Extending capital market access through blockchain
20 July 2021
LiquidShare CEO Jean-Marc Eyssautier and lead IT architect Emil Kirschner talk to Bob Currie about the company鈥檚 strategic pivot, the strength of its capital market operations expertise and the advantages it derives from its DLT-based technology
Image: Jean-Marc Eyssautier
In June 2021, LiquidShare completed an experiment involving the settlement of securities transactions using a central bank digital currency (CBDC) issued by Banque de France, the French central bank, for the payments leg of the settlement operation.
This experiment was conducted with a consortium of 14 financial institutions brought together by LiquidShare and based on the platform it has developed since 2018. This involved a simulation where both listed and unlisted securities were issued on blockchain and settled successfully against central bank money using the CBDC 鈥� with creation, control, and destruction of CBDC tokens vested to the Banque de France.
While seemingly a small and arcane test event, this simulation demonstrates the power that creative application of distributed ledger technology and smart contracts can bring to financial markets. Issuers, whether large corporations, small and mid-sized enterprises (SMEs) or government entities, are able to issue financial instruments on blockchain and to encourage active secondary market trading in these instruments.
This is important for extending access to capital markets, promoting market liquidity and providing opportunity, by 鈥榝ractionalising鈥� these tokens, to make these available in smaller denominations to a wider range of investors.
Importantly, this experiment opens the door for settlement of transactions in both commercial bank and central bank digital money, thereby mirroring the securities settlement ecosystem, and the high levels of operational surety and safety, currently available for traditional securities.
It also represents a noteworthy landmark in a wider research programme being conducted by the Eurosystem, the group of EU central banks, on the benefits of CBDC in payments and transaction settlement.
Permissioned blockchain
Formed in 2017, LiquidShare was created by eight European financial institutions to develop post-trade solutions for financial markets using distributed ledger technology. Its goal is to apply a private permissioned blockchain to support issuance of digital securities and all downstream processing across the transaction lifecycle, enabling participants on the blockchain (commonly known as 鈥榥odes鈥�) to share the same 鈥榞olden source of truth鈥� and to minimise the requirement for costly, often manual, reconciliation.
The founder group 鈥� consisting of AFS Group, BNP Paribas 网爆吃瓜 Services, CACEIS, Caisse des D茅p么ts, Euroclear, Euronext, S2iEM and Societe Generale 鈥� has initially invested in LiquidShare to identify, and to implement, new distributed ledger-based opportunities in real-time transaction processing for both listed and non-listed SME equities.
LiquidShare ran two successful pilots on the settlement platform built between 2018 and 2020 which, among other benefits, demonstrated the benefits of shortening the chain of intermediation between issuer and investor, However, despite these successful trials, the company did not meet its business targets on the SME equity market. One reason for this, it told SFT, was probably because some of the project鈥檚 major shareholders, which had initially driven the formation and early investment in LiquidShare, were among those likely to be disintermediated. According to popular orthodoxy, custodians and depositary banks face a high risk of becoming unnecessary and irrelevant in a world of DLT-driven digital trading.
To address this delicate issue, and to reinforce the company鈥檚 business effectiveness, Jean-Marc Eyssautier explains that LiquidShare has changed its strategic direction over the past 12 months 鈥� what the company calls a 鈥榮trategic pivot鈥�.
This strategic pivot was driven, in no small part, by concerns within its Board of Directors and shareholder group that LiquidShare鈥檚 research and product solutions needed to start paying for itself. While the Board has not wavered from its commitment to building market infrastructure and post-market solutions to support the industry, it demanded clear and prompt evidence that the investments made over the past four years have been spent wisely and will translate into profitable commercial applications.
The practical outcome was twofold. First, the Board of Directors elected to change LiquidShare鈥檚 senior management group 鈥� most visibly by appointing Jean-Marc Eyssautier as its new chief executive in December 2020.
Second, it asked its new management group to demonstrate that it could sell its product solutions to the market and generate revenue. The strategic pivot has given the company a stronger commercial focus, with a clearer timetable for delivery of its net income targets.
Alongside Eyssautier, former BNP Paribas 网爆吃瓜 Services鈥� senior sales executive for European institutional customers Brigitte Gignoux has joined the company as its new head of business development.
Between them, Eyssautier, Gignoux and the business development team have been in close dialogue with clients and prospects to identify where Liquidshare can deliver new areas of efficiency and innovation to the marketplace.
Central to the spirit of the strategic pivot is a commitment to working in co-operation or partnership with clients and shareholders. No longer does LiquidShare refer to developing product solutions that may disintermediate these financial intermediaries. 鈥淥ur priority is to co-design solutions with our customers and stakeholders,鈥� says Eyssautier.
On the basis of the dialogue, LiquidShare has two principal objectives for the second half of 2021 and beyond.
One is to position itself at the forefront of the financial market value chain in supporting the development of digital assets and currencies. A noteworthy landmark, as we have noted, has been the recent settlement of securities transactions against a Central Bank Digital Currency conducted with Banque de France and 14 partner organisations.
A second priority is to extend the service options supported by this DLT-based initiative. Initially, LiquidShare will target private equity investments, focusing on start-up and scale-up companies and providing a secure framework for issuance and registration of security tokens. This will offer flexible digital management software, providing users with the ability to monitor equity structure and fundraising rounds for example, alongside the opportunity to manage automated employee incentive strategies and online legal secretarial support.
More broadly, the company will provide a real-time settlement platform for traditional and digital assets, supporting the transaction lifecycle in an STP environment 鈥� thereby improving automation rates and removing manual interventions from previously heavily-manual asset classes and areas of trade processing.
鈥淲e are agnostic to the type of asset and the type of cash used to settle the trade,鈥� says Eyssautier. 鈥淥ur systems are equipped to support both listed and unlisted securities 鈥� and following our recent proof of concept settlement with the Banque de France and other service partners, we have demonstrated the potential to process CoBM and CeBM transaction settlement across a broad range of assets.鈥�
However, Eyssautier notes that many areas of the asset servicing landscape for heavily-traded traditional cash securities (eg large cap equities, government bonds) already operate efficiently, at high volume and relatively low cost, with high levels of automation.
With the development of the TARGET2-网爆吃瓜 platform for settlement of euro-denominated (and some non-euro) securities, which is owned and operated by the Eurosystem, there is currently little advantage, in terms of processing efficiency, transparency or potential cost savings, that can be delivered through migrating trade processing for T2S-eligible securities into a DLT environment.
Consequently many larger clients and shareholders 鈥� for example large international custodians and depository banks 鈥� are not currently looking to move their whole legacy settlement and asset servicing systems to blockchain for liquid securities.
That is why, as a third target, LiquidShare is focusing its efforts on the pain points of the post-trade area where inefficiencies, areas of risk or manual processes remain. For example, the company is now marketing a middle office platform that will enable full STP settlement for the commercial paper (e.g. eurocommercial paper, ECPs, and negotiable European commercial paper, neuCPs) primary market, thus bridging the existing gap between the trading platforms, the T2S settlement platform and its participating CSDs.
Technology delivery
Beyond capitalising on its expertise as a provider of market infrastructure and post-market solutions, a third major element in LiquidShare鈥檚 growth plan is to develop its footprint as a provider of DLT technology.
鈥淲e identify opportunities to expand as a technology supplier, supporting firms that are developing business solutions on blockchain but which do not have the technical expertise or investment budget to develop their IT architecture in-house,鈥� says Eyssautier. 鈥淥ther firms may not identify this as a core competency and they prefer to outsource. For each of these customers, we offer a technology solution to them on a white-labelled basis, enabling them to focus on the business innovation in which they specialise.鈥�
Reflecting on where LiquidShare鈥檚 major strengths lie as a company, Jean-Marc Eyssautier points to the power of its blockchain-based technology combined with deep expertise across the team in securities operations, market infrastructure and associated regulatory and compliance obligations that confront a service provider.
For Eyssautier, for example, his early experience at the French central bank, a term spent at the French CSD Sicovam (which became Euroclear France in 2000) and then a long career at CACEIS 鈥� as head of operations at pre-merger CDC IXIS, as managing director of CACEIS in Paris, and then as chief risk and compliance officer and, later, head of public affairs 鈥� provided a detailed knowledge of the mechanics of DvP transaction settlement, custody operations, risk management and compliance.
But beyond the people and their embedded knowledge, Eyssautier believes that the technology is also crucially important to LiquidShare鈥檚 future.
Emil Kirschner, LiquidShare鈥檚 lead IT architect, explains that the company took an early decision to employ DAML, the open-source Haskell-based language, to drive its smart contract framework and platform design.
In June 2020, it appointed Blockchain Technology Partners (BTP) to meet its requirements for a blockchain and smart contract-based operations platform.
BTP鈥檚 Sextant for Daml platform is supported on LiquidShare鈥檚 first choice of DLT technology platform, Hyperledger Besu, and this was a primary factor in its selection decision, explains Kirschner. 鈥淒aml offers speed and flexibility when embedding business logic into the smart contract and dramatically simplifies the deployment of the Daml runtime environment on DLT,鈥� he adds.
For example, this enables LiquidShare to add new nodes to the DLT platform quickly and easily, accelerating the speed with which it can onboard new participants on the platform.
鈥淔rom experience we know that it can take a lot of work to configure a robust Hyperledger Besu network. When using BTP Sextant, configuration work that has previously taken days is now taking several hours. This provides a big advantage over competitive offerings available in the market and it provides flexibility to customise block sizes and other parameters in the underlying network to suit our requirements.鈥�
Kirschner says that LiquidShare will continue to take advantage of the benefits that this framework offers, including the deployment of a private transaction manager configuration and enhancements to its privacy settings, to extend the benefits this will offer to partners using the platform.
With these developments, we potentially have a view into the future of what issuance and trade processing will look like. It remains to be seen what role CBDC, stablecoin 鈥� cryptocurrency pegged to fiat currency 鈥� or tokenisation of fiat currency may play in the cash leg of a transaction settlement.
However, LiquidShare has been influential in demonstrating what is possible from a technical standpoint. The decision will lie with central bankers, financial regulators and other policymakers to confirm how quickly these digital CeBM settlement options become a practical reality.
This experiment was conducted with a consortium of 14 financial institutions brought together by LiquidShare and based on the platform it has developed since 2018. This involved a simulation where both listed and unlisted securities were issued on blockchain and settled successfully against central bank money using the CBDC 鈥� with creation, control, and destruction of CBDC tokens vested to the Banque de France.
While seemingly a small and arcane test event, this simulation demonstrates the power that creative application of distributed ledger technology and smart contracts can bring to financial markets. Issuers, whether large corporations, small and mid-sized enterprises (SMEs) or government entities, are able to issue financial instruments on blockchain and to encourage active secondary market trading in these instruments.
This is important for extending access to capital markets, promoting market liquidity and providing opportunity, by 鈥榝ractionalising鈥� these tokens, to make these available in smaller denominations to a wider range of investors.
Importantly, this experiment opens the door for settlement of transactions in both commercial bank and central bank digital money, thereby mirroring the securities settlement ecosystem, and the high levels of operational surety and safety, currently available for traditional securities.
It also represents a noteworthy landmark in a wider research programme being conducted by the Eurosystem, the group of EU central banks, on the benefits of CBDC in payments and transaction settlement.
Permissioned blockchain
Formed in 2017, LiquidShare was created by eight European financial institutions to develop post-trade solutions for financial markets using distributed ledger technology. Its goal is to apply a private permissioned blockchain to support issuance of digital securities and all downstream processing across the transaction lifecycle, enabling participants on the blockchain (commonly known as 鈥榥odes鈥�) to share the same 鈥榞olden source of truth鈥� and to minimise the requirement for costly, often manual, reconciliation.
The founder group 鈥� consisting of AFS Group, BNP Paribas 网爆吃瓜 Services, CACEIS, Caisse des D茅p么ts, Euroclear, Euronext, S2iEM and Societe Generale 鈥� has initially invested in LiquidShare to identify, and to implement, new distributed ledger-based opportunities in real-time transaction processing for both listed and non-listed SME equities.
LiquidShare ran two successful pilots on the settlement platform built between 2018 and 2020 which, among other benefits, demonstrated the benefits of shortening the chain of intermediation between issuer and investor, However, despite these successful trials, the company did not meet its business targets on the SME equity market. One reason for this, it told SFT, was probably because some of the project鈥檚 major shareholders, which had initially driven the formation and early investment in LiquidShare, were among those likely to be disintermediated. According to popular orthodoxy, custodians and depositary banks face a high risk of becoming unnecessary and irrelevant in a world of DLT-driven digital trading.
To address this delicate issue, and to reinforce the company鈥檚 business effectiveness, Jean-Marc Eyssautier explains that LiquidShare has changed its strategic direction over the past 12 months 鈥� what the company calls a 鈥榮trategic pivot鈥�.
This strategic pivot was driven, in no small part, by concerns within its Board of Directors and shareholder group that LiquidShare鈥檚 research and product solutions needed to start paying for itself. While the Board has not wavered from its commitment to building market infrastructure and post-market solutions to support the industry, it demanded clear and prompt evidence that the investments made over the past four years have been spent wisely and will translate into profitable commercial applications.
The practical outcome was twofold. First, the Board of Directors elected to change LiquidShare鈥檚 senior management group 鈥� most visibly by appointing Jean-Marc Eyssautier as its new chief executive in December 2020.
Second, it asked its new management group to demonstrate that it could sell its product solutions to the market and generate revenue. The strategic pivot has given the company a stronger commercial focus, with a clearer timetable for delivery of its net income targets.
Alongside Eyssautier, former BNP Paribas 网爆吃瓜 Services鈥� senior sales executive for European institutional customers Brigitte Gignoux has joined the company as its new head of business development.
Between them, Eyssautier, Gignoux and the business development team have been in close dialogue with clients and prospects to identify where Liquidshare can deliver new areas of efficiency and innovation to the marketplace.
Central to the spirit of the strategic pivot is a commitment to working in co-operation or partnership with clients and shareholders. No longer does LiquidShare refer to developing product solutions that may disintermediate these financial intermediaries. 鈥淥ur priority is to co-design solutions with our customers and stakeholders,鈥� says Eyssautier.
On the basis of the dialogue, LiquidShare has two principal objectives for the second half of 2021 and beyond.
One is to position itself at the forefront of the financial market value chain in supporting the development of digital assets and currencies. A noteworthy landmark, as we have noted, has been the recent settlement of securities transactions against a Central Bank Digital Currency conducted with Banque de France and 14 partner organisations.
A second priority is to extend the service options supported by this DLT-based initiative. Initially, LiquidShare will target private equity investments, focusing on start-up and scale-up companies and providing a secure framework for issuance and registration of security tokens. This will offer flexible digital management software, providing users with the ability to monitor equity structure and fundraising rounds for example, alongside the opportunity to manage automated employee incentive strategies and online legal secretarial support.
More broadly, the company will provide a real-time settlement platform for traditional and digital assets, supporting the transaction lifecycle in an STP environment 鈥� thereby improving automation rates and removing manual interventions from previously heavily-manual asset classes and areas of trade processing.
鈥淲e are agnostic to the type of asset and the type of cash used to settle the trade,鈥� says Eyssautier. 鈥淥ur systems are equipped to support both listed and unlisted securities 鈥� and following our recent proof of concept settlement with the Banque de France and other service partners, we have demonstrated the potential to process CoBM and CeBM transaction settlement across a broad range of assets.鈥�
However, Eyssautier notes that many areas of the asset servicing landscape for heavily-traded traditional cash securities (eg large cap equities, government bonds) already operate efficiently, at high volume and relatively low cost, with high levels of automation.
With the development of the TARGET2-网爆吃瓜 platform for settlement of euro-denominated (and some non-euro) securities, which is owned and operated by the Eurosystem, there is currently little advantage, in terms of processing efficiency, transparency or potential cost savings, that can be delivered through migrating trade processing for T2S-eligible securities into a DLT environment.
Consequently many larger clients and shareholders 鈥� for example large international custodians and depository banks 鈥� are not currently looking to move their whole legacy settlement and asset servicing systems to blockchain for liquid securities.
That is why, as a third target, LiquidShare is focusing its efforts on the pain points of the post-trade area where inefficiencies, areas of risk or manual processes remain. For example, the company is now marketing a middle office platform that will enable full STP settlement for the commercial paper (e.g. eurocommercial paper, ECPs, and negotiable European commercial paper, neuCPs) primary market, thus bridging the existing gap between the trading platforms, the T2S settlement platform and its participating CSDs.
Technology delivery
Beyond capitalising on its expertise as a provider of market infrastructure and post-market solutions, a third major element in LiquidShare鈥檚 growth plan is to develop its footprint as a provider of DLT technology.
鈥淲e identify opportunities to expand as a technology supplier, supporting firms that are developing business solutions on blockchain but which do not have the technical expertise or investment budget to develop their IT architecture in-house,鈥� says Eyssautier. 鈥淥ther firms may not identify this as a core competency and they prefer to outsource. For each of these customers, we offer a technology solution to them on a white-labelled basis, enabling them to focus on the business innovation in which they specialise.鈥�
Reflecting on where LiquidShare鈥檚 major strengths lie as a company, Jean-Marc Eyssautier points to the power of its blockchain-based technology combined with deep expertise across the team in securities operations, market infrastructure and associated regulatory and compliance obligations that confront a service provider.
For Eyssautier, for example, his early experience at the French central bank, a term spent at the French CSD Sicovam (which became Euroclear France in 2000) and then a long career at CACEIS 鈥� as head of operations at pre-merger CDC IXIS, as managing director of CACEIS in Paris, and then as chief risk and compliance officer and, later, head of public affairs 鈥� provided a detailed knowledge of the mechanics of DvP transaction settlement, custody operations, risk management and compliance.
But beyond the people and their embedded knowledge, Eyssautier believes that the technology is also crucially important to LiquidShare鈥檚 future.
Emil Kirschner, LiquidShare鈥檚 lead IT architect, explains that the company took an early decision to employ DAML, the open-source Haskell-based language, to drive its smart contract framework and platform design.
In June 2020, it appointed Blockchain Technology Partners (BTP) to meet its requirements for a blockchain and smart contract-based operations platform.
BTP鈥檚 Sextant for Daml platform is supported on LiquidShare鈥檚 first choice of DLT technology platform, Hyperledger Besu, and this was a primary factor in its selection decision, explains Kirschner. 鈥淒aml offers speed and flexibility when embedding business logic into the smart contract and dramatically simplifies the deployment of the Daml runtime environment on DLT,鈥� he adds.
For example, this enables LiquidShare to add new nodes to the DLT platform quickly and easily, accelerating the speed with which it can onboard new participants on the platform.
鈥淔rom experience we know that it can take a lot of work to configure a robust Hyperledger Besu network. When using BTP Sextant, configuration work that has previously taken days is now taking several hours. This provides a big advantage over competitive offerings available in the market and it provides flexibility to customise block sizes and other parameters in the underlying network to suit our requirements.鈥�
Kirschner says that LiquidShare will continue to take advantage of the benefits that this framework offers, including the deployment of a private transaction manager configuration and enhancements to its privacy settings, to extend the benefits this will offer to partners using the platform.
With these developments, we potentially have a view into the future of what issuance and trade processing will look like. It remains to be seen what role CBDC, stablecoin 鈥� cryptocurrency pegged to fiat currency 鈥� or tokenisation of fiat currency may play in the cash leg of a transaction settlement.
However, LiquidShare has been influential in demonstrating what is possible from a technical standpoint. The decision will lie with central bankers, financial regulators and other policymakers to confirm how quickly these digital CeBM settlement options become a practical reality.
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