Until today, all that was publicly known about Nivaura was its presence in some rather elite blockchain incubators – ranging from JP Morgan's in-residence program to two terms in the UK Financial Conduct Authority's regulatory sandbox.
But it turns out the little-known startup based on Liverpool Street in London, has been doing a lot more than just hobnobbing with bulge bracket banks and building proofs-of-concept.
As revealed exclusively to CoinDesk, Nivaura has formed key partnerships with banks and others in the financial markets space, and has been granted what it described as "restricted" permission from the UK regulator to execute the process of issuing financial instruments and administering them after their release.
If successful, the series of experiments (which includes its work holding client money and assets) would amount to what the startup calls a "self-service for capital markets" that could dramatically compress the complicated vertical processes now in place.
But what truly sets apart the work isn't the FCA access or the partnerships with Tier 1 Investment Bank, Metro Bank, Microsoft, Moody's and more. The real difference here is that while many of Nivaura's competitors insist that a private blockchain is necessary to comply with privacy and transparency regulations, this startup is building its capital markets solutions on the two best-known public blockchains.
Nivaura CEO and chief architect Avtar Sehra – a former theoretical physicist – explained to CoinDesk in detail why the FCA permissions were crucial to demonstrating that the bitcoin blockchain and the public ethereum blockchain can accomplish what is widely believed can only be done on a permissioned blockchain.
"They gave us restricted permissions so we can arrange the deals and execute the deals and hold client assets and money, and we've got a client money account to do this. We did the first issuance, and we've shown that what we're doing can work."
Who needs a smart contract?
To create its market for issuing and administering securities, ranging from debt and equities to more complicated vehicles, Sehra and his team told CoinDesk they have been granted modified MiFID and CASS approvals from the FCA.
But still they had to overcome one key regulatory hurdle: an independent third party is required to reconcile any assets traded or sold. The middleman is legally mandated, or so it would seem.
However, Sehra believes that by reimagining the independent third party, or registrar, as a public blockchain, he could save clients up to 15 percent on costs, and for the past year the firm has been testing that theory.
In November 2016, Nivaura was one of nine startups added to the FCA's newly created regulatory sandbox, a space where innovative companies can experiment on the fringes of finance without concern that the regulator would come crashing down on them for drawing outside the lines.
The technology itself consists of two main components: First is a platform layer that is essentially a document-tracking system complete with KYC ("know your customer") functionality that employs Nivaura's own legal markup language for completing agreements. Second is a "blockchain agnostic" connectivity layer that has been tested on both the public ethereum blockchain and the bitcoin blockchain.
What's important is that, up until this point, the functionality that compresses the middlemen out of existence isn't reliant on the distributed ledger at all. Rather, it is a series of "very simple elements of data," as Sehra described them, such as who is the issuer and how many units of an asset are being created?
Only at the very end of the carefully constructed work flow is the asset moved on the blockchain.
While the smart contract languages associated with ethereum make that process easier from a development perspective, they are not necessary, said Sehra. In the case of bitcoin, the assets exist in bitcoin's "OP_Return" – a field set aside for basic messages that have no impact on the blockchain's mining process.
"We created a system that can execute the transactions and record them on the OP_Return on bitcoin," said Sehra. "It's a metadata solution, and the metadata is essentially saying you can create assets on the OP_Return by constructing the transaction, deploying it."
A new kind of investment bank
That Nivaura's assets are custodied on the bitcoin and ethereum blockchain instead of a registrar makes the startup a bit like an investment bank. The main difference being that the owners of the assets have their own key to the vault in the form of a private key for each bond, debt issuance, etc.
To pull off such a potential paradigm shift, in which capital markets are essentially turned into a high-stakes vending machine, Nivaura has already gathered a host of partners, including multiple banks, which could eventually become their customers, and one registrar that could potentially be disrupted.
For the tests in the second sandbox (which begins next month), Sehra breaks down the work – like any good physicist – into a control case and a test case.
For the control case, Nivaura operates like a traditional, centralized registrar, and even recruited one of the largest registrars in Europe, Capita Asset Services – which administers £600bn-worth of assets for 6 million investors – to custody the funds.
But Capita also helped with the test case, working with Nivaura to create a standard set of documents and agreements that can be executed using the startup's legal language. Law firm Allen & Overy LLP, at which Nivaura will be the first entrepreneurs in residence beginning in September, helped ensure that the documents execute the work flow in a legally compliant way.
To ensure the contracts themselves are populated with reliable data, Nivaura has partnered with Moody's to provide information about pricing and the likelihood of default based on historical trends. Further, both cloud storage and blockchain services were provided via Microsoft Azure's blockchain-as-a-service toolkit.
Capita's director of asset services, Peter Walker, explained that the compression of so many layers of capital markets service into a single system has the potential to open the investment vehicles to those who otherwise couldn't afford them.
In a statement provided to CoinDesk, Walker said:
"Perhaps most significantly, Nivaura's platform facilitates the implementation of policy initiatives to open debt capital markets to SMEs. Thereby diversifying the supply of credit for that sector; the 'engine room' of many national economies."
So far, Nivaura's progress has come largely with the financial support of its founding team, but that is about to change.
Last year Goldman Sachs predicted that blockchain could save capital markets $6bn a year, and, last February, a report by financial infrastructure provider Euroclear and law firm Oliver Wyman estimated that the first live implementations would be implemented by as soon as this August.
In the race to take the lead in this burgeoning ecosystem, Nivaura board member Alan Morgan of MMC Ventures has led a seed round that just closed for an undisclosed amount, with participation by Digital Currency Group and other individual investors.
As the company grows, Sehra says that assets based in bitcoin and ether could end up being only the beginning.
"We're building the system so we can actually denominate instruments in a currency that is also on a blockchain. At the moment we're using bitcoin and ether, but in the future it might be [British pounds] on a blockchain."
Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Nivaura.
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