Nasdaq is taking its first steps into crypto services with an emphasis on security, entering the business with a custody product for bitcoin and ether aimed at institutional investors.&nbsp;



“We feel that custody is foundational to any other service that we build,” says Ira Auerbach, the newly named head of Nasdaq Digital Assets. “The ability to hold on to our customers&#8217; funds in a safe, secure, scalable and accessible manner is a key launch point for anything else we do in the future,” added the former head of the Gemini exchange’s crypto prime brokerage.&nbsp;



Crypto custody is central not only to Nasdaq’s digital asset ambitions, but to the industry as a whole. Clients are required to place enormous trust in their custodians, a confidence that individual investors are skeptical of handing over. This wariness has given rise to the phrase “not your keys, not your crypto,” meaning that private keys – analogous to passwords for the accounts holding crypto funds – do not belong in the hands of intermediaries. Since institutions are unlikely to build out their own infrastructure to custody assets, they need to choose a partner prepared to take custody of institutional-sized cryptocurrency accounts.&nbsp;



When asked why clients would choose a traditional financial player instead of a crypto-native firm to take custody of their digital assets, Auerbach responds that Nasdaq is uniquely positioned because of its knowledge of what institutional clients need in order to use a financial product.



“We have a long history of working with these institutions, we know their pain points, we have products built internally to address these pain points,” Auerbach said. “We think we can make institutions much more comfortable and usher in a larger adoption of the ecosystem.”



In parallel with the custody service, Nasdaq is expanding its anti-financial crime technology to weed out money laundering, fraud and market abuse in digital assets. The advantage Nasdaq has is that the company has the capabilities to analyze potentially fraudulent behavior in both traditional markets and digital assets as well, says Valarie Bannert-Thurner, senior vice president of anti-financial crime technology at Nasdaq.



“The criminals don’t just operate on-chain,” Bannert-Thurner said. “What we’re trying to do is look at the risk and try to identify the actual players that are doing the scams or manipulating the markets and not be limited to on-chain or off-chain. We’re saying let’s look at it across.”



Bannert-Thurner says the knowledge Nasdaq has from its anti-crime business is translating into the world of crypto, even if the underlying technology looks different at times. “The actual scams are not that different from what happened before,” Bannert-Thurner said. “Money laundering is still money laundering, but done slightly differently because you have to find mechanisms to do it.”



Nasdaq sells its anti-financial crime technology as a service to clients like crypto exchanges. While the new custody product is a separate endeavor, it will have crypto-specific anti-financial crime technology built in. One of these protections includes screening details of where digital assets originated and where they are being sent. Typically, users are able to send cryptocurrencies to any address they like without the receiver having to agree, in the same way that anyone who knows where you live can send mail without your approval. This runs the risk of wallet spamming or a practice referred to as “dusting,” which became popular when addresses associated with crypto mixer Tornado Cash were sanctioned by the U.S. Treasury. Individuals who had used Tornado Cash began sending small amounts of cryptocurrencies to the wallet addresses of celebrities like Jimmy Fallon to protest the sanctions. Nasdaq’s screening tool will flag funds coming in from a sanctioned wallet, for example.



Nasdaq’s entry into digital assets comes as other players including Blackrock and Fidelity are building crypto support. In August, Blackrock partnered with Coinbase to offer a private trust offering bitcoin exposure for institutional clients. Earlier this month, EDX Markets—backed by Charles Schwab<a href="https://www.forbes.com/companies/charles-schwab" target="_blank" rel="noreferrer noopener">SCHW</a>&nbsp;<a href="https://www.forbes.com/companies/charles-schwab">-1.2%</a>&nbsp;Corp., Fidelity Digital Assets and Citadel Securities — launched with plans to trade select tokens this year. The increased investment in digital assets comes despite the market’s persistent volatility and top asset bitcoin’s price being down 59% year to date.&nbsp;



“The big firms are starting now, many of them are still exploring, but many actually already are working on moving into the space,” Bannert-Thurner said. “We certainly haven&#8217;t seen the full institutional participation yet by any stretch.”



By Emily Mason, Forbes Staff

NASDAQ – Broadway & 44th Street, NYC

Nasdaq Enters Crypto Business With Focus On Security

TOPLINE Shares of Coinbase, the nation’s largest crypto exchange, skyrocketed nearly 60% within minutes of their public-market debut on Wednesday, propelling the nine-year-old company’s market capitalization to more than 12 times its last private valuation of $8 billion in 2018 and marking another instance of booming demand lifting the still-nascent cryptocurrency space to meteoric highs.



<h4 class="wp-block-heading" id="h-key-facts">KEY FACTS</h4>



Listed on the Nasdaq exchange under the ticker COIN, shares started trading at about 1:30 p.m. EDT Wednesday and immediately surged to a price of more than $398, eclipsing the $250 reference price set on Tuesday.



The soaring stock price boosted the firm’s market capitalization to roughly $105 billion, making Coinbase one of the 100 most valuable publicly traded companies in the United States and more valuable than both New York Stock Exchange parent Intercontinental Exchange and Nasdaq Inc.—combined.



Eschewing the traditional initial public offering that enlists investment banks as intermediaries and underwriters to sell shares ahead of trading, San Francisco-based Coinbase opted instead for a&nbsp;<a href="https://www.forbes.com/sites/jeffkauflin/2021/01/29/coinbase-investors-say-it-could-hit-100-billion-valuation-when-it-goes-public/">direct listing</a>, selling 114.9 million shares on Wednesday directly to the public.



“I wanted there to be just a true market on day one that set the price, not something that was set behind closed doors,” Coinbase&#8217;s billionaire CEO, Brian Armstrong, said on CNBC Wednesday, calling the direct listing “more true to the ethos of crypto.”



Ahead of its listing, Coinbase&nbsp;<a href="https://www.forbes.com/sites/jonathanponciano/2021/04/06/coinbase-posts-record-18-billion-revenue-as-crypto-market-shoots-past-2-trillion-direct-listing/">reported</a>&nbsp;first-quarter revenue that climbed nearly 900% from $190.6 million in the same period last year, blowing past the $585 million it nabbed in the fourth quarter.



Update 5 p.m. EDT: Coinbase shares closed Wednesday at a price of roughly $328, up 31% from the reference price and giving Coinbase a market capitalization of about $86 billion.



<h4 class="wp-block-heading" id="h-crucial-quote">CRUCIAL QUOTE&nbsp;</h4>



“The Coinbase [listing] is a watershed moment and historical event for the crypto industry and something Wall Street will be laser-focused on to gauge investor appetite going forward,” Wedbush Analyst Dan Ives said in a Wednesday morning note to clients, calling Coinbase a “barometer” for growing mainstream [crypto] adoption.&nbsp;



<h4 class="wp-block-heading" id="h-key-background">KEY BACKGROUND</h4>



Coinbase’s foray into the public market comes after a massive year of growth for cryptocurrencies, fueled by inflationary concerns and heightened institutional adoption. Morgan Stanley and Goldman Sachs started offering cryptocurrency to their wealthy clients just last month, and companies like Tesla, MicroStrategy and payments fintech Square have purchased billions of dollars of bitcoin as a means to diversify their largely U.S. dollar-based balance sheets. Up a staggering 825% over the past year, bitcoin hit its latest high, of just under $65,000, early Wednesday morning. The total cryptocurrency market is worth more than $2.2 trillion.



<h4 class="wp-block-heading" id="h-chief-critic">CHIEF CRITIC</h4>



“Even though Coinbase’s revenue surged over the past 12 months, the company has little to no chance of meeting the future profit expectations that are baked into its ridiculously high expected valuation of $100 billion,” says David Trainer, the CEO of investment research firm New Constructs. “The crypto markets are very young, and we expect many more companies to compete for the profits Coinbase enjoys today.”



<h4 class="wp-block-heading" id="h-tangent">TANGENT</h4>



Coinbase joins a growing rank of buzzy tech companies that have started trading over the past year—to varying degrees of fanfare. Gen-Z gaming platform Roblox, which similarly opted for a direct listing, jumped more than 50% on its&nbsp;<a href="https://www.forbes.com/sites/jonathanponciano/2021/03/10/roblox-valuation-hits-42-billion-as-gen-z-gaming-giant-skyrockets-50-in-ipo/">first trading day</a>&nbsp;in January and has since climbed about 6% higher. Airbnb and Doordash debuted in December, and both roughly doubled on their first day of trading, but&nbsp;<a href="https://www.forbes.com/sites/jonathanponciano/2020/12/10/airbnb-ipo-shares-valuation-billion-more-than-marriott-hilton-hyatt/">Airbnb</a>&nbsp;has jumped about 25% since then, while&nbsp;<a href="https://www.forbes.com/sites/jonathanponciano/2020/12/09/doordash-ipo-shares-first-day-of-trading/">DoorDash</a>&nbsp;has tanked 23%.



<h4 class="wp-block-heading" id="h-what-to-watch-for">WHAT TO WATCH FOR</h4>



Crypto regulation. “With cryptocurrencies’ astronomical price jumps, and as they become increasingly embedded in the global financial system, investors must expect much greater government scrutiny,” Nigel Green, the CEO of $12 billion advisory deVere Group, said in a Wednesday note, adding that Coinbase’s direct listing will help the firm reach a wider investment base other than “the usual crypto evangelists.” Gary Gensler, a blockchain and cryptocurrency professor at the MIT Sloan School of Management, was&nbsp;<a href="https://www.forbes.com/sites/jonathanponciano/2021/04/14/gary-gensler-confirmed-sec-chairman/">confirmed</a>&nbsp;as the Securities and Exchange Commission’s new chairman on Wednesday, and one SEC official has said&nbsp; he’s “sympathetic to the call for regulatory clarity” in the space.



<h4 class="wp-block-heading" id="h-further-reading">FURTHER READING</h4>



<a href="https://www.forbes.com/sites/jonathanponciano/2021/04/13/bitcoin-hits-new-high-ahead-of-coinbase-listing-but-74-of-fund-managers-think-its-just-a-bubble/">Bitcoin Hits New High Ahead Of Coinbase Listing, But 74% Of Fund Managers Think It&#8217;s Just A Bubble</a>&nbsp;&nbsp;(Forbes)



<a href="https://www.forbes.com/sites/jonathanponciano/2021/04/06/coinbase-posts-record-18-billion-revenue-as-crypto-market-shoots-past-2-trillion-direct-listing/">Coinbase Posts Record $1.8 Billion In Revenue As Crypto Market Shoots Past $2 Trillion</a>&nbsp;(Forbes)



<a href="https://www.forbes.com/sites/michaeldelcastillo/2020/02/19/coinbase-billionaire-brian-armstrongs-plan-to-make-bitcoin-ethereum-xrp-safe-for-all/">Bitcoin&#8217;s Guardian Angel: Inside Coinbase Billionaire Brian Armstrong&#8217;s Plan To Make Crypto Safe For All</a>&nbsp;(Forbes)



<a href="https://www.forbes.com/sites/jeffkauflin/2021/01/29/coinbase-investors-say-it-could-hit-100-billion-valuation-when-it-goes-public/">Coinbase Investors Say It Could Hit $100 Billion Valuation When It Goes Public</a> (Forbes)



By Jonathan Ponciano, Forbes Staff

In this photo illustration, the Nasdaq Stock Market logo

Coinbase Skyrockets In Nasdaq Listing, Landing $105 Billion Valuation On First Day Of Trading

Cryptocurrency exchanges who want to use Nasdaq’s proprietary surveillance technology need to have more than money.



A team of about 20 people contribute to helping in an elaborate due-diligence process aimed at ensuring that any exchange who wants to use the technology that scans for fraudulent transaction patterns is both technically capable, and morally inclined to use the powerful software wisely.



For exchanges who pass the test (and can foot the bill) they’ll be granted access to the same surveillance technology Nasdaq itself uses to ensure its clients that trading volume is as free from fraud and manipulation as possible.



So far, seven cryptocurrency exchanges have passed Nasdaq’s muster, according to a Nasdaq representative speaking with&nbsp;Forbes, though only two, Gemini and SBI Virtual Currency, have been publicized. As more cryptocurrency exchanges seek to lure new customers, the assurance of Nasdaq’s technology is already being used to attract institutions and traders used to more mainstream venues.



During a briefing with members of media today, Nasdaq’s head of exchange and regulator surveillance team, Tony Sio, who works within the market surveillance division, shared the questions every cryptocurrency exchange must answer as part of a larger presentation on the state of the industry around the world.



“Historically, we don’t do such a large vetting process for our clients because they are much more well-known,&#8221; said Sio. “But as we started working with less well-known names, startups, then we realized we needed to do this check process.”



During the briefing at Nasdaq&#8217;s offices earlier today, Sio presented a detailed overview of how the company on-boards its crypto exchange clients, broken down in to three categories: Business Model, KYC/AML, and Exchange Governance &amp; Controls.



While the press briefing was for educational purposes, in an interview following, Sio provided&nbsp;Forbes&nbsp;with further context, explaining how his team of legal and technical experts use the criteria to evaluate possible customers for risk. Not everyone makes the cut, he says.



The first section of a document, titled “Key Questions to Ask When Evaluating a Cryptocurrency Exchange,&#8221; was called “Business Model.” Of the questions in that section, one jumped out: “How reputable are the products available to trade on the venue?”



What’s interesting about this is that it shows Nasdaq is concerned about who is using crypto assets, and how they are being used. As questions about the importance of how a crypto asset was used in the past (Was it used to buy drugs? Does that matter?) continue to be sorted out, this point will likely only continue to raise in value.



The second section of the document is called “KYC/AML,” which stands for know-your-customer/anti-money laundering. Like the questions about business models, the most interesting question in this section relates to reputation. “What is the organizational structure and what are the founders’ backgrounds (i.e. tech expertise, financial markets expertise, etc.).”



What stands out about this question is the importance that past experience plays. From the early days of cryptocurrency, and now into other crypto-assets, the industry&#8217;s biggest value proposition was that it would democratize finance and a wide range of industries by letting retail consumers build and manage their own financial products.



Instead of innovation coming from the top down, crypto would be grassroots. While Nasdaq has shown a willingness to work with some unusual clients in the cryptospace, the ones we know about support what these questions reveal about Nasdaq&#8217;s interest in working with proven entities, something other regulated exchanges and technology providers will likely follow.



In the third and final section of the “key questions” document, “Are crypto asset listing standards in place?” is the most insightful. While some of the largest cryptocurrency exchanges, like Circle (which owns the Poloniex exchange) and Coinbase, publicly post their new asset listing process, others are much more opaque, leaving open the door to pay-to-play allegations and other potentially fraudulent activity.



Most recently, in June 2018 SBI Virtual Currencies run by Japanese financial giant SBI Holdings,&nbsp;<a href="https://business.nasdaq.com/mediacenter/pressreleases/1728735/gemini-to-launch-market-surveillance-technology-in-collaboration-with-nasdaq" target="_blank" rel="noreferrer noopener">announced&nbsp;</a>it was using Nasdaq’s matching system. Before that, in April 2018, the heavily licensed Gemini cryptocurrency exchange run by Tyler and Cameron Winklevoss,&nbsp;<a href="https://www.sbigroup.co.jp/english/news/pdf/2018/0604_a_en.pdf" target="_blank" rel="noreferrer noopener">announced&nbsp;</a>it was using Nasdaq’s SMARTS surveillance system. “Our deployment of Nasdaq’s SMARTS Market Surveillance will help ensure that Gemini is a rules-based marketplace for all market participants,” said Gemini CEO Tyler Winklevoss in a statement at the time.



Beyond providing technical support to these exchanges, Nasdaq’s interest in blockchain has been largely limited to investing in other non-cryptocurrency applications of the technology. In September 2015 Nasdaq&nbsp;<a href="https://www.forbes.com/sites/laurashin/2015/09/09/visa-citi-nasdaq-invest-30-million-in-blockchain-startup-chain-com/#4ea03d5c199c" target="_blank" rel="noreferrer noopener">joined&nbsp;</a>a $30 million investment round in Chain, a blockchain startup that eventually partnered with Nasdaq to launch Linq, a platform for issuing private equities. Then, last week Nasdaq led a $20 million&nbsp;<a href="https://www.forbes.com/sites/michaeldelcastillo/2019/01/23/exclusive-nasdaq-leads-20-million-investment-in-enterprise-blockchain-startup-symbiont/?ss=crypto-blockchain" target="_blank" rel="noreferrer noopener">investment&nbsp;</a>in Symbiont, another blockchain company building services that eliminate middlemen in traditional financial workflows.



While competitors like the New York Stock Exchange have partnered with Microsoft and Starbucks to launch its own cryptocurrency exchange, Bakkt,&nbsp;<a href="https://www.forbes.com/sites/caitlinlong/2018/08/03/ice-creating-new-cryptocurrency-market-a-double-edged-sword/#29482e031015" target="_blank" rel="noreferrer noopener">later this year</a>, Nasdaq&#8217;s cryptocurrency exchange guidelines are likely to be limited to providing technical support for now.



“The objective that we’re trying to work with crypto, is we see this as a growing asset class,” says Sio. “So we’re working to help provide our technology, it could be around matching, it could be around surveillance, to help our customers as they grow their marketplaces.”



<a href="https://www.forbes.com/sites/michaeldelcastillo/">&#8211;</a>Michael del Castillo Forbes Staff

Tag: Nasdaq

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