Nivaura Executes World’s First Automated Cryptocurrency Denominated Bond Issuance
LONDON, 22 November 2017 – The world’s first fully automated cryptocurrency-denominated bond issuance that is also cleared, settled and registered on a public blockchain infrastructure was successfully completed today by Nivaura, a fintech company that has developed a cloud-based service for the issuance and administration of financial instruments by small and medium-sized issuers.
The Nivaura platform enables the issuance and administration of legally enforceable financial instruments at significantly lower cost than current channels. LuxDeco, an online retailer of luxury furniture and home decor accessories, issued ether-denominated bonds which were structured, executed and will be administered through the Nivaura platform. The transaction took place in Fuse – a tech innovation space based in Allen & Overy’s London offices – and was part of the Financial Conduct Authority’s regulatory sandbox, which allows businesses to test innovative products, services, business models and delivery mechanisms in the real market, with real consumers.
A key element of the Nivaura platform and this transaction is the Legal Mark-up Language (LML) component, which enables the conversion of standard legal contracts into machine-readable formats to enable the automated formation, performance and enforcement of financial instruments.
The LML-based legal contracts governing LuxDeco’s cryptocurrency-denominated bonds were automatically structured on Nivaura’s platform based on issuer and investor requirements, and then seamlessly cleared, settled and registered on the open public Ethereum blockchain network. The purpose of this execution was to demonstrate the benefits of Nivaura’s capital markets solution.
Dr. Avtar Sehra, CEO and Chief Product Architect at Nivaura, commented: “As cryptocurrencies or tokenised fiat-currencies become an accepted form of payment mechanism it won’t be long before automated crypto-denominated deals become standard practice, so the fact that we’ve successfully executed a private placement transaction with retail investors puts us in a really good position to help those who follow in LuxDeco’s footsteps”
Allen & Overy partner Phil Smith, who leads the relationship with Nivaura, added: “This is a really exciting development not just for LuxDeco, Nivaura and A&O, but for the debt capital markets as a whole. The Nivaura platform has the potential to open up the markets to those smaller companies that previously saw cost of execution as a limiting factor. We believe we’re likely to see some really interesting shifts in the funding landscape as a result.”
LuxDeco CEO, Jonathan Holmes, said: “We’re a fast growing SME with a global client base, operating in the luxury retail space. In some jurisdictions our clients have already expressed interest in paying in bitcoin or ether. After we executed our first GBP bond issuance with Nivaura for short term financing of seasonal inventory, a cryptocurrency based test case made sense. If we start accepting payments in cryptocurrency there is potentially a natural case for funding our working capital cycles through this means too.”
Allen & Overy has assisted Nivaura commercially in a variety of ways, including providing support in developing all bond document templates in the Nivaura platform for use in the Financial Conduct Authority’s regulatory sandbox environment.
This test consisted of a fully automated cryptocurrency denominated bond issuance, completely cleared, settled and registered on a public blockchain infrastructure. However, Nivaura has previously executed two successful automated GBP-denominated bond issuances using the platform. These were cleared and settled using a traditional post-trade set-up and mirrored on an open public blockchain network. The GBP funds, held in a client money account, were tokenised for on-chain clearing, settlement and registration of the issued assets.
Nivaura has executed its three issuances in the Financial Conduct Authority sandbox as a participant in both Cohort 1 and Cohort 2 of the programme, the only company to be involved in both cohorts. The overall execution process of the world’s first cryptocurrency denominated bond issuance consisted of the following steps: As part of J.P.Morgan’s in-residence programme Nivaura received input for the development of an automated bookbuilding process that could be deployed for a number of different financial instruments. With the help of law firm Allen & Overy Nivaura then used the general issuance and administration structure to construct legally compliant documentation that enabled automated formation, performance and enforcement of an ethereum based bond instrument using smart contracts.
In turn, credit rating firm Moody’s Analytics priced the instrument by providing data to generate yield curves, factoring the volatility of ethereum into the structure of the bond itself. Specifically, while a control experiment, which was a GBP denominated bond issuance tokenised on the blockchain described above, paid 2.5 percent annual interest, the ethereum bond paid an annual interest of 10 percent to help offset the perceived risk of using a cryptocurrency prone to rapid price fluctuations.
While the end-to-end process was designed to be as self-service as possible, a trustee service is also provided by Link Asset Services (previously known as Capita) in case the issuer defaults on the loan. The purpose of this is to ensure efficient and effective enforcement capability of the contract in a legally viable manner. In addition, support was provided by Microsoft to deploy the whole regulated service on Microsoft Azure infrastructure.
Nivaura was the first company invited to work in Fuse. As entrepreneurs-in-residence, Nivaura team members are helping to guide the other tech companies working in the space by sharing advice and business experiences while continuing to develop their own business. In addition Nivaura is part of the J.P.Morgan In-residence programme and Microsoft Accelerator, where they gain the expertise and guidance on financial and technology areas.
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Nivaura is a fintech offering modular digital platform solutions for end-to-end automation for issuance and administration of debt, equity and structured notes. To learn more, please visit: