We’ve talked for a long time about the entry of institutional investors into the cryptocurrency space. Numerous high-profile ETFs came and went, crypto slowly grew users and then was dashed by the ongoing bear market, and governments across the globe still seem to be on the fence about how to regulate digital assets. Exchanges came and went, hacks have abounded, and policymakers have been left wondering how to wrap their head around it all.
Then Nasdaq entered the game.
Nasdaq operates highly technical and comprehensive fraud detection software that could build the foundation of trust needed to bolster investor confidence in cryptocurrency exchange operators. In an industry first, seven crypto exchanges have passed Nasdaq’s requirements in terms of tech capabilities and management team dedication to consumer benefit and will be given access to the same fraud detection and surveillance tech that is used with trading on the Nasdaq itself.
Two of these exchanges – Gemini and SBI Virtual Currency – were actually named, but with five more in tow, this development bodes well for the crypto space in general since any exchange that can brand itself as fraud-free according to Nasdaq standards will undoubtedly be able to bring in new customers and slowly nurture growth and trade. Nasdaq’s tech has already been used for a long time to attract institutions as well as traders who are more accustomed to institutional avenues for investment, and the spillover effects of this overlap between the Nasdaq and the seven crypto exchanges is the first of what is hopefully a slew of positive news on the institutional fintech side of the market.
The vetting and filtering process for these exchanges was, understandably, much more rigorous than it usually is with more well-known and mainstream players. Since they were dealing with small-time exchanges, many of which were probably not even known to many on the Nasdaq side of the table, the questions, requirements, and commitments that had to be discussed and guaranteed – both from Nasdaq as well as on the behalf of the exchanges – were formulated and used for the first time ever.
Some of the areas in which companies applying to use Nasdaq’s tech were vetted included their business model, Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols in place, and general governance, controls, and audit protocols that are to be used and followed. It was clear from the onset that not every applicant would be successful, because not all of the products listed on exchanges are known to be very reputable, and product repute was one of the factors under consideration when it came to greenlighting exchanges for this initiative. Think of numerous s***coins that exchanges both large and small have listed over the years. Such behavior would not fly when working with the Nasdaq!
Another area that caused many applicants to fall through the cracks was when it came to pinpointing who is using the crypto assets listed or stored on the exchange, and for what purpose. As things slowly become clearer, we’ll have a better idea of which questions matter more and which ones do not, but for now, the “used by” and “used for what purpose” questions continue to be very relevant to the discussion at large.
In terms of business model, the Nasdaq team wants to make as sure as possible that the team leading the initiatives that they are scrutinizing know what they are doing. This isn’t start-up boot camp, so it is clear that what the Nasdaq team is honing in on is the value of experience because the crypto industry’s biggest impact factor was that it would democratize finance and other industries through sustainable innovation and adoption. Although you don’t necessarily need a team of vets to do that, having one at the helm does wonders for investor confidence (and, clearly, the confidence of Nasdaq decision-makers).
Finally, Nasdaq wanted to make sure that there were clear token listing guidelines in place. While some exchanges do publicize how they choose and list tokens, other exchanges are less clear when it comes to this aspect of exchange operations, leaving a cloud of doubt hanging over certain tokens and the practice of pump and dump often associated with exchange owners, crypto whales, or other large players artificially boosting the price of a newly-listed token and then bailing when the time for them is right – at the expense of common investors.
Nasdaq’s interests in crypto and blockchain in general extend beyond simply providing technical support to these exchanges. So far, it has been limited to investing in non-crypto projects that use the technology. For example, as far back as September 2015, Nasdaq joined a $30 million funding round in Chain, and more recently, it led a $20 million round that financed Symbiont, a blockchain company that builds tools to eliminate financial middlemen. However, even though Nasdaq’s role with these exchanges is expected to be more that of an overseer than a player, what we can conclude is that Nasdaq sees crypto as a growing asset class and they want to help companies and exchanges work with their technology, improve it, and grow marketplaces – and, who knows? Maybe make that institutional plunge we’ve heard so much about once the time is right.