Nasdaq takes its first steps into crypto services with a focus on security, entering the market with a custodial product for bitcoin and ether aimed at institutional investors.
“We believe custody is fundamental to any other service we build,” says Ira Auerbach, the new head of Nasdaq Digital Assets. “The ability to hold our clients’ funds in a safe, secure, scalable and accessible manner is a key launching point for everything we do in the future,” the exchange’s former head of crypto prime brokerage added. Gemini.
Custody of cryptos is central to not only Nasdaq’s digital asset ambitions, but the industry as a whole. Clients are required to place enormous trust in their custodians, a trust that retail investors are skeptical of passing on. This mistrust has given rise to the phrase “not your keys, not your crypto,” meaning that private keys – analogous to passwords for accounts holding crypto funds – do not belong to intermediaries. Since institutions are unlikely to build their own infrastructure to hold assets, they should choose a partner willing to support institutional-sized cryptocurrency accounts.
When asked why customers would choose a traditional financial player over a crypto-native company to take custody of their digital assets, Auerbach replies that the Nasdaq is in a unique position because of its knowledge of what institutional clients need to use a financial product.
“We’ve worked with these institutions for a long time, we know their pain points, we have products designed in-house to address those pain points,” Auerbach said. “We believe we can make institutions much more comfortable and usher in greater ecosystem adoption.”
Along with the custody service, Nasdaq is expanding its financial crime prevention technology to eliminate money laundering, fraud, and market abuse in digital assets. The advantage of Nasdaq is that the company has the ability to analyze potentially fraudulent behavior in traditional markets and digital assets, said Valarie Bannert-Thurner, senior vice president of anti-financial crime technology at Nasdaq.
“Criminals don’t just operate in chains,” Bannert-Thurner said. “What we’re trying to do is look at the risk and try to identify the real players who are committing the scams or manipulating the markets and not just the chain or chain. We say look the other way.
Bannert-Thurner says the insights Nasdaq has from its anti-crime business translates into the world of crypto, even if the underlying technology sometimes looks different. “The real scams aren’t that different from what’s happened before,” Bannert-Thurner said. “Money laundering is still money laundering, but done slightly differently because you have to find mechanisms to do it.”
The Nasdaq sells its anti-financial crime technology as a service to clients such as crypto exchanges. Although the new custodial product is a separate company, it will incorporate crypto-specific anti-financial crime technology. One of these protections includes filtering the details of the origin of digital assets and their destination. Generally, users can send cryptocurrency to any address they choose without the recipient’s consent, much like anyone who knows where you live can send mail without your approval. This runs the risk of wallet spamming or a practice called “dusting,” which became popular when addresses associated with the Tornado Cash crypto mixer were sanctioned by the US Treasury. People who had used Tornado Cash began sending small amounts of cryptocurrency to the wallet addresses of celebrities like Jimmy Fallon to protest the sanctions. Nasdaq’s screening tool will flag funds from a sanctioned wallet, for example.
Nasdaq’s entry into digital assets comes as other players, including Blackrock and Fidelity, build crypto support. In August, Blackrock partnered with Coinbase to offer a private trust offering bitcoin exposure to institutional clients. Earlier this month, EDX Markets, backed by Charles Schwab
“The big companies are starting now, a lot of them are still exploring, but a lot of them are already working on getting into space,” Bannert-Thurner said. “We certainly haven’t seen full institutional participation from afar yet.”