Aug 14, 2018
Enterprise blockchain startup Axoni has raised $32 million to help it finish moving some of the largest financial infrastructures in the world to technology that interoperates with the ethereum blockchain.
Led by Goldman Sachs and Nyca Partners, the Series B investment will be used to complete work on projects including the Depository Trust and Clearing Corporation’s effort to move its $11 trillion Trade Information Warehouse to a custom-built blockchain.
With other investors including Wells Fargo, J.P. Morgan, Citigroup, NEX Group, Franklin Templeton, Andreessen Horowitz, Y Combinator, Digital Currency Group and more, the investment represents a diverse sampling of Wall Street institutions and the Silicon Valley investors out to disrupt them.
But what sets the capital infusion apart from other plays in the enterprise blockchain space is how many of the investors in the New York-based company are also clients turning blockchain technology into real distributed ledger applications. Or as Axoni co-founder and CEO Greg Schvey described it in an exclusive interview with Forbes: "Turning projects into products."
“These are very strategic investors,” said Schvey. “We have deep strategic and commercial engagements with most of them.”
The investment, which Schvey described as being “in line with the standard terms and dilution" associated with Series B financing, brings the total capital raised to $55 million.
The lead Goldman Sachs investment came from the bank’s Principal Strategic Investments division, which makes investments with a strategic look to the bank's business interests. As shareholders in DTCC, Goldman Sachs was already an indirect investor in Axoni, and has other projects ongoing as well.
As part of the Series B, Schvey, 31, and his co-founder brother, Jeff, 33, plan to substantially increase the number of employees from 55, mostly via new engineering hires. In addition to the new employees, Schvey says the firm, which was founded in 2016, plans to further invest the funds to help existing clients integrate their own users into three platforms nearing completion.
While Schvey refrained from revealing many new details about those integrations, part of the investment includes Goldman Sachs managing director, Ashwin Gupta, and Wells Fargo’s head of market structure and electronic trading services, C. Thomas Richardson, taking a seat on Axoni’s board of directors. The pair join existing board members Michael McFadgen of NEX Group and Joe Ratterman, the former CEO of Bats Global Markets, now Cboe.
Notably, less than a month after Axoni closed its $18 million Series A, led by Wells Fargo and NEX Group, the startup announced its partnership DTCC, the largest financial infrastructure in the world, which processes $1.6 quadrillion in securities transactions annually.
While Schvey declined to share revenue resulting from helping build such platforms, he says Axoni is “not yet profitable, but with a conscious choice to prioritize growth.” According to Nyca Capital founder and former Visa president Hans Morris, it was Schvey’s ability to onboard existing customers, coupled with what Morris described as a low burn rate, that attracted him to Schvey’s management style.
“What’s really tough, is getting a large group of these big organizations to agree. And he’s really effective at it,” said Morris, who worked as Visa president from 2007 to 2009. “He’s young enough to be close to the evolving technology, but he also has a rare combination of resilience, prudence and aggressiveness.”
By far, the largest enterprise blockchain project currently being developed by Axoni is its effort with DTCC, the New Jersey-based clearing company seen by many as the epitome of financial middlemen that might be made unnecessary by blockchain. By moving part the clearing organization’s transactions to a shared, distributed ledger similar to that which lets bitcoin users send money without banks, the time to close and the middlemen required are both reduced.
To this end, DTCC announced in January 2017 that it had selected Axoni’s Axcore blockchain to re-platform the Trade Information Warehouse, which services nearly every global derivatives dealer in the world and 2,500 buy-side firms. IBM was designated to lead the initiative, under the advisement of distributed ledger consortium R3.
Designed to be largely interoperable with the ethereum blockchain, the platform is scheduled to enter what a DTCC spokesperson described as “industry-wide testing cycles” later this quarter, continuing into next year. Then, following what the representative called “the completion of successful user acceptance testing” the platform that underpins the legal records, life-cycle events, and cash flow of the derivatives warehouse is expected to launch.
“Go live has a lot of other preparations and testing,” said Schvey.
Notably, DTCC did not participate in the investment round, in spite of having invested in Axoni competitor Digital Asset, which is now working to re-platform part of the Australian Securities Exchange (ASX) using its own distributed ledger platform. However, three notable partners that did join the investment are Goldman Sachs, J.P. Morgan and Citigroup, which last year announced their own successful test using Axcore for trading equity derivatives.
The months-long project automated the entire life cycle of 70 structured tests for both single stock and portfolio total returns swaps, according to a statement released in November. “In the equity derivatives market,” Schvey told Forbes, “you have a world where everybody is managing connections to all the various counterparties independently. They’re each managing their own data systems, their own calculations systems, and what that leads to is a substantial amount of breaks.”
“When we think about blockchain technology,” he added, “what we really think about is the application of it to solve for data synchronization.”
In the third, and perhaps most mysterious data synchronization project, returning Series A lead investor, NEX Group, is building what Schvey calls “a massive FX post-trade data network.” In a testament to how long enterprise blockchain solutions can take to build and launch, the NEX Group project, which leverages its existing Harmony messaging network, is among the earliest enterprise blockchain projects, having begun work with Axoni in early 2016 when the company went by the name ICAP.
“It’s much more than a check when you work with firms like this,” said Schvey. “And they’ve really been great partners.” But as is often the case with blockchain, which by its very nature breaks down borders between nations and businesses, the lines that form these partnerships are blurry.
Beyond Axoni’s largest client, DTCC, investing in one of Schvey’s best-known competitors, Digital Asset, IBM itself, which was named as the lead of the DTCC project, has its own blockchain solution that lies at the heart of Northern Trust’s private equities platform and Maersk’s supply chain platform.
Further adding to such complicated competition is R3, which in addition to being listed as a consultant on the DTCC project recently added foreign exchange giant CLS to its list of investors and scooped up the patronage of B3i, a blockchain insurance consortium that was previously exploring Hyperledger Fabric.
Even U.K-based Clearmatics, which like Axoni is also adapting the ethereum blockchain, has established seemingly friendly relations with Axoni. Earlier this year the two firms demonstrated a derivatives contract using Axoni’s Axlang smart contract language and Clearmatics' interoperability protocol for connecting multiple blockchains.
“At the end of the day, when you’re that aligned on the technical vision, it makes it easier to collaborate and cooperate,” said Schvey. “Ultimately, I would definitely, definitely expect that a substantial amount of time and energy and resources go into collaborations with Clearmatics and other firms who have taken a similar view.”
To further enable the network effects of linking the world’s financial infrastructures via a network of blockchain technologies, Axoni is preparing to open source its Axcore blockchain protocol, built around the ethereum virtual machine, in the first half of next year. Additionally, the Axlang smart contract language, which can be compiled down to the ethereum virtual machine, is also slated to be contributed to the open source community.
“This was a key concept in our original design, as it allows us to collaborate closely with the largest open source communities in the space,” said Schvey, “while still achieving the enterprise requirements of our clients.”
Serving to further bridge the gap between private blockchains built on protocols like Axcore that require permission to use and ones like bitcoin that are free for anyone to join are Schvey and his brother. In 2016 the brothers spun off Axoni from cryptocurrency trading services startup Tradeblock, founded three years earlier to serve institutional clients.
Now both brothers sit on the board of directors at both companies. From this rare perspective, Schvey says they are seeing an increased willingness among enterprises to explore the infrastructure and security requirements that might be required for them to handle cryptocurrencies, though he declined to elaborate on who.
“The notion of public and private being separate, really creates a false-dichotomy,” said Schvey. “The line between them is blurring substantially, particularly if you look at it as a technologist. You really don’t have to come at it with the religious fervor that people have had, which is really coming down quite a bit.”
Turning projects into products. These are very strategic investors. We have deep strategic and commercial engagements with most of them.
Greg Schvey, Axoni co-founder and CEO