Bank of America – Deutsche Bank Says $31 Million Blockchain Investment Could Save Capital Markets ‘Billions’ Of Dollars

Blockchain startup Axoni has raised an additional $31 million from German Bank Deutsche Bank, Intel Capital, Swiss bank UBS and existing investors including Citi, Goldman Sachs, JPMorgan, Wells Fargo and others. The investment, a Series B add-on, from the round initially announced in August 2018, brings the total amount invested in the firm to $90 million.

Though no new board members will join as part of the investment, Intel Capital investment manager David Mueller joins as a board observer. Axoni’s co-founding CEO Greg Schvey says “there was a material increase in the valuation,” falling short of unicorn status, though he declined to share the exact terms of the investment. 

Prior to the round, the New York-based firm signed a deal with DirectBooks, a startup owned by Deutsche Bank, Bank of America, Barclays, BNP Paribas, Citi, Goldman Sachs, JPMorgan, Morgan Stanley, and Wells Fargo building a shared infrastructure the banks now use to issue corporate bonds. In November 2020 the company quietly went live, attracting the interest of its owners in Axoni as a possible investment opportunity, according to Henrik Johnsson, Deutsche Bank’s co-head of global capital markets.

The investment is part of a larger change within traditional financial institutions that many believed could be threatened by blockchain and other forms of distributed ledgers used by bitcoin to move value with less dependence on slow intermediaries and expensive manual audits. “Across the banks, the potential reduction in operational risk is certainly in the hundreds of millions, if not in billions,” of dollars says Johnsson.

If that sounds like an exaggeration, a better understanding of the current bond issuance process might give an idea of the number of expensive, and potentially unnecessary middlemen. Currently, when a company like AT&T wants to raise capital, it first posts the amount the company wants to raise and the interest rate it’s offering on a newswire like Bloomberg. A team of salespeople at Deutsche Bank, JPMorgan or any number of other banks then spend the next three hours or so manually calling asset managers at Blackrock, Wellington and others to see if they’re interested. 

Those managers then contact as many as hundreds of fund managers within their firms to see if they’re interested in the opportunity, and after collecting a list of investors manually call back Deutsche Bank, JPMorgan or whichever other bank and place an order. As interest rates and amounts are frequently misunderstood, or funds are oversold, a manual, and expensive process of reconciling the numbers then kicks into action. Johnsson compares the process to “standing at the turnstile of the metro or the ‘tube’ here in the UK., and asking people to pay in coins, while everyone wants to just take their debit card and swipe and walk through the turnstiles.” 

Three years ago the group of banks backing DirectBooks set out to solve the problem by building their own distributed ledger which they could share to accelerate the time to sell bonds, and reduce redundancies and errors, according to Johnsson, who was on the founding board of directors. After encountering a number of obstacles, the DirectBooks team hired Axoni to do it for them. As opposed to a bitcoin-like system that tracks the bonds after their sale, as others are working on, what Axoni built was a back-office process for actually making the sale, the bonds themselves will still settle the normal way through the Depository Trust Company in the U.S. and Euroclear in Europe, for example.

“There’s a huge amount of risk out there that doesn’t need to exist just for people not understanding what is going on with their trading data,” says Schvey, 34. “And so we can introduce a tremendous amount of efficiency, both on the cost and risk side from the work that we’re doing.”

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While DirectBooks, Deutsche Bank and Axoni all declined to share the total volume of the corporate bonds the startup handles, one source estimates it’s probably about three bonds a week, valued at around $300 million each. Though the exact value saved may be hard to quantify at the early stage of implementation, the Securities Industry and Financial Markets Association, a U.S. trade association, says global bond markets outstanding increased to $105.9 trillion in 2019.

“If you look at the list of parties on the DirectBooks platform, you’ll get a sense of just the scale of what’s going on there,” says Schvey. “Those are most of the leading underwriters.” By reducing the operational risk, the savings on each bond might be relatively small, adds Johnsson, but will add up across all the DirectBooks owners. “That’s a big saving for us, he says. “You multiply across all the banks involved, and you start getting into big numbers.”

Axoni was founded in 2013 to build and implement blockchain and distributed ledger technology similar to that which powers bitcoin, but for global financial markets. In January 2017, Axoni partnered with the Depository Trust and Clearing Corporation (DTCC) to help it move its $11 trillion Trade Information Warehouse for credit derivatives swaps to its Axcore blockchain, a process that has been delayed numerous times thanks to unexpected difficulties moving such complicated transactions in such high amounts to a single, shared ledger. In February 2020 Citi and Goldman Sachs announced they used Axcore to conduct what they described as the first blockchain equity swap. Three months later, the Options Clearing Corporation, which helps (BA)TS, Cboe, Nasdaq and the New York Stock Exchange clear equity derivatives, announced it would move $72 billion in equities to the platform.

Since then, Axoni has added support for four new asset classes, including bond issuance with DirectBooks, and three other networks that aren’t yet public. The approximately 20 clients Schvey says the firm has, now include buy-side and sell-side firms, infrastructure providers, and technology companies in the U.S., Europe, and Asia. Though Schvey declined to share revenue numbers, he says the firm has doubled its growth year over year for the past two years.“We will be investing quite a bit and making sure that these things get up and running, particularly the ones that’s we have to build before we get paid on them.”

While an estimated 92% of enterprise blockchain projects fail, research firm Forrester predicts that 30% of those that have survived so far will enter production this year. For example, R3’s Corda, was last week selected by real estate data firm StreetWire to help track property data; ConsenSys’s Quorum, partnered with the Chinese government, and Hyperledger Fabric is being used by Russia’s Sberbank to create a blockchain-based currency backed by rubles. 

As part of the investment Schvey, says the firm that employs 70 people will hire additional coders that specialize in infrastructure application development and user experience, both from a technical perspective, and understanding how the new workflows can be integrated into existing systems and processes. The firm also plans to continue putting money into developing the International Swaps and Derivatives Association (ISDA) common domain model for how assets are tracked.

“We’ve invested quite a bit into the deployment of the common domain model, which is effectively a standard way of modeling data and events across different asset classes,” says Schvey. “And so that’ll help not only standardize for our internal productivity, but also for our clients to recognize what’s going on across different assets.”