Capital markets startup Nivaura has developed what it’s calling “the first commercially viable floating rate bond using blockchain technology,” and the new instrument is now being tested by banking giant Santander and LeasePlan, the vehicle leasing company
Announced to coincide with CoinDesk’s Consensus 2019 in New York, Nivaura said other clients working on its floating rate notes (FRNs) include the London Stock Exchange Group (LSEG) and Premfina, a growth-stage premium financing service provider in the insurance industry.
Avtar Sehra, CEO of Nivaura, told CoinDesk:
“Some of the key clients that we are working with on the novel aspects around FRNs and tokenized registers are LSEG, Santander and LeasePlan.”
Nivaura, which recently closed a $20 million seed round led by LSEG, has participated in all five “sandbox” cohorts of the U.K. Financial Conduct Authority. The regulator’s program explores ways to issue digital assets in a compliant fashion and use public blockchains like bitcoin and ethereum as a settlement layer.
Back in 2016, Nivaura executed a reinsurance instrument which managed a register of noteholders using an on-chain token allocation system (sometime before the popularity of this approach took hold in the ICO explosion), while also creating a “calculation and paying agent” smart contract on ethereum.
The firm is now applying the same approach to FRNs, using a money market data feed to trigger a calculation. FRNs are calculated according to current market rates, such as the federal funds rate or the London Inter-bank Offered Rate (LIBOR), plus a quoted spread (a typical coupon would look like “3 months USD LIBOR +0.20%”).
Sehra said the FRN project is a useful extension of the work his team has done to tokenize equity, and for that to then be transferable on a regulated exchange.
Tokenized hybrids
“We are extending the simple tokenized equity and bond models to include more interesting hybrid and structured instruments that would be more useful for our clients and partners,” Sehra said. “A natural extension of this is to ensure that the interest is not just simple fixed-rate coupons, but has the flexibility to be a floating value depending on some external reference rate.”
There are really two parts to tokenized securities, Sehra explained. The first is the token register (or the smart contract) that creates the financial instrument on a blockchain like ethereum, and allows for the transfer of tokens from one party to another, in accordance with a KYC/AML whitelisting process.
The second is the events manager. Different securities have different types of events – consider bonds and their coupons, redemptions and defaults, or equities and their voting and dividend rights. However, as instruments become more complex the number of events and information required to manage the events becomes more nuanced and complex, too.
Managing and programming all the complex events into a smart contract is not commercially viable at this time and not well understood from a regulatory perspective for tokenized securities, said Sehra.
“However, some of the tools to manage the key information flows in the events can be standardized and automated,” he said.
In the case of FRNs, it involves managing the data feeds, making a calculation, generating payment amounts and then executing those payments through a smart contract on a blockchain.
Sehra said:
“Just like the token register model requires whitelisting and accountable end-points to ensure decentralized registers can be used for securities, event management on a blockchain will also require endpoint checks and sign off by trusted parties before capital markets participants will even contemplate using it.”
Santander image via Shutterstock