using the Bitcoin blockchain, and is working on adding Zcash and JP Morgan’s Quorum protocols.
In November, Nivaura launched the world’s first automated bond issuance that was denominated in a cryptocurrency and cleared and settled on a public blockchain. Its platform technology automated the creation of the necessary legal documents, user onboarding, key management, the coordination of covenants, conditions and bookbuilding. The required creation of the asset and money registers and delivery versus payment settlement of the instrument was performed on the Ethereum public blockchain network.
“What we’re showing is you can use open public infrastructure for regulated financial instruments, which is a very critical step, because from the earliest stages we’ve always believed public infrastructure is a viable way forward for particular instruments that don’t necessarily have high volume secondary markets,” Sehra said at last year’s launch. “As cryptocurrencies or tokenised fiat-currencies become a more accepted form of payment mechanism it will lead to an increasing uptake in using public blockchain infrastructure for registration, clearing and settlement of the securities.”
Blockchain is a peer-to-peer distributed ledger that can be added to but not modified, making it very secure. Each entry is secured into blocks of entries, and each new block is cryptographically linked to the previous one. It is historically known as a core part of the digital currency bitcoin but can be used for any transaction of value.